047 

Minutes 

of 

The Meeting of the Advisory Committee on Community Banking 

of the 

Federal Deposit Insurance Corporation 

Held in the Board Room 

Federal Deposit Insurance Corporation Building 

Washington, D.C. 

Open to Public Observation 

October 14, 2010 8:38 - A.M. 

The meeting of the FDIC Advisory Committee on Community 

Banking ("Committee") was called to order by Martin J. 

Gruenberg, Vice Chairman, Federal Deposit Insurance Corporation 

("Corporation" or "FDIC") Board of Directors. 

The members of the Committee present at the meeting were: 

R. Daniel Blanton, President and CEO, Southeastern Bank 

Financial Corporation and Georgia Bank & Trust Company of 

Augusta, Augusta, Georgia; Charles G. Brown, III, Chairman and 

CEO, Insignia Bank, Sarasota, Florida; Deborah A. Cole, 

President and CEO, Citizens Savings Bank and Trust Company, 

Nashville, Tennessee; Craig M. Goodlock, Chairman and CEO, 

Farmers State Bank, Munith, Michigan; James H. Gray, Chairman, 

Beach Business Bank, Manhattan Beach, California; Timothy W. 

Koch, Professor and Chair, Finance Department, Moore School of 

Business, University of South Carolina, Columbia, South 

Carolina; John P. Lewis, President and CEO, Southern Arizona 

Community Bank, Tucson, Arizona; Jan A. Miller, President and 

CEO, Wainwright Bank & Trust Company, Boston, Massachusetts; 

Rebecca Romero Rainey, Chair and CEO, Centinel Bank, Taos, New 

Mexico; Bruce A. Schriefer, President, Bankers' Bank of Kansas, 

National Association, Wichita, Kansas; Laurie Stewart, President 

and CEO, Sound Community Bank, Seattle, Washington; and Ignacio 

Urrabazo, Jr., President, Commerce Bank, Laredo, Texas. 

Committee members Dorothy J. Bridges, President and CEO, City 

First Bank of D.C., Washington, D.C.; Jack E. Hopkins, President 
048 

and CEO, CorTrust Bank, National Association, Sioux Falls, South 

Dakotai and Matthew Williams, Chairman and President, Gothenburg 

State Bank & Trust Company, Gothenburg, Nebraska, were absent 

from the meeting. 

Members of the FDIC Board of Directors present at the 

meeting were: Sheila C. Bair, Chairmani Martin J. Gruenberg, 

Vice Chairmani and Thomas J. Curry, Director (Appointive). 

Corporation staff who attended the meeting included: 

Ruth R. Amberg, Michael J. Barry, Valerie J. Best, Michael W. 

Briggs, Michelle M. Borzillo, Luke H. Brown, Richard A. Brown, 

Glenn E. Cobb, Kymberly K. Copa, Christine M. Davis, Patricia 

Devoti, Joseph A. DiNuzzo, Gregory E. Eller, Diane L. Ellis, 

Michael T. Figge, Ralph E. Frable, Steven D. Fritts, Suzy S. 

Gardner, Tray Halverson, Nancy W. Hunt, Thomas S. Johnson, 

Rachel A. Jones, Sally J. Kearney, Kenyon T. Kilber, Ellen W. 

Lazar, Alan W. Levy, Roberta K. McInerney, Tariq A. Mirza, 

Arthur J. Murton, Kathleen G. Nagle, Paul M. Nash, 

Christopher J. Newbury, Thomas E. Nixon, Richard J. Osterman, 

Jr., Grace Pyun, Claude A. Rollin, Barbara A. Ryan, 

Christopher J. Spoth, Marc Steckel, Sandra L. Thompson, Jesse o. 

Villarreal, James C. Watkins, Cottrell L. Webster, and Bucky 

Wells. 

William A. Rowe, III, Deputy to the Chief of Staff and 

Liaison to the FDIC, Office of the Comptroller of the CurrencYi 

and Charlotte M. Bahin, Senior Counsel for Special Projects, 

Office of Thrift Supervision, were also present at the meeting. 

Vice Chairman Gruenberg opened the meeting, noting that 

Chairman Bair had been delayed but would soon arrive. He 

observed that the Dodd-Frank Wall Street Reform and Consumer 

Protection Act ("Dodd-Frank Act") had been enacted since the 

last meeting in April, and that much of the day's agenda would 

focus on the law's impact on a range of community banking 

issues. Vice Chairman Gruenberg then introduced Paul M. Nash, 

Deputy to the FDIC Chairman for External Affairs, who moderated 

the day's agenda. In turn, Mr. Nash introduced Richard A. 

Brown, Chief Economist, FDIC, and Associate Director, FDIC 

Division of Insurance and Research ("DIR"), and James C. 

Watkins, Deputy Director, Supervisory Examinations, FDIC 

Division of Supervision and Consumer Protection ("DSC"), who 

spoke about the "Economic Outlook and Condition of the 

Industry." 

October 14, 2010 
049 

Mr. Brown provided the Committee with an overview of the 

U.S. economy. He noted that mortgage credit distress is still 

present, and that foreclosures remain high, though down somewhat 

from 2009. Mr. Brown continued, noting that there had been some 

recent stabilization in home prices, but observing that 

cumulative price declines remain approximately 28 percent below 

peak levels on average nationwide. He next discussed the index 

of leading economic indicators, and opined that a double-dip 

recession appeared unlikely. Nonetheless, he reported that 

consumer and business confidence remained very subdued and 

outlined various reasons for that weakness. Mr. Brown observed 

that the economy had lost substantial jobs in the past decade, 

including one-third of manufacturing jobs, which makes resolving 

other economic problems more difficult. He concluded his 

overview by discussing unemployment and other concerns on a 

geographic basis, and welcomed the Committee's observations and 

questions. 

In response to questions from Members Urrabazo and 

Goodlock, a discussion of the Board of Governors of the Federal 

Reserve System's ("Federal Reserve") anticipated program of 

quantitative easing followed. In response to a question from 

Vice Chairman Gruenberg, Mr. Brown also discussed recent 

developments concerning lenders being unable to document their 

title in foreclosure and the effect of the resulting uncertainty 

on credit intermediation. In this regard, Mr. Watkins stated 

that DSC was closely monitoring the situation, and that the 

mortgage backed security market had remained stable so far. 

At this point, Chairman Bair arrived and began presiding at 

the meeting. 

In response to a question from Member Miller concerning an 

extended period of stagnation such as Japan's, Mr. Brown 

discussed the characteristics of recessions that followed 

financial crises and made observations about differences in the 

Japanese and U.S. circumstances. 

Mr. Watkins then discussed a variety of measures of bank 

health and supervisory concerns. These included: bank failure 

rates since the start of the current crisis; asset quality 

concerns, focused on construction and development, and 

commercial real estate ("CRE"); underperforming assets and their 

relation to bank capital; bank earnings, which are weak; and 

interest rate risk. 

October 14, 2010 
The subject of interest rate risk ("IRR") arose at various 

times during the meeting. Mr. Watkins observed that a rising 

interest rate environment could cause risk in institutions that 

had invested in long-term assets at low interest rates. A 

sudden increase in interest rates, a "shock," would not only 

affect banks' balance sheets, but would negatively affect the 

ability of marginal borrowers to repay loans. Mr. Brown added 

that there were few historical precedents for how the interest 

rate environment would unfold. 

050 

In response to Chairman Bair's request for input from the 

Committee, Members Blanton, Schriefer, and Brown provided 

examples of how banks were responding to the interest rate risk 

and associated supervisory concerns. Member Koch reiterated 

that IRR caused concerns with net interest income and borrowers' 

ability to service their debt, and cautioned that banks should 

be modeling the movement of asset quality down the chain. 

Member Miller and Chairman Bair shared concerns that, although 

banks had a good record of responding to a stable interest rate 

environment, they had not experienced a stable environment at 

the current low rates. Member Stewart later observed that a 

concern she had with IRR was its impact on her bank's home 

equity portfolio, and noted that the bank was assisting 

customers to refinance their loans into fixed rate loans during 

this low interest rate period. Mr. Brown stated that, in most 

recoveries, job growth occurs before interest rates start to 

rise, but that it is not a guaranteed outcome. 

In response to a question from Chairman Bair, the Committee 

discussed the broader question of weak borrower demand and its 

causes. Member Blanton indicated that borrowers lacked 

confidence in the economic recovery to be willing to expand 

their businesses, and also that many borrowers were tied to real 

estate in some way and that there was too much uncertainty for 

them. Member Goodlock discussed borrowers' lack of cash flow, 

lack of sales, and pessimism about improvements. Member 

Urrabazo observed that loan demand remained low in Texas and 

that people wanted to maintain liquidity rather than take risks. 

Member Gray observed that there was loan demand in his Southern 

California market, often from borrowers whose loans were not 

being renewed by larger banks. Member Stewart made consistent 

observations about her market, adding that her bank also 

obtained business from failed and merged banks. She observed 

that community banks were able to modestly expand with high 

quality credits. Members Urrabazo and Gray also discussed 

opportunities in Small Business Administration lending. 

October 14, 2010 
Later in the meeting, Vice Chairman Gruenberg asked followup questions about opportunities for community banks when larger 

institutions discontinue credit lines. Several members noted 

that capital constraints limited banks' ability to respond to 

the demand. 

051 

The Committee and staff discussed job growth and factors 

inhibiting it. Mr. Brown stated that private job growth was 

slow but steady, but that governments continued to retrench. 

Members Gray and Cole expressed the opinion that there would not 

be much job growth until employers' uncertainty about their 

costs were resolved in areas such as health care, taxes, and 

financial reform. Member Goodlock indicated he believed that 

the loss of government jobs was long-term or permanent because 

of the resistance to higher taxes to pay for them. Members 

Goodlock and Blanton noted that many regulations still need to 

be written to implement recent legislation, and that, until the 

regulations are complete, uncertainty about them will inhibit 

growth. 

The Committee, Vice Chairman Gruenberg, and staff also 

reviewed the positive relationship between lending 

concentrations (especially CRE and construction and development 

lending) and problem bank status or failures. Mr. Brown noted 

that banks that concentrated in CRE took on greater risk but did 

not earn a greater return on assets, over the longer term, than 

banks that did not take on heightened risk. The Committee 

discussed the effect of troubled European debt on u.S. interest 

rates; it also discussed mortgage defaults and the existence and 

timing of "strategic" defaults. At the invitation of Chairman 

Bair, the Committee provided observations about agricultural 

lending and potential risks in that market. 

The day's second panel regarded "Capital Adequacy and 

Regulatory Requirements." Mr. Nash introduced Steve D. Fritts, 

Associate Director, Risk Management Policy Branch, Policy, DSC, 

and Gregory E. Eller, Deputy Chief Accountant, Accounting and 

Securities Disclosure Section, Risk Management Policy Branch, 

Policy, DSC. In his opening remarks, Mr. Fritts provided some 

relevant statistics to the Committee, noting that capital had 

been a major issue for community banks and that some had 

difficulty raising capital. 

The discussion turned to the Department of the Treasury's 

("Treasury") new small lending capital program, currently in 

development. Mr. Fritts and Chairman Bair emphasized that the 

FDIC had only a consultative role in the program but could serve 

October 14, 2010 
as a conduit for the Committee's concerns, and noted also that a 

Treasury representative was in the audience to hear their 

concerns firsthand. The Committee discussed a variety of issues 

about the program including: eligibility to participate; the 

need for clarity and stability in the program's rules; whether 

there would or should be requirements to expand lending in order 

to participate; and the definition of what would be considered a 

small business loan. Several members, including Members Brown, 

Blanton, and Miller discussed whether the principle of matched 

funding would be applied. Member Blanton expressed the 

preference that the program not impose a matching requirement, 

but that if one was used, that capital raised in the previous 

two years be grandfathered into the calculation. Chairman Bair 

observed that the rationale for a matching requirement, if one 

was used, was to provide a market validation of a bank's 

viability. She noted that it was Treasury's decision and that 

the FDIC could help act as a conduit for community bankers' 

concerns. 

In response to a question from Member Schriefer, Mr. Fritts 

discussed the regulatory treatment of any capital from the 

program and the need for banks to engage in capital planning 

since the program was not permanent. The Committee also 

discussed the interaction of capital planning, trust preferred 

securities, and section 171 of the Dodd-Frank Act, captioned 

"Leverage and Risk-Based Capital Requirements," and known as the 

Collins Amendment. Nancy Hunt of DSC observed that bank holding 

companies with assets under $15 billion would be allowed to 

grandfather trust preferred securities under the new law. 

Chairman Bair observed that trust preferred securities were 

debt, not capital, and that there had been correlations between 

the use of them in certain circumstances and bank failures which 

resulted in higher deposit insurance premiums. 

The Committee discussed regulatory capital. Member 

Goodlock observed that banks felt that there was some 

uncertainty on the subject, and that some consultants gave 

conflicting advice on what regulators expected at examinations. 

Mr. Fritts advised that the standards did not change except by 

public changes to the regulation, but that capital levels are 

commensurate with balance sheet strength and that conditions can 

worsen. Examiners, he added, exercise judgment regarding the 

balance sheet and management. Members Goodlock and Blanton gave 

their views about examiner discretion, suggesting that local 

examiners may not have enough latitude. Member Brown observed 

that, over time, bankers and regulators' views about how much 

O~2 

October 14, 2010 
capital was sufficient had changed, and that better 

communications could increase mutual understanding. 

The Committee discussed stress testing. In response to a 

question from Member Koch, Mr. Fritts noted that management in 

small community banks do it daily as they monitor the economic 

conditions in their communities, but that vendor tools could 

also have a valuable role. Chairman Bair inquired whether 

bankers felt they would benefit from more specific guidance. 

053 

She observed that CAMELS ratings tended to be lagging 

indicators, resulting in the Deposit Insurance Fund ("DIFU) 

reserves tending to lag as well. If regulators made CAMELS 

ratings more forward looking, stress testing might be considered 

as a factor, but, she noted, prudent bank management was 

probably already doing anything that might be required. She 

invited future input on the subject. Members Goodlock and Brown 

made further observations about stress testing, noting that some 

vendors indicated that it was already mandatory, and that 

inadequate testing models can give a false sense of security. 

Mr. Nash expressed concern about vendor statements that stress 

testing was mandatory when that was not the case. Member Koch 

and Mr. Fritts discussed similarities and differences between 

vendor stress testing models and the Uniform Bank Performance 

Report ("UBPRU) system that regulators have used for over ten 

years. 

Regarding how much capital banks should hold, Member 

Urrabazo noted that managers of publicly held banks had to 

balance the competing interests of regulators and investors, who 

demanded a certain return on their investments. Chairman Bair 

flagged for the Committee a developing issue involving the Basel 

III capital requirements that allowed very large banks to use 

advanced approaches to risk weight their assets. In the FDIC's 

view, the advanced approaches did not result in sufficiently 

robust capital, and she asked for community banking support for 

rulemaking that would implement protective language. 

The Committee turned to additional accounting issues, 

including mark to market requirements, which Member Gray viewed 

as very subjective since community banks hold most loans to 

maturity and there is really no market with which to establish a 

price. Mr. Eller and Mr. Fritts generally agreed, and Mr. Eller 

described a joint comment letter that the banking agencies had 

submitted to the Financial Accounting Standards Board ("FASBU) 

concerning fair value accounting which expressed the agencies' 

concern about the practical implementation of market pricing on 

financial instruments such as loans that are held to maturity. 

October 14, 2010 
054 

In response to a question from Mr. Nash, Mr. Eller indicated 

that no specific date had been set for FASB action, but that a 

deferred effective date would apply to smaller non-public 

institutions. Mr. Eller also described other current accounting 

issues for the Committee, including a FASB proposal concerning 

leasing that might affect capital adequacy requirements. Member 

Blanton, Mr. Fritts, and Chairman Bair discussed the accounting 

treatment of banks building reserves relative to expected losses 

during better economic times. Other issues discussed by the 

Committee included: the Dodd-Frank Act's effect on credit 

ratings; new FASB guidance on triple debt restructuring; and 

dependency ratio requirements in light of the new, higher 

deposit insurance coverage limits. 

The Committee stood in recess at 10:35 a.m. 

* * * * * * * 

The meeting reconvened at 10:54 a.m. that same day. 

Diane L. Ellis, Deputy Director, Financial Risk Management and 

Research, FDIC Division of Insurance and Research ("DIR"), and 

Marc Steckel, Associate Director, Financial Risk Management 

Branch, Financial Risk Management and Research, DIR, led the 

third panel discussion, titled "The Evolving Deposit Insurance 

Assessment System," which focused on the Dodd-Frank Act's 

changes to the management of the DIF. Ms. Ellis reported that 

based on industry feedback and staff analysis, DIR was preparing 

several rulemakings, one of which is aimed to allow the FDIC to 

keep the DIF in the black throughout future economic cycles 

while charging steady premiums. This would entail, she 

indicated, a much larger DIF than in the past, with a reserve 

ratio minimum of about 2 percent. The benefit of doing that, 

she explained, would be that there could be a steady effective 

assessment rate of 8 to 8.5 basis points, or about half of the 

current rate, which would result in a much less pro-cyclical 

deposit insurance system. Ms. Ellis also discussed other items 

being developed for the FDIC Board's consideration, including: 

the terms of a DIF restoration plan; changes to the designated 

reserve ratio (now 1.25 percent, going to a minimum of 1.35 

percent); and a long-term policy about assessment rates and 

dividends to manage the DIF over the long run. 

Mr. Steckel then addressed matters being developed for 

later Board consideration. He observed that the Dodd-Frank Act 

changed the assessment base from a focus on domestic deposits to 

a focus on, roughly speaking, assets less capital, which would 

generally be beneficial to banks that fund with domestic 

October 14, 2010 
deposits. He stated that the FDIC had much implementation work 

to do, including defining key concepts and terms, and ensuring 

that the new assessment base continues longstanding policies 

regarding insurance pricing for banks. 

055 

In response to a question from Member Koch, Mr. Steckel 

discussed efforts to defuse the notion that there are 

institutions that are "too big to fail," and reiterated that 

deposit insurance would not be used to support large, uninsured 

conglomerates. Nonetheless, he observed, there were deposits in 

some very large, complex companies and that the FDIC was 

proposing a separate system for assessing them. 

Members Goodlock and Blanton voiced support for stable 

deposit insurance premiums and viewed building the DIF reserves 

as prudent. Members and staff discussed the need for Committee 

members and others who lived through the recent crises to be the 

institutional memory for why higher reserves are needed when, in 

the future, there will likely be calls for lowering premiums. 

In response to a question from Member Blanton, Ms. Ellis 

described estimated timelines to achieve the DIF goals; she 

noted that the DIF was recently $15 billion in the negative, it 

is estimated that it could be positive by early 2012, and that 

the 1.15 to 1.35 reserve ratio range might be reached by the end 

of 2018. She added that the cost of increasing the reserve 

ratios from 1.15 to 1.35 would be borne by institutions over $10 

billion in assets, not smaller ones. 

Member Goodlock and Ms. Ellis discussed the comparability 

of the DIF reserve to a bank's loan loss reserve and how large 

they should be. Chairman Bair expressed the view that the DIF 

is better analogized to capital than a loan loss reserve, and 

noted that the FDIC is trying to strike the right balance in 

order to avoid the DIF reserve from becoming negative in the 

event of a future crisis. 

In response to a question from Member Lewis concerning the 

effect of loss share agreements ("LSA") on bank failure losses 

and the effect of that on insurance assessments, Mr. Steckel and 

Ms. Ellis confirmed that LSAs were often the least cost 

resolution strategy, which would generally help keep assessments 

lower. The Committee further discussed failed bank resolutions, 

noting that as the FDIC and the resolution industry gained 

experience, the FDIC had achieved some improved resolution 

results. In response to a question from Member Schriefer, the 

Committee, staff and the Chairman discussed the changing 

October 14, 2010 
characteristics of failing and problem banks since the start of 

the crisis. 

In response to a question from Member Koch about how banks 

will be affected by the proposed changes in the assessment base, 

Mr. Steckel indicated that generally, most banks would benefit 

from the proposed changes, and that a small number of banks, 

mostly larger ones, with more non-deposit funding, would pay 

more. Responding to Member Rainey, Mr. Steckel estimated that 

assessments based on the June 2011 call report would be based on 

the proposed system. 

In response to a question from Member Lewis, Mr. Nash 

stated that the FDIC continued to be strongly committed to the 

community banking system, which was critical to the rebuilding 

economy and that there was no effort afoot to squeeze them out. 

Chairman Bair endorsed this view and added that, although there 

was consolidation during the crisis, the Dodd-Frank Act favored 

smaller banks, noting, for example, that many new requirements 

explicitly did not apply to institutions under $10 billion. In 

other ways, she said, the new law's changes would level the 

playing field that had previously favored larger institutions. 

The Committee proceeded to discuss the interaction of various 

forces acting on community banking such as the age of bank 

management and directorsi whether the field was attractive to 

new entrantsi and the impact of increased regulatory burden. 

At Chairman Bair's invitation, several members spoke about 

the impact of regulatory burden, noting that, among other 

things, smaller banks have less capacity to digest large numbers 

of changesi may have inadequate earnings to afford the necessary 

compliance expertisei and now find too many staff focused on 

compliance rather than traditional banking activities. Chairman 

Bair suggested that, if the banking industry became engaged, the 

new Consumer Financial Protection Bureau ("CFPB U ) could help 

simplify rules for the mutual benefit of consumers and the 

industry. Member Stewart later observed that community bankers 

could "use this opportunity to make good reform that makes sense 

and does the work.u 

Vice Chairman Gruenberg encouraged members to provide the 

FDIC with a list of compliance burdens and their costs, both in 

existing law and in the Dodd-Frank Act. In response, Member 

Brown reported that the cost of responding to new overdraft optin rules caused a $1 billion asset bank about $150,000 in 

compliance costs, while his own $136 million bank had increased 

Federal Reserve Regulation Z compliance costs of about 20 

056 

October 14, 2010 
057 

percent. Member Cole spoke about a "driftdown" effect that 

regulatory requirements for larger banks subsequently became 

good banking practices for smaller banks. Member Gray suggested 

that including safe harbor provisions in new laws and 

regulations would be extraordinarily helpful. Member Urrabazo 

recommended that banks be creative in responding to compliance 

requirements; for example, in implementing opt-in requirements, 

his bank had taken the opportunity to contact all of its 

customers and cross-sold other products. Mr. Nash urged the 

industry to accept the reality of the new CFPB and become 

constructively engaged in the regulatory process for the benefit 

of all. Member Miller observed that there was an important 

difference between regulation and enforcement of the regulation. 

Vice Chairman Gruenberg agreed, noting that the enforcement of 

regulations against non-bank financial service providers was a 

crucial issue and noted that it should be among the top 

priorities of the CFPB. 

Mr. Nash then introduced Kathleen G. Nagle, Associate 

Director, Consumer Protection Branch, Consumer Protection and 

Community Affairs, DSC, and Joseph A. DiNuzzo, Counsel, 

Assessments and Legislation Unit, Assessments and Legislation 

Section, Corporate, Consumer, Insurance, and Legislation Branch, 

FDIC Legal Division, who led the fourth panel discussion, 

titled, "Deposit Insurance Coverage and Advertising Rules." Mr. 

DiNuzzo began by reviewing deposit insurance coverage issues 

with the Committee in light of the Dodd-Frank Act which raised 

the Standard Maximum Deposit Insurance Amount to $250,000. 

After providing illustrative examples, he observed that it was 

possible for consumers to structure their deposits in a way to 

obtain a significant amount of deposit insurance coverage. Mr. 

DiNuzzo noted that different rules applied to business deposit 

accounts which are generally limited to the $250,000 coverage 

limit. He noted, however, that on a temporary basis (until the 

end of 2012), the Dodd-Frank Act provided for unlimited deposit 

insurance coverage for business non-interest earning transaction 

accounts (a program that is separate from the Transaction 

Account Guarantee ("TAG") Program that will expire at the end of 

2010) . 

Ms. Nagle began her discussion by noting that the FDIC had 

changed its advertising rule consistent with the $250,000 

coverage limit and that banks would need to update their teller 

signs by January 3, 2011. She then reviewed four products that 

the FDIC offers, at no cost, to assist banks and consumers to 

understand deposit insurance. The first is an electronic 

deposit insurance calculator, which can be adapted to reflect a 

October 14, 2010 
bank's name, logo and website appearance, if the offering bank 

chooses. The FDIC also provides: a call center seven days per 

week that responds to deposit insurance questions; the brochure 

"Insuring Your Deposits," which the FDIC has provided for 

consumer education since 1934; and telephone seminars on deposit 

insurance for bank employees. 

The Committee then discussed, and asked questions about, 

various deposit insurance issues. Member Brown discussed 

questions that had been raised in examinations about liability 

concentration risk when it appeared to examiners that too many 

customers had deposits over the coverage limits and thus might 

withdraw deposits if the bank appeared to be troubled. He noted 

that his bank had responded by working with customers to ensure 

that their deposits were titled so as to be insured, so that 

customers would be less susceptible to fears of uninsured 

deposits. 

Chairman Bair observed that in some failed banks, there had 

been complaints from uninsured depositors that they had been 

unaware of their lack of coverage, and solicited the Committee's 

views on whether it would be useful (or excessively burdensome) 

for banks to flag the insurance limit issue to new customers 

whose deposits neared the coverage limit. Members Brown and 

Blanton responded that such a rule may provide limited 

protection because many accounts are opened well below the 

coverage limit but drift upward over time. In response to 

questions from Members Brown and Rainey about disclosure 

requirements on sweep accounts for businesses, Mr. DiNuzzo 

responded that disclosure was required and model language was 

provided in the recent rulemaking, and would be further 

publicized when the rule became final. In response to a 

question from Member Cole, Chairman Bair stated that the FDIC 

and other regulators were reviewing adjustments to the 

dependency calculation in light of the higher insurance coverage 

limits. Generally, the Committee reviewed the FDIC's deposit 

insurance and educational products favorably. Member Blanton 

reported customers were much less concerned that all their 

deposits were covered by insurance than they had been a year ago 

and that he viewed it as a great sign that the crisis was 

passing. 

The Committee held a lunch recess beginning at 12:11 p.m. 

* * * * * * * 

October 14, 2010 

058 
The meeting reconvened at 1:41 p.m. Arthur J. Murton, 

Director, DIR, then led the discussion of "Mitigating Systemic 

Risk and the FDIC's New Resolution Authority." He observed 

that, in the period of late 2008 to early 2009, it became 

apparent that government policy makers had inadequate tools to 

deal with the problem of institutions being perceived as "too 

big to fail." As a result, the Dodd-Frank Act had made 

important changes to the law, he said, including changes to the 

FDIC's role in maintaining financial stability. Mr. Murton 

described three broad changes in the FDIC's role and its new 

Office of Complex Financial Institutions ("OCFI"), of which he 

is Acting Director. The first change is to give the FDIC 

"orderly liquidation authority" to wind down systemically 

important bank holding companies and nonbank financial 

companies. This authority, he explained, allows the FDIC, in 

appropriate circumstances, to take control of a failing 

institution, and maintain the essential operations while selling 

off the franchise. As in a failing bank resolution, 

shareholders would be wiped out and creditors would be left in 

receivership, thus imposing market discipline on these entities. 

He noted that a critical difference between the FDIC process and 

bankruptcy is that the FDIC is able to plan ahead for such a 

resolution, resulting in much less disruption. 

A second major change, Mr. Murton stated, is that the DoddFrank Act requires systemically important financial institutions 

to have resolution plans, also called "living wills," in which 

the firm provides the FDIC with information about their 

structure and exposures and describes a method by which they 

could be resolved (though the FDIC would not be bound by the 

plan if resolution actually became necessary). He noted that 

the resolution plans would be made pursuant to regulations 

issued jointly by the Federal Reserve and the FDIC, and reviewed 

by them. If the plans are deficient, the agencies can require 

changes to be made to them, or, ultimately, require divestiture 

of certain operations. Mr. Murton added that the resolution 

plans would not be one-time paper exercises, but rather, would 

be reviewed and updated on a regular basis. 

A third change that Mr. Murton discussed was the Dodd-Frank 

Act's creation of the Financial Stability Oversight Council 

("FSOC") that would take a broader look at financial trends and 

risk that had not been accounted for in the previous regulatory 

structure, and to address those issues as they arise. The FSOC 

has issued two Advance Notices of Proposed Rulemakings, he 

noted: one addressing how systemically important firms should be 

designated; and how to implement the Volcker Rule to end 

October 14, 2010 

059 
proprietary trading. In order to support the FDIC Chairman's 

role on the FSOC, Mr. Murton described several steps the OCFI 

will take to maintain a thorough understanding of how these 

financial institutions operate. One step will be to increase 

monitoring of such firms, including increasing the number of 

FDIC personnel in the largest banks. Another step will be to 

engage in horizontal, or peer, analysis of the institutions to 

identify where systemic risk is building. Other parts of the 

OCFI, he noted, will review the resolution plans/living wills of 

such firms, and another group will address international and 

cross-border issues to facilitate possible resolutions. Mr. 

Murton and Chairman Bair noted that no DIF funds would be used 

to support OCFI activities that do not relate to insured 

institutions. 

The Committee then discussed various issues relating to the 

new Dodd-Frank Act responsibilities, including: possible 

dilution of the FDIC "brand" as the FDIC addresses issues other 

than insured deposits; how monitoring of non-bank financial 

institutions will differ from that of insured institutions; and 

the budget for the OCFI (approximately $20-30 million per year) . 

Vice Chairman Gruenberg noted that a new tool the FDIC will have 

is the back-up examination authority for certain bank holding 

companies, in addition to the banks within them. Finally, 

Member Brown remarked that public relations will be important to 

the success of the new responsibilities, and noted that, in his 

experience, discussions of the "living will" concept resonated 

particularly well with the public. Member Cole expressed her 

appreciation for the FDIC's commitment to ending the perception 

that some institutions were too big to fail. 

Mr. Nash then introduced Ellen W. Lazar, Senior Advisor to 

the FDIC Chairman for Consumer Policy, and Luke H. Brown, 

Associate Director, Compliance Policy Branch, DSC, who discussed 

"Consumer Protection and Compliance Issues" with the Committee. 

Mr. Brown noted that the FDIC's new Division of Depositor and 

Consumer Protection, which will be separate from the risk 

management division, would become operational in early 2011, 

under the leadership of Mark Pearce, until recently Chief Deputy 

Commissioner of Banks for North Carolina. He discussed the 

Dodd-Frank Act's division of consumer protection 

responsibilities between the new CFPB and the FDIC; noting that 

the CFPB would have most of the rule writing authority and 

examination and enforcement duties for institutions with assets 

over $10 billion, while the FDIC would retain its examination 

and enforcement authority for insured institutions up to $10 

billion. With regard to those latter 4,700 institutions, Mr. 

060 

October 14, 2010 
Brown anticipated no significant changes in the FDIC's 

examinations or other interactions with those institutions. 

061 

Mr. Brown discussed recent proposed guidance on overdrafts 

that was based on the results of a national survey and which 

updated 2005 interagency guidance. He described the guidance as 

targeted to automated overdraft programs that are overused by 

some consumers, and reminds institutions to make meaningful 

disclosures and to ensure that consumers understand the risks 

and costs associated with overdraft protection. He indicated 

that staff is currently reviewing public comment on the 

proposal. 

Mr. Brown also discussed a variety of recent and current 

Community Reinvestment Act ("CRAil) activities, including: a 

series of interagency hearings across the country about whether 

the CRA regulations should be revisedj recent changes to the CRA 

regulations to support the stabilization of communities affected 

by high foreclosure ratesj revisions to CRA regulations 

concerning student loansj and a recent CRA forum for FDIC 

examiners. 

Ms. Lazar then provided the Committee with information 

about two FDIC pilot programs, one for transaction accounts and 

one for savings accounts, aimed at increasing the availability 

of banking services for moderate and low income consumers. She 

explained that the guiding principles for the accounts included: 

having transparent rates and fees that are reasonable and 

proportional to costSj being FDIC insured and compliant with 

consumer protection lawsj and being electronic, thus helping to 

limit banks' acquisition and maintenance costs. The FDIC would 

soon review applications from banks to participate in the pilot 

programs, which would run for one year, and which will yield 

information about the viability of the accounts, as well as 

their volume, use, and profitability. Ms. Lazar also discussed 

a recently concluded pilot program aimed at providing small 

dollar loans to consumers, as alternatives to overdrafts and 

payday lending. In response to questions from Committee 

members, she confirmed that the pilot programs were meant to 

encourage banks to engage in the activities by providing 

information, and were not mandatory. Chairman Bair added that 

the pilots were an outgrowth from the FDIC Advisory Committee on 

Economic Inclusion, were related to a study of the unbanked led 

by Vice Chairman Gruenberg, and were an attempt to bring more 

unbanked and under-banked consumers into the banking system by 

providing accounts that worked for their basic financial needs. 

October 14, 2010 
062 

The Committee then discussed a variety of consumer banking 

and protection issues, including: the interaction of the small 

dollar loan program with state usury laws (Member Urrabazo); and 

banks' reluctance to provide check cashing for checks not drawn 

on their own accounts (Member Blanton). In response to Member 

Cole's inquiry whether the small dollar loan pilot program had 

been profitable or cost neutral, Chairman Bair responded that 

they had been profitable overall. Ms. Lazar provided further 

data about the pilot program's charge-off and delinquency rates. 

Member Rainey described a problem facing banks concerning 

the authorization of ACH transactions that are then not 

submitted for payment until after the account balance has been 

reduced by subsequent check transactions to a point below the 

authorized ACH amount. In such cases, she noted, regulations 

require that the bank must pay the authorized ACH amount but do 

not allow it to charge the customer. Member Rainey reported 

that such occurrences cost her bank about $50,000 per year; 

Member Goodlock reported that his bank had $30,000 of such costs 

per year. 

Member Rainey also described a CRA problem that her bank 

had experienced because a recent surge of deposits had caused 

the bank's loan to deposit ratio to go to historical lows. She 

indicated that single factor had adversely affected the bank's 

CRA rating. Member Urrabazo observed that the loan side of the 

CRA equation is very heavily weighted, and Member Blanton 

suggested that a bank's market environment needs to be factored 

into CRA ratings. Chairman Bair inquired whether regulators 

fail to look sufficiently at the saving side of the CRA 

equation. Mr. Brown of DSC agreed that examiners should be 

looking at the bank's performance context and making appropriate 

adjustments. 

The Committee engaged in a wide-ranging discussion of 

overdraft program issues, including customers' frequency of use, 

the costs of frequent usage, the reasons for it, and 

alternatives to it. It was noted that the bulk of overdraft 

program fees tended to be paid by lower income customers. 

Member Urrabazo contrasted banks' traditional response to 

overdrawn checks (honoring approximately 15 percent and 

returning about 85 percent), to the reverse treatment in 

overdraft programs (accepting about 80 percent of overdraws) 

He noted that the current treatment was possible because of 

volume considerations, and that the overdraft program fees made 

it possible to offer other bank products for free. He and 

Chairman Bair discussed the relationship of frequent overdraft 

October 14, 2010 
program use to the extension of credit to such customers. 

Chairman Bair inquired why banks did not set up lines of credit 

for highly frequent users, or view overuse as a financial 

education issue and ensure that such customers were fully 

informed about credit alternatives that they might have, 

especially in light of the relatively high cost of overdraft 

program fees. In addition, she inquired whether regulators had 

contributed to the prevalence of overdraft programs instead of 

credit because the regulatory burden was higher on extending 

credit than charging fees. 

063 

The Committee members provided feedback on a variety of 

overdraft program issues. Members Blanton and Urrabazo reported 

that 81 and 85 percent of their customers, respectively, had 

chosen to opt in to their programs, and that frequent users were 

among the first to do so. Member Stewart advised that one 

should be cautious in viewing overdraft program fees as very 

expensive credit because, for customers in a difficult economic 

environment, such fees might be the best bargain in town 

compared to incurring late fees or charges elsewhere. Regarding 

the option of opening lines of credit for frequent overdraft 

program users, Member Schriefer noted that, in his experience, 

the line of credit was quickly used and not repaid, so that the 

customer was not put in an improved situation. 

Member Blanton, responding to the idea of contacting 

frequent overdraft users, expressed concern that such contacts 

might encourage customers to leave the banking relationship, 

especially if such calls began at six uses per year, which he 

viewed as too early. Vice Chairman Gruenberg shared 

observations about overdraft usage rates based on the FDIC's 

national survey, and supported the idea of ensuring that 

frequent users were aware of alternatives. Chairman Bair 

indicated that complaints about overdraft programs had doubled 

in the last couple years and that she viewed them as a 

reputational risk issue for community banks. She asked the 

Committee and community bankers to continue to think 

constructively with the FDIC about how to resolve the issue so 

that overdraft programs did not need to be an early focus of the 

new CFPB or discourage people from entering and maintaining 

banking relationships. 

The Committee stood in recess at 2:49 p.m. 

* * * * * * * 

October 14, 2010 
The meeting reconvened at 3:00 p.m. that same day. Mr. 

Nash then introduced Roberta K. McInerney, Deputy General 

Counsel, Corporate, Consumer, Insurance, and Legislation Branch, 

FDIC Legal Division, for the "Roundtable Discussion on the DoddFrank Wall Street Reform and Consumer Protection Act and Other 

Issues." Ms. McInerney noted that the FDIC was tasked with 44 

rulemaking initiatives under the Dodd-Frank Act and reviewed 

with the Committee how they and the public can access 

information about them through the FDIC website. She described 

how the website provides links to information on a great variety 

of topics, including: the legislation itself; links to webcasts 

of roundtable discussions of important issues; proposed 

rulemakings on which the public can comment; documents that 

describe steps the FDIC has already taken; as well as objectives 

and timetables for taking action on remaining legislative 

mandates. Mr. Nash indicated that the FDIC and other agencies 

were engaged in a substantial amount 0f consultation on many 

topics, and that it was not true that work is happening in 

silos; he then solicited questions and observations from the 

Committee. 

Member Lewis flagged a developing issue regarding 

correspondent banks and large banks not supporting letters of 

credit for community banks because of concerns about the 

treatment of them if the community bank failed. Mr. Spoth 

indicated that he would follow up on the issue on behalf of the 

FDIC. 

At the request of Mr. Nash, the Committee members discussed 

economic and banking conditions in their regions. Member 

Blanton noted that, in Georgia, some areas continued to struggle 

while others were doing better, with good employment and good 

industry; although the economy was slow, it was acceptable. 

Although not many banks were raising capital, he observed that 

some organizations were acquiring banks through FDIC loss share 

agreements and other means. Member Stewart noted that most 

distressed banks in the Washington region were west of the 

Cascade Mountains and that some of the problem banks had been 

able to recapitalize. Unemployment was down a small amount, she 

said, home values had stabilized in the Puget Sound region, and 

her bank was experiencing an unanticipated refinancing boom. 

Member Koch reported that the South Carolina economy was 

flat at best; unemployment was at about 11 percent. He said 

that bankers were primarily just treading water, trying to 

reduce concentrations and that there was little new lending. 

Member Gray indicated that California had pockets that were 

064 

October 14, 2010 
doing well and others that were really suffering. A major 

concern, in his view, was the state government budget deficit. 

He also reported that there was high unemployment, that 

prospects were relatively poor because the economy was less 

diversified than in the past, and that many jobs were 

permanently gone. He indicated that there was increasing talk 

of mergers among weak banks. 

065 

Member Goodlock stated that agriculture and tourism were 

bright spots in Michigan, but that its largest industry, 

automobile manufacturing, was still suffering. He reported that 

some pockets of the state continued to do well but that others, 

including the Detroit area, still suffered. There had been 

failed banks for which there had been no bidders for the assets, 

he said, and recently, there had been talk of "zombie" banks 

that were not failing but had trouble growing because of capital 

constraints. He indicated that real estate values appeared to 

have hit their low, and also that he was concerned what would 

happen if unemployment compensation was not renewed. Member 

Rainey stated that New Mexico was still technically in recession 

but that, in the northern part of the state, the economy seemed 

to have settled. She reported that there were some signs of 

returning loan demand but it was occurring in areas where the 

bank had to manage concentrations, such as CRE and construction. 

Member Brown of Florida stated that he was currently more 

optimistic than he had been 90 days earlier. He noted that 

lower end housing was stabilizing, that vacant land prices had 

settled quite a bit, but that CRE was unclear, and that there 

might be a burst of foreclosures. 

Member Schriefer reviewed the economic conditions in 

different parts of Kansas: the Kansas City area struggled the 

most, with many unprofitable banks; the Wichita area was fairly 

flat; and agricultural areas, such as Russell, were doing 

better. In his view, one quarter of banks in his region were 

looking forward to new opportunities; half were just holding 

steady, and one quarter were questioning their future due to 

regulatory or management problems. Member Urrabazo reported 

that although some pockets of Texas still suffered, the 

metroplexes had done fairly well. The real estate market 

remained down overall, in his view, but there had been an influx 

of new jobs and residents. He observed that the import-export 

business in border areas had picked up, likely because of 

increased car manufacturing, and that many banks were adjusting 

to restructurings that occurred in the prior year. 

October 14, 2010 
066 

Concerning Tennessee, Member Cole reported that they had 

experienced fewer bank closures than other areas but that many 

smaller community banks needed capital boosts. She reviewed 

economic issues in different areas of the state and noted that 

Nashville condominium developments had been a big problem and 

continued to be a challenge for banks. Member Miller indicated 

that the New England economy was adequate overall, that there 

had been less overbuilding there than in other areas, and that 

unemployment had begun to ease, although it remained the biggest 

challenge. Member Lewis described the Phoenix, Arizona area as 

being "in the tank" and that, with the volume of vacant CRE 

there, it would be a long time before they pullout. Tucson, on 

the other hand, was much better off and had some industries 

starting to see increases, such as defense, biomedical research, 

and agriculture. 

Member Lewis also inquired about the FDIC's views about the 

Committee's contributions over its year of existence and if a 

scorecard of issues might be created. Mr. Nash responded that 

the Committee had provided an early warning to the FDIC about 

the TAG account which enabled the FDIC to take proactive steps 

on the issue. The FDIC had also found the Committee's 

contributions on overdraft protection to be very helpful as the 

FDIC developed its policies, he said, and intended to rely on 

the Committee in a similar way in the future. Finally, Mr. Nash 

noted generally that it was helpful for the FDIC to hear from a 

cross-section of the industry from around the country. Chairman 

Bair stated that the Committee had exceeded expectations at each 

meeting and continued to get better. Agreeing with Mr. Nash's 

observation about the TAG program, she added that she learned a 

lot at each meeting and created lists of subjects to pursue 

afterward, such as: FDIC's stress testing expectations, 

requiring appraisals, workouts and/or write downs, and their 

pro-cyclical impact; and the effect of deposit ratios on CRA 

ratings and how the FDIC deals with that. Chairman Bair said 

that she found the meetings helpful to her and hoped that the 

Committee also found them helpful to know what the FDIC was 

thinking. Vice Chairman Gruenberg agreed with the Chairman's 

appreciation for the Committee's input, and noted in particular 

that the Committee's "granular feedback" gave him and the FDIC a 

much better feel for the banker's perspective, which allowed the 

FDIC to make better informed judgments on the various issues 

before it. 

October 14, 2010 
There being no further business, the meeting was adjourned. 

Executive Secretary 

Federal Deposit Insurance Corporation 

And Committee Management Officer 

FDIC Advisory Committee on Community 

Banking 

October 14, 2010 
Minutes 

of 

The Meeting of the FDIC Advisory Committee on Community Banking 

of the 

Federal Deposit Insurance Corporation 

Held in the Board Room 

Federal Deposit Insurance Corporation Building 

Washington, D.C. 

Open to Public Observation 

October 14, 2010 - 8:38 A.M. 

I hereby certify that, to the best of my knowledge, the attached 

minutes are accurate and complete. 

Sheila C. Bair 

Chairman 

Board of Directors 

Federal Deposit Insurance Corporation 

and 

Presiding Officer 

October 14, 2010, Meeting of the 

FDIC Advisory Committee on Community Banking 

Dated: January 18, 2011