Banking regulation might have been too lax before the housing bust, but federal lawmakers at a hearing in Newnan questioned Tuesday whether the crackdown since then has unfairly punished community banks and slowed the industry’s recovery.
“Banks that are too big to fail survived. Banks that are too small have been cut loose,” said Rep. Lynn Westmoreland, a Republican from Coweta County who is also a former home builder.
More than 100 people -- mostly bankers, homebuilders or regulators -- attended the hearing. Westmoreland was joined by three other members of the panel, including David Scott, a Democrat who represents areas of south and west metro Atlanta.
They said regulators from the Federal Deposit Insurance Corp., the Federal Reserve and the Office of the Comptroller of the Currency may have become overzealous in their enforcement of community banks.
Bankers, they said, complain of “mixed messages” from regulators, especially when it comes to helping distressed borrowers.
Georgia leads the nation in bank failures with 67 since mid-2008, and the state remains stuck in a fickle recovery.
Most of Georgia’s failed banks are small community institutions that lent to developers in a white hot real estate market.
Critics have alleged uneven treatment of troubled banks and said methods the government uses to dispose of failed banks harm borrowers and could be hindering the economic recovery by restricting credit.
Regulators, however, said their practices are designed to return the industry to health so that banks can help fund an economic rebound.
“We want banks to deploy capital and liquidity, but in a responsible way that avoids past mistakes and does not create new ones,” said Kevin Bertsch, associate director of bank supervision and regulation for the Federal Reserve. Regulators also said they’ve instituted guidance to help banks work with distressed borrowers.
Chuck Copeland, chief executive of First National Bank of Griffin, complained of “regulatory paralysis,” and of bankers being criticized in hindsight after previously receiving top marks for management.
Michael Rossetti, a home builder and bank director, said banks and businesses “are being regulated to death,” and that orders to reduce concentrations in risky loans have curtailed sensible lending.
Gary Fox, former chief executive of Bartow County Bank, which failed in April, said Georgia was overbanked during the housing bubble, with too many new institutions allowed to form in 1990s and 2000s when banking laws were relaxed.
That led to riskier lending practices as banks competed for business, he said.
Westmoreland and Scott -- often at opposite ends of the ideological spectrum -- are co-sponsoring a bill to require the inspector general of the FDIC and the nonpartisan Government Accountability Office to examine enforcement practices and sales of failed banks to healthy rivals.
So-called loss-share deals are often offered to attract buyers of failed banks, with the FDIC absorbing a large percentage of the losses on bad loans. Regulators say loss-share deals have saved the FDIC’s deposit insurance fund, which backstops deposits, $40 billion. Critics charge the deals result in fire sales of assets and injure borrowers.
Regulators also say the deals help maintain real estate values better than earlier failed bank liquidations, which involved bulk auctions of assets.
The bill also would examine certain accounting practices that critics say force banks to write down the value of certain performing loans, often involving real estate.
“Most of the banks that failed [in Georgia] have been appraised out of business,” said Fox.
The bill has passed the U.S. House of Representatives and is pending in the Senate.
Rep. Spencer Bachus, R-Ala., another member of the subcommittee and chairman of the House Financial Services Committee, criticized some regulators’ actions, but added it can be “human nature” to blame someone else for problems. Bachus said regulators might have made mistakes but added he doesn’t think they forced bank failures.
The subcommittee members present, who also included Chairwoman Shelley Moore Capito, R-W. Va., all have received contributions from financial institutions over the years.
Brian Olasov, an expert in distressed real estate and a non-attorney managing director at Atlanta law firm McKenna Long & Aldridge, said regulation has skewed too strict in the wake of the recession.
“Nobody saw the depth and severity of the problem,” he said.
Kevin Jacques, finance professor at Baldwin-Wallace College in Ohio and a former U.S. Treasury Department economist, said the banking crisis exposed serious problems hidden inside many once-profitable banks, leaving regulators to walk a tightrope between oversight that is too harsh or soft.
“Regulators make a very nice target for politicians for being too stringent [during a bad economy],” Jacques said.
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