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ICBA Urges Congress to Support Legislation to Address Oppressive Exam Environment for Community Banks

Washington, D.C. (July 8, 2011)—James McKillop, president and CEO of the Independent Banker’s Bank of Florida, today urged members of the House Financial Services Subcommittee on Financial Institutions and Consumer Credit to support ICBA-backed legislation to address the smothering effects that community banks face from over-regulation.

McKillop advocated for the following key bills that would provide needed regulatory reform:

  • The Common Sense Economic Recovery Act of 2011, H.R. 1723
  • A bill to instruct the Federal Deposit Insurance Corporation Inspector General to study the impact of insured depository institution failures, H.R. 2056
  • The Communities First Act, H.R. 1697

Enactment of these bills would go a long way toward improving the oppressive examination environment and the economic recovery in local communities across the nation.

“The exam environment is discouraging lending at the very time that bank credit is needed to sustain the economic recovery,” McKillop said during his testimony. “What is particularly frustrating to community bankers is that field examination practices are often not consistent with the directives from Washington. The misplaced zeal and arbitrary demands of examiners can have a chilling effect on credit.”

McKillop went on to outline specific community bank concerns, including write-downs of performing loans based on collateral value despite the cash flow of the borrower, second-guessing of appraisals and moving the capital goalposts beyond what is required by regulation.

“While all banks accept the need for balanced regulatory oversight, the pendulum has swung too far in the direction of over-regulation,” McKillop said. “ICBA supports H.R. 1723 because it will reaffirm existing agency guidance on loan classifications and bring more consistency to the examination process. The bill provides that a loan must be put on accrual status if it has been paid on a current basis for the past six months, among other conditions.”

Establishing conservative, bright-line criteria will allow lenders to modify loans, as appropriate, without fear of being penalized. If H.R. 1723 becomes law, it will give bankers the flexibility to work with struggling but viable borrowers and help banks maintain the capital they need to support their communities.

“ICBA also supports H.R. 2056, which would require the Inspector General of the FDIC to study examination and resolution policies that may contribute to the current difficult environment for banks,” McKillop continued. “The study would focus on many of the concerns that we have identified in the current exam environment, such as paper losses that cause an institution to raise more capital and commercial real estate loan workouts.”

ICBA fully supports H.R. 2056 and believes it might also be appropriate for the GAO to work closely with the FDIC inspector general because the topics to be studied—with the exception of loss-sharing agreements—are common to all the federal banking agencies and affect all banks, not only those examined by the FDIC.

McKillop also advocated for the beneficial Communities First Act (H.R. 1697), or CFA, which contains many reforms that would improve the regulatory environment and community bank viability. “CFA would raise the threshold number of bank shareholders that triggers SEC registration from 500 to 2,000—SEC compliance costs are a significant expense for listed banks,” he said. “Another provision would extend the five-year net operating loss carryback provision to free up community bank capital now when it is needed most. We’re very pleased that CFA has growing bipartisan co-sponsorships in the House.”

To read McKillop’s full testimony, visit www.icba.org.