Community banks generally have been pleased with the exam environment during the pandemic. However, as the pandemic winds down, ICBA urges examiners to be broadly flexible in their review of Paycheck Protection Program loans. Given the urgent circumstances under which these loans were made and the ambiguous and frequently shifting guidance from the Small Business Administration, any second guessing of these loans by examiners would effectively punish lenders who acted in good faith and whose only concern was to support their communities in a crisis.
In the wake of the pandemic, ICBA urges examiners to be flexible with regard to bank capital levels. Stimulus payments and PPP loans have created an abrupt inflation of balance sheets and have created pressure on capital positions. This should be viewed an effect of the government’s response to the pandemic that warrants examiner flexibility.
ICBA will resist efforts by the regulators to impose hard concentration limits on any type of lending, including lending to fossil fuel or other carbon-intensive industries. ICBA will oppose stress testing based on adverse climate change assumptions.
The banking industry should not be used as a lever to reduce carbon emissions (in the manner of the FDIC’s prior “Operation Choke Point”) through undue scrutiny of loans to carbon-intensive industries or disclosure requirements.
Community banks are concerned that certain restrictions or practices that apply to the largest banks will come down to their level as “best practices.” Examiners should not apply large bank practices to community banks that operate according to a different, less complex, and more conservative business model.
ICBA opposes a supervisory process that places community banks at a competitive disadvantage to larger institutions due to inconsistent oversight.
ICBA supports legislation that would reform the appellate process for agency decisions or actions and allow bankers to appeal to an independent council or ombudsman office an adverse determination made by an examiner in an exam report. The FDIC’s proposal to replace the Supervision Appeals Review Committee with a more independent Office of Supervisory Appeals is a positive step.
ICBA supports regulation that would limit the use of Matters Requiring Attention (MRAs) to violations of law, regulation, or material safety and soundness issues.
In some cases of bank failure, the FDIC, in its capacity as receiver, has gone too far in its attempts to recover from directors and officers on the grounds of negligence or gross negligence. The business judgment rule in most states should protect bank directors and officers from business decisions made in the ordinary course of business.
Community Banks and the Pandemic
Community banks have generally been pleased with the exam environment during the pandemic. However, as we emerge from the pandemic, ICBA strongly advocates for examiner flexibility. Examiners should not second guess PPP loans which were extended under crisis conditions and with shifting guidance from the Small Business Administration. Examiners should also be flexible with regard to capital levels which are currently under pressure as a result of the impact of stimulus payments and PPP-related deposits on community bank balance sheets.
ICBA strongly advocates for an environment where regulators and financial institutions work together to help consumers and small businesses have access to financial products and services. An atmosphere of “gotcha” examination and supervision – which was common before the pandemic – where community banks are exposed to legal and compliance risk for minor, inadvertent calculations or documentation errors, is inappropriate and counterproductive.
There should be latitude for informal dialogue. Not every minor suggestion made during an exam should be formally recorded as a “Matter Requiring Attention.” These should be limited to violations of law, regulation, or material safety and soundness. Examiners should use reasonable judgement and respect in the conduct of exams. A more flexible approach would allow for less guarded interactions and a more productive partnership between bank management and examiners.
Additional concerns include:
Compliance exams have broadened in scope and a wide range of loans and disclosures have become subject to scrutiny under fair lending, Unfair, Deceptive, or Abusive Acts and Practices (UDAAP) and the Truth-in-Lending Act.
Regulatory agreements that limit a bank’s ability to declare dividends harm shareholders and make it more difficult for the bank to raise capital.
Hard concentration limits on any type of lending, including commercial real estate (CRE), agricultural, or residential mortgage lending will reduce credit availability and harm economic growth.
Applying “Best Practices” to Community Banks.
Community banks are concerned that certain restrictions or practices that apply to the largest banks will come down to their level through the examination process as encouraged or expected “best practices.” Examiners should not apply large bank practices to community banks that have a different, less complex, and more conservative business model.
Examiners also should not criticize community banks in their final written examination reports for not complying with “best practices” unless the criticism involves a violation of bank policy or regulation. Industry “best practices” should be transparent and sufficiently known throughout the industry before they are cited in an examination report.
ICBA supports legislation that would reform the procedure for seeking review of an agency decision or action resulting from an exam, including classification of a loan, an exam rating, or the adequacy of loan loss reserve provision. Currently, bankers can seek review of these actions or decisions within the agency internally or through its ombudsman’s office. However, these appeals are usually not successful. Furthermore, community bankers often choose not to appeal out of fear of retaliation.
ICBA supports legislation that would allow bankers to appeal to an independent council or ombudsman office that would prohibit any sort of retaliation against the bank for exercising its right of appeal. ICBA also supports the FDIC’s recent efforts to replace the Supervision Appeals Review Committee with a more independent Office of Supervisory Appeals. However, we recommend expanding the reviewing panel within the Office of Supervisory Appeals from three to five members and requiring that two of the members be either former community bankers or attorneys that have represented community banks on supervisory issues.
FDIC Overreach Against Directors and Officers of Failed Banks
ICBA believes that in some cases the FDIC is overreaching in its lawsuits against directors and officers of failed banks. State business judgment rules should protect the decisions made by officers and directors in the ordinary course of business, including lending decisions. Officers and directors should only be liable in cases of gross negligence or fraud. Aggressive FDIC lawsuits against directors and officers of failed banks exacerbate the challenge of recruiting and retaining community bank directors and officers.
Impact of Climate Change Initiatives
Congress, the White House, and the Agencies are increasingly focused on the intersection of climate change and the financial industry. Some wish to use finance as a lever to force the reduction of carbon emissions. Others are concerned about the potential impact of climate change on asset values. ICBA believes we will see proposals for monitoring and disclosure of bank loan portfolios’ exposure to carbon-intensive industries, stress testing based on adverse climate change assumptions, and concentration limits. ICBA will oppose these initiatives.
Community banks must not be a mechanism for a forced reduction of carbon emissions. Moreover, because they know their customers and communities, community banks
are best positioned to monitor the risk of their own portfolios and banking practices.