A bipartisan group of representatives is trying to move forward through the House a bill (the "Financial Institutions Examination Fairness and Reform Act") that would provide a modicum of due process for bankers who believe that they've been dealt an unfair report of examination by their federal banking regulator. The scheme involves the use of an ombudsman (actually, an ombudsman on steroids) and, if the bank wants to take it that far, an administrative law judge. It's not as objective a forum as a federal district court, but it's not as public a forum, either. When you're dealing with a report of examination that contains adverse findings, especially findings you think are damaging and unfair, the confidentiality of the proceedings are likely an attractive trade-off.
As expected, the federal banking regulators have responded like they'd been prodded in their sensitive areas by a taser on "full-tilt-boogie" setting. According to an article in last week's American Banker by Kevin Wack (paid subscription required), bank regulators warned of dire consequences should their "hands be tied" by that dreaded Fifth Amendment to the U.S. Constitution.
"The bill would, in certain instances, tie the hands of regulators when they believe a bank's risk profile requires more capital," Jennifer Kelly, the Office of the Comptroller of the Currency's senior deputy comptroller for midsize and community bank supervision, said in testimony to the House subcommittee on financial institutions and consumer credit.
"A few months' delay in implementing corrective measures, particularly in times of precipitous economic decline, can mean the difference between failure and survival for a troubled bank," she said. "More fundamentally, we believe the authority granted to this office would compromise the independence of the banking agencies."
Yes, I can see where having your hands tied by due process requirements can be annoying. Baby Doc Duvalier used to complain about the same thing, so he just had everyone he didn't like shot. As to "the difference between failure and survival" boiling down to "a few months' delay" during which a hearing must take place before someone more objective than either contestant, that's a load of something you don't want to step in, even if you work around cattle all day and are used to the smell. Please name one bank that failed over the last three years where the outcome would have been affected by a 60- or 90-day delay to contest an adverse examination report. Please name one troubled bank that did not fail during such perriod but would have failed if "corrective measures" mandated by an adverse examination report would have been delayed by 60-to-90 days.
[Sound of crickets chirping]
Committee members were, for the most part, unsympathetic to the regulators' concerns.
"I kind of wonder if we're a little bit in an alternative universe here," Capito said, referring to the difference between the agencies' testimony and the assertions of bankers that the regulators' standards are tightening and inconsistent. "Is there a big disconnect here?"
Rep. Lynn Westmoreland, a Georgia Republican, whose home state has been hit particularly hard by bank failures, responded to the argument that Congress should not meddle with exam standards by asking the regulators: "So do you think we can screw up this more than ya'll have?"
Kelly responded that the OCC is constantly talking to banks and soliciting their views on inconsistencies in exams. "So we are continuing to try to work these issues very aggressively," she said.
Later, upon learning that the FDIC bars retaliation against banks that complain about their exam results, Westmoreland resorted to a colorful analogy.
"That's like your dog having its teeth into your neighbor's leg, and you telling the neighbor, I don't allow it to bite," he said.
It's hard to warm up to politicians these days, but those were some righteous licks those folks got in.
Here's the bottom line, I think: this bill stands a chance of being passed this year that is somewhere between "slim" and "none." Until the national elections in November, Congress is merely a frozen mass of brake lights clogging the legislative superhighway. On the other hand, these bills, and the fact that they're receiving bi-partisan support, set down markers that can be useful in "persuading" regulators to ease up on the jackboots planted on the neck of the community banking business before their wings are seriously clipped by Congress. They can also point a path to a future legislative approach if partisan gridlock ever breaks free (for which some readers tell me I'm daffy to even hope). I expect to see similar bills proposed that will also take a "fundamental due process" approach in other areas of bank regulation where banks believe the regulators have seized "A Bridge Too Far."
UPDATED 02.06.12 TO MAKE MORE COHERENT THE POINT ABOUT 60-T0-90 DAY DELAY NOT BEING A "LIFE-OR-DEATH" PROPOSITION. BLAME THE ORIGINAL VERSION ON INATTENTION CAUSED BY THE SUPER BOWL, WHICH IS AN EXCUSE THAT PRESENTS ITSELF ONLY ONCE A YEAR.