The American Banker's Editor-at-Large Barbara Rehm's latest column (paid subscription required) is reason enough to subscribe to that trade publication, if you're not already doing so. Barbara brings to light something that we didn't see during the last banking crisis, perhaps because in the 1980s, there were so many wild and woolly cowboys riding savings and loans off cliffs that state banking regulators didn't think that they should get between the federal banking regulators and the state banks that were free-falling to their inevitable collision with a hard surface. This time around, state regulators are speaking up.
Community bankers who argue federal regulators are being too tough on them have a surprisingly vocal ally: state commissioners. Like their federal counterparts, the state commissioners are committed to ensuring banks operate prudently and customers are protected from abuses. Many just think the job could be done more reasonably.
"I don't necessarily disagree with some of the things [federal regulators] are saying, but they are using a sledgehammer to kill a gnat," said Mississippi Banking Commissioner John Allison.
Heavy-handed federal bureaucrats who enjoy bullying small bankers? Who would have ever thought such an animal existed?
As was the case during the last meltdown, the federal regulators, especially the FDIC, argue that they should be driving the bus, because it's the FDIC's money, not the state's money, that's at risk when a bank fails. That's a legitimate point and one that state bank regulators I speak with concede. The complaint, however, is not that the feds are driving the bus, it's that they're driving it too fast and too aggressively.
The questions this raises for policymakers include: Is the dual banking system being weakened? Are talented bankers being prevented from managing their way out of a mess? Will that further concentrate the banking business? Will it thwart economic recovery?
These aren't unimportant issues to community bankers, or the larger economy, because notwithstanding the fact that the biggest banks are national banks (where they enjoy their federal preemption and the fact that they have only one primary regulator), approximately 80% of the total number of banks in this country have a state, not a federal, charter. Most small town banks are state banks, and, therefore, many smaller communities are feeling the pinch o when federal regulators beat down and (as has been happening with hundreds of them over the last few years) close down state banks.
Apparently, things have been getting a bit tense between the state and federal regulators lately.
Some state commissioners are refusing to sign enforcement actions initiated by the Fed or FDIC, saying they are simply too severe. This is not a frequent occurrence, but it is happening.
"Whatever you have to say as a state regulator really doesn't matter," said Tom Gronstal, who just completed nine years as Iowa's banking commissioner.
Gronstal said he has complained about it to federal regulators. "They were polite the first few times I said anything. They didn't really believe me. After that they just didn't want to hear it. They have their system and they are going to run with it."
According to Barbara, state officials are not blaming the local federal officials with whom they interact, but the Borgs in D.C.
Topping the list of complaints is that Washington is preventing field examiners from exercising judgment, or as one state commissioner put it "using any common sense." "The federal regulators paint banks with a broad brush and the state regulators look at them individually," said Mick Thompson, who has led the Oklahoma banking department since 1992. Thompson said, and other commissioners agreed, that an assessment of management talent is key to determining how much rope to give a bank. "It all goes back to management," he said. "If we have confidence in management, we are going to work with them a little bit more."
Federal officials nesting in our nation's capitol naturally deny that state regulators have any cause to complain, one even expressing bewilderment as to why they might be saying such things. Of course, they also express absolute confidence in Hosni Mubarak's continued hold on power in Egypt.
Boiling down the state regulators' complaints about the federales to their bare bones, they appear to be the following:
- If every troubled bank that is examined is hit with low ratings per a one-size-fits-all policy that disregards management's ability to recover, the low rating itself will make it virtually impossible for the bank to raise capital needed to work its way out of its problems. In other words, the clampdown becomes an accelerator of an inevitable death spiral.
- The restrictive clamps put on banks by enforcement actions are impeding the lending function, which not only hurts the banks' chances of recovery, but the economy's chances of working its way out of the malaise in which it wallows.
- The federal regulators are, intentionally or not, killing the community banking business in twos, threes, and fours-or-more at a time, which, in turn, is hastening the concentration of the banking business. As Connecticut's banking commissioner, Howard Pitkin, puts it, "If the federal government doesn't recognize that they have regulation run riot, the whole thing is going to go away and we are going to have large banks, which will not serve anybody's interest except for the very largest businesses." Howard, I hate to say it, but for all of the populist doublespeak that spews forth from certain quarters of D.C., that may very well be the hidden agenda.
As someone who's represented both the elephants and the hamsters of the banking business during the last three and one-half decades, I hope I'm wrong. I hope articles like Barbara's engender some serious dialogue, reflection, and cooperation between state and federal regulators to save those community banks that may be salvageable by some solution short of a bullet in the head. Given the fact that I receive e-mails from federal bank regulators like the following, this one from someone who asked that his/her name not be used, I'm not holding my breath:
Kevin, good capitalist that you are, I am sure you realize these institutions went under mainly because they made too many loans to people with no ability to pay them back when times got tough. [The federal banking regulator for which this individual works] didn’t cause them to fail. All the agency did was mercifully put those banks out of their misery (and into the loving hands of the FDIC) when they had already ruined themselves.
That's what you're dealing with, state bankers and state bank regulators. Every bank that fails does so solely because of its own ineptitude. The only mistake regulators make is not closing them down quickly enough. Nothing the regulator does contributes to the failure of any bank, other than not cracking down on the bank soon enough. Anyone who says anything to the contrary is sneer-worthy.
Speaking of which, below is rare footage of Sheila Bair's conversation with a state bank regulator who simply won't get with the program and join the hive.






