Remarks by FDIC Chairman Sheila C. Bair
to the Independent Community Bankers of America's
2010 National Convention and Techworld; Orlando, Florida
March 19, 2010
This has been a season of challenges for the banking industry and our economy. It has
also been a season in which many groups – including this one – have been trying to
send a message to Washington about what will work and what will not work in terms of
economic policy. I think you're getting through.
The message we're hearing in Washington is this: Community banks are essential to
the economy, but many of them are experiencing acute credit distress; Community
banks are doing more than their share under difficult circumstances to provide the credit
that will be needed to create jobs in the recovery; Community banks are looking for a
balanced approach to supervision and regulation as they themselves walk a fine line in
their lending policies; and Community banks support regulatory reform that finally ends
too big to fail and levels the playing field, but they rightfully oppose reforms that just
heap more regulation on them.
Economists tell us that the worst of the recession is behind us, yet we know that credit
performance is a lagging indicator. You are still seeing the effects of the recession in
your past-due and nonaccrual loans. Our latest Quarterly Banking Profile showed that
noncurrent loans at FDIC-insured institutions reached a record high of almost 5.4
percent at year end. The credit crisis, which began on Wall Street, is now mostly being
felt on Main Street. Your customers are feeling the effects of diminished cash flows and
lower collateral values. And you are seeing your nonperforming loans continue to rise.
Amid these ongoing events, some clear lessons stand out for all to see. First, the worst
excesses that led to the credit crisis were not generated by community banks. To be
sure, many community banks are highly dependent on commercial real estate and
construction loans. And these concentrations did create a vulnerability to the credit
crisis we have seen in mortgage and real estate markets during the past three years.
Institutions that did not manage these risks are now experiencing high credit losses and,
in many cases, lower supervisory ratings. But most of the risky subprime and
nontraditional mortgages that fueled the housing bubble were not the work of
community banks. They were the work of a highly complex, disjointed and
depersonalized securitization process.
By contrast, community banking is a relationship business, where character and
creditworthiness both count, and where you take care of your customers because they
are more than just a number to you. Small businesses create two thirds or more of all
net new jobs. And they overwhelmingly rely on credit provided by community banks.
Overall bank lending is down. Total loans and leases held by FDIC-insured institutions
fell by 7.5 percent in 2009 – the steepest decline since 1942. Several factors are
responsible for this, including weak demand from household and business borrowers a
to the Independent Community Bankers of America's
2010 National Convention and Techworld; Orlando, Florida
March 19, 2010
This has been a season of challenges for the banking industry and our economy. It has
also been a season in which many groups – including this one – have been trying to
send a message to Washington about what will work and what will not work in terms of
economic policy. I think you're getting through.
The message we're hearing in Washington is this: Community banks are essential to
the economy, but many of them are experiencing acute credit distress; Community
banks are doing more than their share under difficult circumstances to provide the credit
that will be needed to create jobs in the recovery; Community banks are looking for a
balanced approach to supervision and regulation as they themselves walk a fine line in
their lending policies; and Community banks support regulatory reform that finally ends
too big to fail and levels the playing field, but they rightfully oppose reforms that just
heap more regulation on them.
Economists tell us that the worst of the recession is behind us, yet we know that credit
performance is a lagging indicator. You are still seeing the effects of the recession in
your past-due and nonaccrual loans. Our latest Quarterly Banking Profile showed that
noncurrent loans at FDIC-insured institutions reached a record high of almost 5.4
percent at year end. The credit crisis, which began on Wall Street, is now mostly being
felt on Main Street. Your customers are feeling the effects of diminished cash flows and
lower collateral values. And you are seeing your nonperforming loans continue to rise.
Amid these ongoing events, some clear lessons stand out for all to see. First, the worst
excesses that led to the credit crisis were not generated by community banks. To be
sure, many community banks are highly dependent on commercial real estate and
construction loans. And these concentrations did create a vulnerability to the credit
crisis we have seen in mortgage and real estate markets during the past three years.
Institutions that did not manage these risks are now experiencing high credit losses and,
in many cases, lower supervisory ratings. But most of the risky subprime and
nontraditional mortgages that fueled the housing bubble were not the work of
community banks. They were the work of a highly complex, disjointed and
depersonalized securitization process.
By contrast, community banking is a relationship business, where character and
creditworthiness both count, and where you take care of your customers because they
are more than just a number to you. Small businesses create two thirds or more of all
net new jobs. And they overwhelmingly rely on credit provided by community banks.
Overall bank lending is down. Total loans and leases held by FDIC-insured institutions
fell by 7.5 percent in 2009 – the steepest decline since 1942. Several factors are
responsible for this, including weak demand from household and business borrowers a
decline in the credit standing of many borrowers and tighter standards on the part of
many banks.
But the one group of banks that has proven to be the steadiest source of credit is
community banks. During the final quarter of 2009, loans and leases at the largest
banks – those with over $100 billion in assets – fell by 2.8 percent, or about seven times
as much in percentage terms as the decline at community banks. These largest banking
organizations accounted for more than 90 percent of the total drop in bank lending for
the quarter. The smallest banks – those with assets less than $100 million – actually
increased their loans by more than half of one percent. While so many big banks keep
pulling back, you are hanging in there, doing your best to support the credit needs of our
struggling economy. That deserves recognition in Washington, and all of our thanks.
Supervisory Guidance
As you know, the FDIC supervises almost 5,000 banks – mostly community banks. So
we have a keen appreciation for the role you play in the economy and the challenges
you have faced as the recession hit Main Street full force. In the Fall of 2008, at the
height of the financial crisis, the FDIC took a leading role as the federal banking
agencies issued a joint statement to the industry on meeting the needs of creditworthy
borrowers. The statement pointed out that in the wake of the crisis our economy would
become even more dependent on bank credit, and that it would be in everyone's
interest for banks to make prudent lending a priority.
In October, regulators again called attention to credit distress and credit availability with
a new statement on commercial real estate (CRE) loan workouts. The CRE guidance
encourages banks to continue making good loans to commercial real estate
borrowers—most of which are small businesses. It also encourages banks to work with
borrowers that are experiencing difficulties in their repayment capacity because of
economic conditions. And it emphasizes that restructured loans will not be subject to
adverse classification by examiners solely because the value of the underlying collateral
has fallen.
Last month, the federal banking agencies and the Conference of State Bank
Supervisors issued a joint statement on lending to creditworthy small-business
borrowers. The statement recognizes the importance of small businesses and the fact
that some are experiencing difficulty in getting credit. It clearly states that financial
institutions that extend credit using prudent lending standards will not be subject to
supervisory criticism.
I know that there are concerns about examiners being overzealous in adversely
classifying loans and applying capital requirements. These are issues that we have
discussed at length with our Community Bank Advisory Committee, which was created
last year to conduct just this type of dialog. What I want you to understand is that we
hear your concerns. We are trying very hard to achieve a balanced approach to
supervision during these challenging times. There are no easy answers or quick fixes
here, and we will need to work together to get through this as we've always done.
many banks.
But the one group of banks that has proven to be the steadiest source of credit is
community banks. During the final quarter of 2009, loans and leases at the largest
banks – those with over $100 billion in assets – fell by 2.8 percent, or about seven times
as much in percentage terms as the decline at community banks. These largest banking
organizations accounted for more than 90 percent of the total drop in bank lending for
the quarter. The smallest banks – those with assets less than $100 million – actually
increased their loans by more than half of one percent. While so many big banks keep
pulling back, you are hanging in there, doing your best to support the credit needs of our
struggling economy. That deserves recognition in Washington, and all of our thanks.
Supervisory Guidance
As you know, the FDIC supervises almost 5,000 banks – mostly community banks. So
we have a keen appreciation for the role you play in the economy and the challenges
you have faced as the recession hit Main Street full force. In the Fall of 2008, at the
height of the financial crisis, the FDIC took a leading role as the federal banking
agencies issued a joint statement to the industry on meeting the needs of creditworthy
borrowers. The statement pointed out that in the wake of the crisis our economy would
become even more dependent on bank credit, and that it would be in everyone's
interest for banks to make prudent lending a priority.
In October, regulators again called attention to credit distress and credit availability with
a new statement on commercial real estate (CRE) loan workouts. The CRE guidance
encourages banks to continue making good loans to commercial real estate
borrowers—most of which are small businesses. It also encourages banks to work with
borrowers that are experiencing difficulties in their repayment capacity because of
economic conditions. And it emphasizes that restructured loans will not be subject to
adverse classification by examiners solely because the value of the underlying collateral
has fallen.
Last month, the federal banking agencies and the Conference of State Bank
Supervisors issued a joint statement on lending to creditworthy small-business
borrowers. The statement recognizes the importance of small businesses and the fact
that some are experiencing difficulty in getting credit. It clearly states that financial
institutions that extend credit using prudent lending standards will not be subject to
supervisory criticism.
I know that there are concerns about examiners being overzealous in adversely
classifying loans and applying capital requirements. These are issues that we have
discussed at length with our Community Bank Advisory Committee, which was created
last year to conduct just this type of dialog. What I want you to understand is that we
hear your concerns. We are trying very hard to achieve a balanced approach to
supervision during these challenging times. There are no easy answers or quick fixes
here, and we will need to work together to get through this as we've always done.