8/14/2019 American Bankers Association Letter to White House

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December 21, 2009

The PresidentThe White House1600 Pennsylvania Ave., NWWashington, DC 20500

Dear Mr. President:

As we all look for ways to help the economy continue its recovery, the American BankersAssociation wishes to share several ideas for enabling community banks to make more

loans. Of course, banks cannot manufacture loan demand where there is none. But inthose markets where banks have opportunities to expand their lending, the followingsteps could remove unnecessary impediments.

1. Do not use distressed sales prices when valuing performing loans. Someexaminers reportedly are directing banks to write down the value of collateral based ondistressed sales prices. This classification of performing loanscreating the anomalousperforming non-performing loans can set in motion a downward spiral for theborrower and ultimately the bank, as the bank requires more collateral or more equityfrom the borrower, the borrower cannot meet the new requirements, the loan defaults, andanother property is dumped into an already depressed market. The banks capital getsdepleted as a result, which in turn curtails the amount of new loans the bank can make.

While the banking agencies recently issued potentially helpful guidance on commercialreal estate workouts and are working on appraisal guidance, the heads of each of theagencies must be vigilant in their efforts to ensure that examiners are not beinginappropriately conservative in their reviews of bank assets.

2. Rationalize the rules governing brokered deposits. This issue has two components.First, the current rules governing brokered deposits treat certain depositssuch as thoseswapped by banks that are part of a network like CDARSas brokered even though thedeposits are generated largely from core deposit customers and perform like coredeposits. As a result, community banks are discouraged from competing for largerdeposits that could provide the funding for new loans. The brokered deposit rules shouldnot hamper a banks ability in this way.

Second, examiners are criticizing banks for using brokered deposits even though suchdeposits often are cheaper and more stable sources of funding than deposits obtainedthrough other sources. Where a bank is using brokered deposits to fund rapid growth,examiners are right to be concerned. But criticizing deposits solely because they arebrokered hampers a banks ability to obtain low-cost funding and thus limits the banksability to make loans. The regulators should not discourage banks from using brokeredCDs in a safe and sound manner.

3. Consider all insured deposits as core deposits. Examiners continue to view depositsbetween $100,000 and $250,000 as non-core deposits, notwithstanding deposit insurance

Edward L. YinglingPresident and CEOPhone: 202-663-5328Fax: 202/663-7533E-mail: eyinglin@aba.com

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8/14/2019 American Bankers Association Letter to White House

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coverage up to $250,000 per account. This can make a banks sources of liquidity lookmore volatile than they are, thus discouraging banks from accepting the larger deposits.Fewer deposits translates directly into fewer loans. To avoid this, the regulators should,as a general matter, treat a deposit that is fully insured as a core deposit.

4. Permit more of a banks reserves to be counted as capital. The agencies capital

rules permit a banks allowance for loan and lease losses to count as capital only up to1.25% of a banks risk-weighted assets. This is an arbitrary limit that fails to recognizefully the loss-absorbing abilities of the allowance. Because each dollar of capital cansupport up to $10 of loans, counting more of the reserves as capital would enable banksto make more loans.

5. Avoid procyclical capital rules. Examiners often are directing a bank to improve itscapital ratios significantly above the well capitalized thresholds at a time when privatecapital is unavailable or very expensive. In addition, the capital rules requiredramatically more capital in certain circumstances (such as when debt securities aredowngraded to below investment grade). A bank that is faced with an examiner directiveor that is holding a downgraded investment often has no choice but to reduce assets

including loansin order to remain in capital compliance. The agencies should notincrease minimum capital requirements during a downturn, and the regulations shouldavoid the cliff effects produced by sudden and large required increases in capital ratios.

6. Use a small amount of TARP funds to help viable community banks. TARP fundshave not been made available to a large group of community banks that are viable butthat are working through asset quality problems. As we pointed out in a letter toSecretary Geithner on this issue, the recent loss-share agreements offered by the FDICwhen a bank fails are encouraging private investors to wait for a bank to fail instead ofinvesting in banks that are going concerns. These viable but struggling banksand theircustomers, their communities, and the Deposit Insurance Fundwould benefit ifTreasury were to invest a comparatively small sum of money in banks that can raise

matching capital from private sources. Without such assistance, these banks are forced toimprove capital ratios by decreasing their assets, including loans.

We stand ready to work with the Administration and the banking agencies to addressthese issues.

Sincerely,

Edward L. Yingling

cc: The Hon. Timothy Geithner, Secretary of the TreasuryThe Hon. Lawrence Summers, Chairman, National Economic Council