By Yali N’Diaye

WASHINGTON (MNI) – Bank examiners are appropriately following
guidance when they classify loans during a community bank examination, a
Federal Reserve official said Tuesday, indicating examiners are not
unduly restricting bank activity, or as a result, credit extension.

“There has been much discussion recently about whether examiners
are unnecessarily restricting the activities of community banks,” said
Kevin Bertsch, associate director in the Fed’s Banking Supervision and
Regulation division, in testimony before a House Financial Services
subcommittee.

However, after reviewing examination activities, the Federal
Reserve concluded that its “examiners were appropriately implementing
the guidance and were consistently taking a balanced approach in
determining loan classifications,” he continued.

Instead, Bertsch pointed to the ongoing “high levels of problem
loans and charge-offs” that “continue to strain bank resources.”

“Most of the asset quality and earnings problems in community banks
stem from relatively high concentrations in construction and other
commercial real estate loans that were built up during the real estate
boom that started in the early part of the last decade,” he said, a fact
that is well known to the banking community.

Congress has repeatedly told banking regulators, not just the Fed,
that small banks in their respective districts report an excessively
strict implementation of the rules without proper judgement when
classifying loans. They say this sometimes significantly weakens the
bank’s profile — with implications for capital charges — when not
pushing it to fail in the most extreme cases.

Yet Bertsch said the Fed review documentation “indicated that
examiners were carefully considering the full range of information
provided by bankers when evaluating these loans.”

In particular, he said, “examiners were taking into account
mitigating factors noted by bankers, where appropriate, in determining
the regulatory treatment for the loans.”

Former Federal Deposit Insurance Corp. Chair Sheila Bair had
invited lawmakers during past hearings to bring specific cases to her
attention to show regulators’ good will. She had also stressed that
guidance called for examiners to take such exceptional circumstances
into account rather than follow a robotic application of the rules.

In addition, Bertsch argued regulators do want the banks to “deploy
capital and liquidity,” just in a “responsible way.”

He noted that in the past quarters, community banks’ earnings have
improved, and asset quality is also starting to do so, but that the
decline in loan balances has held back revenue growth.

** Market News International Washington Bureau: 202-371-2121 **

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