Many of the small regional banks are going to find

In a letter to all federal banking agencies, House Financial Services Committee Chairman Barney Frank (D-Mass.) strongly encouraged them to keep their examiners from being “unnecessarily aggressive,” and called on them “to show some temperance in their regulation of traditional banks.”

“While our regulators need to uphold proper safety and soundness standards in this difficult economy ... aggressive decisions made in the field by individual examiners or teams intended to require banks to hold or acquire capital in excess of the official regulatory standard for being 'well-capitalized' must be avoided, to prevent more banks from failing unnecessarily,” Frank wrote.

Frank reminded the agencies that the sub-prime loan problem did not come about because of origination problems at traditional community banks. He pointed out, however, that “it is the already highly regulated traditional depository institutions that are feeling the greatest regulatory pressure” because of current bank examination pressure.

Frank identified the conflict between demands from Members of Congress that banks increase lending, in order to stimulate the economy and work with troubled borrowers, as they try to stay within the “increasingly stringent directives” from federal bank regulatory agencies that keep banks from doing so.

The chairman noted rightly that traditional community banks fill an important and critical need in today's economy, “and it would be short-sighted to weaken that role through overzealous regulatory actions – actions based not on wrong-doing or poor management practices at (community) banks, but on changes in the economic environment and toughening regulatory standards.” (emphasis added).

Frank encouraged the agencies to implement a “measured approach” in their examination procedures directed by agency leadership, rather than being implemented and improvised by arbitrary decisions made in the field.

"Examiners that are now being inappropriately tougher in their analysis of asset quality and are consistently requiring downgrades of loans whenever there is any doubt about (that loan's) condition are acting counter to the kind of balanced approach required in the current economy,” he said. “While there is no question that regulatory gaps and other regulatory short-comings were a significant contributor to the economic crisis, those gaps were largely within the non-bank lending market and Wall Street banks.” (emphasis added).

“Thankfully the chairman has come out strongly on this critical issue,” said OBA President Roger Beverage. “Many of the problems being confronted today by traditional bankers have come about because of new regulations and overly-zealous examiners. Mr. Frank is simply asking the agencies to show a bit of restraint, in order to avoid creating a snow-ball effect.”

Beverage pointed out that in some areas of the country, like Georgia, banks are having trouble because of actions by FDIC-appointed receivers that are working to quickly dispose of failed bank assets. By doing so, these “fire-sale” efforts have an adverse impact on all similar kinds of assets in the same or nearby trade area of the failed banks.

In other parts of the country, “unofficial” capital requirements are replacing “normal” and published capital requirements, which forces banks to restrict lending activities even further. Frank pointed out that in both instances regulatory actions are counter-productive and “a slower economic recovery can ... result from over-reaction to the current crisis.”

“The chairman also confirmed what we've been hearing from banks in some parts of the state,” Beverage said. “The focus of examiners has tended to be on asset quality, and if asset quality is deemed 'bad' then the other elements of the CAMELS component have been downgraded as well. That's just nonsense.

“In fact, state banking departments normally use the other elements to mitigate damage from a downgrade of asset quality and improve the over-all CAMELS rating, At least that's what I used to do it, and I know Commissioner Thompson has generally approached it in the same way.”