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American Bankers Association Letter to White House

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1120 Connecticut Avenue, NW Washington, DC 20036 1-800-BANKERS www.aba.com

World-Class Solutions, Leadership & Advocacy Since 1875

December 21, 2009

Edward L. Yingling President and CEO Phone: 202-663-5328 Fax: 202/663-7533 E-mail: [email protected]

The President The White House 1600 Pennsylvania Ave., NW Washington, DC 20500 Dear Mr. President: As we all look for ways to help the economy continue its recovery, the American Bankers Association 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 in those markets where banks have opportunities to expand their lending, the following steps could remove unnecessary impediments. 1. Do not use distressed sales prices when valuing performing loans. Some examiners reportedly are directing banks to write down the value of collateral based on distressed sales prices. This classification of performing loans – creating the anomalous “performing non-performing” loans – can set in motion a downward spiral for the borrower and ultimately the bank, as the bank requires more collateral or more equity from the borrower, the borrower cannot meet the new requirements, the loan defaults, and another property is dumped into an already depressed market. The bank’s capital gets depleted 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 commercial real estate workouts and are working on appraisal guidance, the heads of each of the agencies must be vigilant in their efforts to ensure that examiners are not being inappropriately 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 deposits – such as those swapped by banks that are part of a network like CDARS – as brokered even though the deposits are generated largely from core deposit customers and perform like core deposits. As a result, community banks are discouraged from competing for larger deposits that could provide the funding for new loans. The brokered deposit rules should not hamper a bank’s ability in this way. Second, examiners are criticizing banks for using brokered deposits even though such deposits often are cheaper and more stable sources of funding than deposits obtained through 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 are brokered hampers a bank’s ability to obtain low-cost funding and thus limits the bank’s ability to make loans. The regulators should not discourage banks from using brokered CDs in a safe and sound manner. 3. Consider all insured deposits as core deposits. Examiners continue to view deposits between $100,000 and $250,000 as non-core deposits, notwithstanding deposit insurance

coverage up to $250,000 per account. This can make a bank’s sources of liquidity look more 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 bank’s reserves to be counted as capital. The agencies’ capital rules permit a bank’s allowance for loan and lease losses to count as capital only up to 1.25% of a bank’s risk-weighted assets. This is an arbitrary limit that fails to recognize fully the loss-absorbing abilities of the allowance. Because each dollar of capital can support up to $10 of loans, counting more of the reserves as capital would enable banks to make more loans. 5. Avoid procyclical capital rules. Examiners often are directing a bank to improve its capital ratios significantly above the “well capitalized” thresholds at a time when private capital is unavailable or very expensive. In addition, the capital rules require dramatically more capital in certain circumstances (such as when debt securities are downgraded to below investment grade). A bank that is faced with an examiner directive or that is holding a downgraded investment often has no choice but to reduce assets – including loans – in order to remain in capital compliance. The agencies should not increase minimum capital requirements during a downturn, and the regulations should avoid 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 funds have not been made available to a large group of community banks that are viable but that are working through asset quality problems. As we pointed out in a letter to Secretary Geithner on this issue, the recent loss-share agreements offered by the FDIC when a bank fails are encouraging private investors to wait for a bank to fail instead of investing in banks that are going concerns. These viable but struggling banks – and their customers, their communities, and the Deposit Insurance Fund – would benefit if Treasury 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 to improve capital ratios by decreasing their assets, including loans. We stand ready to work with the Administration and the banking agencies to address these issues. Sincerely,

Edward L. Yingling cc: The Hon. Timothy Geithner, Secretary of the Treasury The Hon. Lawrence Summers, Chairman, National Economic Council

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