[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
TOO BIG HAS FAILED: LEARNING FROM
MIDWEST BANKS AND CREDIT UNIONS
=======================================================================
FIELD HEARING
BEFORE THE
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
AUGUST 23, 2010
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-151
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61-855 WASHINGTON : 2010
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina RON PAUL, Texas
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California WALTER B. JONES, Jr., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
JOE BACA, California SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois JOHN CAMPBELL, California
GWEN MOORE, Wisconsin ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota KENNY MARCHANT, Texas
RON KLEIN, Florida THADDEUS G. McCOTTER, Michigan
CHARLES WILSON, Ohio KEVIN McCARTHY, California
ED PERLMUTTER, Colorado BILL POSEY, Florida
JOE DONNELLY, Indiana LYNN JENKINS, Kansas
BILL FOSTER, Illinois CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana ERIK PAULSEN, Minnesota
JACKIE SPEIER, California LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York
Jeanne M. Roslanowick, Staff Director and Chief Counsel
Subcommittee on Oversight and Investigations
DENNIS MOORE, Kansas, Chairman
STEPHEN F. LYNCH, Massachusetts JUDY BIGGERT, Illinois
RON KLEIN, Florida PATRICK T. McHENRY, North Carolina
JACKIE SPEIER, California RON PAUL, Texas
GWEN MOORE, Wisconsin MICHELE BACHMANN, Minnesota
JOHN ADLER, New Jersey CHRISTOPHER LEE, New York
MARY JO KILROY, Ohio ERIK PAULSEN, Minnesota
STEVE DRIEHAUS, Ohio
ALAN GRAYSON, Florida
C O N T E N T S
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Page
Hearing held on:
August 23, 2010.............................................. 1
Appendix:
August 23, 2010.............................................. 37
WITNESSES
Monday, August 23, 2010
Beverlin, John D., Sr., President and Chief Executive Officer,
Mainstreet Credit Union........................................ 26
Herndon, David L., President and Chief Executive Officer, First
State Bank of Kansas City, Kansas.............................. 19
Hoenig, Thomas M., President, Federal Reserve Bank of Kansas City 6
Kemper, Jonathan M., Chairman and Chief Executive Officer,
Commerce Bank, Kansas City, and Vice Chairman, Commerce
Bancshares, Inc................................................ 23
Kemper, Mariner, Chairman and Chief Executive Officer, UMB
Financial Corporation.......................................... 21
Marsh, Marla S., President and Chief Executive Officer, Kansas
Credit Union Association....................................... 25
Stones, Charles A., President, Kansas Bankers Association........ 17
APPENDIX
Prepared statements:
Moore, Hon. Dennis........................................... 38
Beverlin, John D., Sr........................................ 40
Herndon, David L............................................. 45
Hoenig, Thomas M............................................. 52
Kemper, Jonathan M........................................... 60
Kemper, Mariner.............................................. 72
Marsh, Marla S............................................... 79
Stones, Charles A............................................ 84
Additional Material Submitted for the Record
Moore, Hon. Dennis:
Comments on the Dodd-Frank Wall Street Reform & Consumer
Protection Act............................................. 89
Letter from the National Association of Federal Credit Unions
(NAFCU).................................................... 91
TOO BIG HAS FAILED: LEARNING FROM
MIDWEST BANKS AND CREDIT UNIONS
----------
Monday, August 23, 2010
U.S. House of Representatives,
Subcommittee on Oversight
and Investigations,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 9:40 a.m., in
the Capital Federal Conference Center, Regnier Center, Johnson
County Community College, 12345 College Boulevard, Overland
Park, Kansas, Hon. Dennis Moore [chairman of the subcommittee]
presiding.
Members present: Representatives Moore and Jenkins.
Also present: Representative Cleaver.
Chairman Moore of Kansas. Good morning. This field hearing
of the Subcommittee on Oversight and Investigations of the
House Financial Services Committee will come to order.
Our hearing today is entitled, ``Too Big Has Failed:
Learning from Midwest Banks and Credit Unions,'' inspired from
the April 6, 2009, Time magazine cover story, ``The End of
Excess: Why this Crisis is Good for America.'' This is the
second in a series of hearings where we will look at the key
issues that may not be receiving enough attention, so we can
learn and work towards a stronger and more stable financial
system.
Before we begin with the formal proceedings, I want to take
a moment of personal privilege to first thank Johnson County
Community College President Terry Calaway and all of the staff
and faculty here for hosting today's field hearing.
For those of you who do not know, before my constituents
sent me to Congress, I was elected and proud to serve on the
Board of Trustees for Johnson County Community College, and I
am very glad we were able to have one of my last subcommittee
hearings here at Johnson County Community College.
I also want to thank the other members who have traveled
and taken time out of their busy schedules to be with us today:
Congressman Emanuel Cleaver from the 5th Congressional District
of Missouri; and Congresswoman Lynn Jenkins from the 2nd
District of Kansas. Thank you very much for being here.
We will begin this hearing with the members' opening
statements, up to 10 minutes per side, and then we will hear
testimony from our witnesses. For each witness panel, members
will each have up to 5 minutes to question our witnesses. The
Chair advises our witnesses to please keep your opening
statements to 5 minutes, to keep things moving, so we can get
members' questions in.
Without objection, all members' opening statements will be
made a part of the record. I now recognize myself for 5 minutes
for an opening statement.
Our economy continues to slowly recover following the worst
financial crisis and recession since the Great Depression in
1929. While there were a number of contributing factors that
caused the financial crisis, one of the lessons we have learned
is that ``too-big-to-fail'' financial firms can cause a lot of
damage if not appropriately supervised.
And who paid the price for these mistakes? Unfortunately,
it was not those ``too-big-to-fail'' firms on Wall Street, but
rather our constituents and businesses here in Kansas and
across the country. American households lost about $14 trillion
in net worth over the course of 2 years. Retirement accounts
saw an over 20 percent decline in value, forcing many Americans
to delay their retirement. Millions of Americans lost their
homes through foreclosure. Bernie Madoff's Ponzi scheme
defrauded $65 billion from investors.
And the government was forced to respond to prevent further
damage. Congress approved, and even though it was deeply
unpopular, I voted for the $700 billion TARP proposal. I did so
not because I wanted to, but because it was the right thing to
do, I believe, for our people and our country. In fact, while
there continue to be misperceptions about it, economist Mark
Zandi, an advisor to Republican Senator John McCain in the last
presidential election, has recently done some analysis and
found that without TARP, the Recovery Act, and other measures,
we would have seen the unemployment number double with 8.5
million fewer jobs, and that is on top of the more than 8
million jobs we have already lost.
But given the economic damage we did suffer, it is not
surprising that many Americans have lost their faith in our
financial system. As Mr. Hoenig has put it, ``too big has
failed'' and we need our financial institutions, big and small,
to get back to the fundamental business of banking and
financial intermediation. And while not perfect, I believe that
the types of smaller and medium-sized banks and credit unions
we will hear from today and others here in the Midwest should
be held up as an example of what the post-crisis financial
system should look like. Financial firms should know who their
customers are and perform proper due diligence before making a
loan.
To help restore Americans' faith in our financial system, I
worked as both a senior member of the House Financial Services
Committee and as a House conferee to improve and perfect the
financial regulatory reform measure. Part of this work included
defending smaller banks, credit unions, and small businesses
that did nothing to create the financial crisis.
For example, I worked with my colleagues to provide a full
grandfathering of existing trust-preferred securities for all
banks with less than $15 billion. I pushed to fully preserve
the thrift charter, making the case that while the ineffective
Office of Thrift Supervision should be eliminated, the business
model with which many Kansas thrifts acted responsibly should
not be eliminated. And I offered the amendment to exempt all
banks and credit unions with fewer than $10 billion in assets
from the new Consumer Financial Protection Bureau's enforcement
powers. Many forget, but a new consumer financial protection
agency was not only called for by the Obama Administration, but
by former Secretary Hank Paulson as well.
The Dodd-Frank Act includes other new powers to regulate
``too-big-to-fail'' financial firms and provides regulators
with a new liquidation tool that will ensure we end ``too-big-
to-fail'' bailouts, and we shut down any financial firm--big
and small--that fails. As the bill was being signed into law,
the headlines from the Wall Street Journal were, ``Big Win for
Small Banks'' and ``Small Banks Avoid Overhaul's Sting.''
That said, I understand that with any new set of rules
comes unfamiliarity. Something I hope to see as the new rules
are implemented is not an endless stream of additional
disclosure forms that are difficult for small firms to comply
with and only serve to confuse consumers. We created the
Consumer Bureau to streamline and simplify these financial
forms and documents so that consumers know what they are
signing up for, and as a result, will be much easier for small
community banks and credit unions to comply with.
It is time to move forward with a stronger financial
system, and I look forward to hearing from today's witnesses on
what lessons we can and should learn from responsible banks and
credit unions we are fortunate to have here in the Midwest.
I now recognize for up to 10 minutes, my colleague,
Representative Lynn Jenkins, a member of the House Financial
Services Committee.
Ms. Jenkins. Good morning, and thank you, Mr. Chairman,
for holding today's important hearing. And I would like to
thank Federal Reserve Bank President Hoenig for being here with
us this morning. We have an important topic to discuss.
It is important to every American trying to obtain a home
loan, small business loan, car loan and even those concerned
with their own job stability. Individuals and businesses are
asking about the health of their bank and their ability to
obtain a loan from their bank when they need it. These
questions are essential to every American household and
business, and it is my hope that both President Hoenig and our
panel of bankers and credit unions can share with us some
strategies they have employed to ensure that they can continue
to provide these important services to our communities.
I am proud to be here today to highlight lending
institutions in Kansas as industry leaders in making prudent
financial products available to customers and maintaining the
integrity of their institutions throughout that process.
The financial crisis has dramatically impacted the lending
industry as a whole and many of the banks represented here
today have managed to provide an example to others of what
sound judgment and policy looks like during times of irrational
exuberance. However, many of our witnesses represent community
banks and credit unions already feeling overly burdened by the
government and regulators, and now are feeling the crunch more
broadly with the passage of financial regulatory reform. Other
witnesses represent regional banks, which have performed
admirably, but will now have to restructure their business
model.
I am eager to learn what lessons you all can share with us
today that we can carry back to Washington, and what trends you
see that have you concerned for your industry in the future. I
am sure the banking community, and the credit unions have much
to share with us today, and I am anxious to hear from both
sides as to how this can be constructive for all of us.
I want to again thank the chairman for putting this
together, holding the hearing, and I look forward to hearing
testimony from each of today's witnesses.
I yield back the balance of my time.
Chairman Moore of Kansas. Thank you, Representative
Jenkins, for being with us today.
I now recognize Representative Emanuel Cleaver for up to 5
minutes, another member of the House Financial Services
Committee. Congressman Cleaver.
Mr. Cleaver. Thank you, Mr. Chairman. I appreciate you
allowing me to participate in this field hearing. I am not on
the Oversight and Investigations Subcommittee but the work that
you have done already has paid off with the legislation we
recently approved. It is an honor to participate with you at
this very important hearing. You are right on point to look at
the ``too-big-to-fail'' issues and their impact from the view
of Midwest banks and credit unions, which have not seen the
problems that some of their east, west, and north coast
brethren have encountered.
It is my pleasure to welcome the very distinguished
witnesses for today's hearing. From time to time, I consult
with the financial services industry in my district, and they
have always provided sound advice. It is also a great honor
that they can come before us today and provide testimony.
Mr. Chairman, earlier this spring, Committee Chairman
Barney Frank joined you and me to honor UMB and Commerce Bank,
who were named the second and third rated best banks in America
in 2009, by Forbes magazine. As I was putting together the
background for the awards, I learned some important information
about UMB and Commerce Bank that is relevant to today's
hearing.
UMB's shared corporate vision is to be recognized for their
unparalleled customer experience. One of the corporation's
shared values is, ``customers first, we do the unparalleled to
create an environment that consistently exceeds the
expectations of our customers.'' UMB embodies strong community
involvement in all the communities it serves. From financing
for small businesses to providing working capital loans to
companies that support job creation and retention to employee
volunteerism and corporate donations, UMB stands tall with
their communities. In fact, UMB recently received an
outstanding rating from the Office of the Comptroller of the
Currency in their most recent public evaluation of UMB's
community lending and participation.
When the largest banks in America were trying to repay
billions of dollars in TARP funds and to improve their balance
sheets to deal with the impact of the severe economic problems
the States were having, UMB was keeping to their business
strategy--conservative, with slow, steady growth. And in
September 2009, the street.com article entitled ``UMB's Kemper
Proves Boring is Better: Best in Class,'' Mariner Kemper said,
``The Street, the investor population believed that we could
leverage our earning streams more if we had taken the same
risks as the rest of the industry. I am thrilled to be able to
stand up and say our strategies worked for us. We did not erase
20 years of earnings by taking three years of risk.'' In a
press release around the same time, Mr. Kemper said, ``This
ranking also shows that the regional banking model works. UMB
sticks to our time-tested prudent business practices such as
making loans within our territory, building relationships with
our customers, and understanding that strong underwriting
practices produce quality results. Our standards have remained
unchanged in all economic conditions. This principle, as well
as a focus on a diverse income stream from fee-based businesses
affords us steady growth.''
Likewise, Commerce Bancshares, Inc.'s corporate mission is
to ``raise the voice of the customer and in doing so create a
differentiating experience which encourages our customers to
develop a relationship with Commerce and then become long-
tenured loyal customers. The company's customer promise is ask,
listen, solve. That means the company promises to ask the right
questions, listen carefully to what our customer is telling us,
then solve for the appropriate solution to meet our customers'
specific needs. Commerce Banks embody strong community
involvement in all that it does in this community.''
And then finally, Mr. Chairman, Commerce is committed to
environmental sustainability to reduce their environmental
footprint. They encourage recycling, try to consume less paper,
encourage employee carpooling and public transportation, and
monitor and manage energy usage. In 2008, Commerce opened
Missouri's first LEED-certified bank branch in O'Fallon,
Missouri.
Mr. Chairman, more than 100 banks have failed over the past
2 years since our economy began its meltdown. They have taught
us valuable lessons on how not to run a bank. And so today, UMB
and Commerce Banks, as well as many other community banks,
regional banks, and credit unions are juxtaposed to those
``too-big-to-fail'' banks and teach us what banks should do, or
how not to fail.
Thank you, Mr. Chairman, I yield back the balance of my
time.
Chairman Moore of Kansas. I thank my colleagues for their
statements.
I am very pleased to introduce our first witness, who was
so respected the last time he testified before our subcommittee
earlier this year that we had to invite him again.
This morning, we will hear from Mr. Tom Hoenig, President
and Chief Executive Officer of the Federal Reserve Bank of
Kansas City. President Hoenig is currently the longest-serving
Federal official and this year is a voting member of the
Federal Open Market Committee. He has been a strong,
independent Midwestern voice in the national debate on
financial reform and economic recovery. In fact, our title from
today's hearing comes directly from a speech Mr. Hoenig made in
Omaha in March 2009. And he has been one of the leading experts
people turn to on ending ``too-big-to-fail.''
I want to publicly thank Mr. Hoenig and his entire staff at
the Kansas City Fed for being such a valuable resource to me
and our office, as well as for your service to the Kansas City
community.
Without objection, Mr. Hoenig, your written statement will
be made a part of the record, and you are recognized for 5
minutes to provide a summary of your written statement.
STATEMENT OF THOMAS M. HOENIG, PRESIDENT, FEDERAL RESERVE BANK
OF KANSAS CITY
Mr. Hoenig. Chairman Moore, thank you very much, and
Congresswoman Jenkins and Congressman Cleaver, thank you for
this opportunity to testify before the subcommittee. I think it
is a timely hearing about the future of community banks.
Before I begin, I do want to note and share with you,
Chairman Moore, that this wonderful campus and this wonderful
school was also helped to be formed by an individual by the
name of Will Billington, who was a mentor of mine from the
Federal Reserve system, and he was one of the founding
trustees, and so it is a great pleasure for me to join you here
today.
Chairman Moore of Kansas. Thank you.
Mr. Hoenig. Let me just say that over the past 20 years,
as the banking industry has consolidated into fewer and larger
banks, a perennial question has been, ``Is the community bank
model viable?'' The short answer is ``yes.'' The longer answer
is, ``yes, if they are not put at a competitive disadvantage by
policies which favor and subsidize the largest financial
institutions in this country.'' I have worked closely with
community bankers my entire career, through good and bad
economic times. I know the business model works, and therefore,
they can survive and prosper.
There are more than 6,700 banks in the country, and all but
83 would be considered community banks based on a commonly used
cutoff of $10 billion in assets. In the Tenth District, we have
about 1,100 banks, and all but 3 would be considered a
community bank. A lower threshold of $250 million, which
focuses on a far more homogeneous group, still includes about
4,600 banks or about two-thirds of all banks. My submitted
material and remarks now are directed towards this group of
banks, this smaller group, which serve Main Street in
communities across this country of ours.
Community banks are essential to the prosperity of the
local and regional economies across the country. The maps I
provided show that community banks have the majority of offices
and deposits in almost a third of the counties nationwide.
However, their presence and market share are most substantial
among Midwestern States, where their role is particularly
crucial in rural areas and smaller cities. It is the economies
in these States that would suffer most significantly without
their presence. Why?
Community banks have maintained a strong presence despite
industry consolidation because their business model focuses on
strong relationships with their customers and their local
communities. Banks in our region, for example, serve all facets
of their local economy, including consumers, small businesses,
farmers, real estate developers, and energy producers. They
know their customers and local markets, know that their success
depends on the success of these local firms, and they recognize
that they have to be more than a gatherer of funds if they hope
to prosper as a bank. These factors are a powerful incentive to
target their underwriting to meet specific local credit needs.
And it gives their customers an advantage of knowing who they
will be working with in both good and difficult times. Larger
banks are important to a firm as they grow and need more
complicated financing, there is no question. But in this
region, most businesses are relatively small and their needs
can be met by the local bank.
It is said that a community with a local bank can better
control its destiny. Local deposits provide funds for local
loans. Community banks are often locally owned and managed
through several generations of family ownership. This vested
interest in the success of their local communities is a
powerful incentive to support local initiatives. It is the very
``skin in the game'' incentive that regulators are trying to
introduce into the largest banks, that has been lost for some
time. It is the small community's version of ``risking your own
funds'' that worked so well in the original investment banking
model, and kept partners from making risky mistakes that would
require personal bankruptcy back then, and government
intervention more recently.
There is no better test of the viability of the community
bank business model than this financial crisis, this recession
and abnormally slow recovery that we have experienced over the
past 2\1/2\ years. The community bank business model has held
up well when compared to the megabank model that had to be
propped up with taxpayer funding. Community bank earnings last
year were lower than desired, but on a par with those of the
larger banks. However, community banks generally had higher
capital ratios that put them in a better position to weather
future problems and support lending.
This is an important point to note as the decline in
overall bank lending, particularly to small businesses, is a
major concern to all of us. Data show that community banks have
done a better job serving their local loan needs over the past
year. Community banks as a whole increased their total loans by
about 2 percent as compared to a 6 percent decline for larger
banks. In addition, community banks have had either stronger
loan growth or smaller declines across major other loan
categories. Business lending in particular stands out, with
community bank loans dropping only 3 percent as compared a 21
percent decline for the larger banks.
Of course, some community banks made poor lending and
investment decisions during the housing and real estate boom of
the mid-2000's. Unlike the largest banks, community banks that
fail will be closed and sold. For community banks that survive,
it will be a struggle to recover. Commercial real estate,
particularly land development loans, will be a drag on earnings
for some time yet. Nevertheless, for those that recover, a
business model that continues to focus on customer
relationships will be a source of strength for local economies.
Thus, community banks will survive the crisis and recession
and will continue to play their role as the economy recovers.
The more lasting threat to their survival, however, concerns
whether this model will continue to be placed at a competitive
disadvantage to the largest banks. Because the market perceived
the largest banks as being ``too-big-to-fail,'' they had the
advantage of running their business with a much greater level
of leverage and a consistently lower cost of capital and debt.
The advantage of their ``too-big-to-fail'' status was
highlighted during the crisis when the FDIC allowed unlimited
insurance on non-interest-bearing checking accounts out of
concern that businesses would move their deposits from the
smaller to the largest banks. As outrageous as this may seem,
in many cases it is easier for larger banks to expand through
acquisition into small communities. This occurs because smaller
banks tend to focus on their local markets and, therefore, face
significant restrictions to in-market mergers. This policy
ignores the fact that the largest 20 financial institutions in
the United States now control just under 80 percent of the
country's total financial assets. In other words, the anti-
competitive market analysis needs to be looked at, given the
changing times.
Going forward, the community bank model will face
challenges. Factors such as higher regulatory compliance costs
and changing technology will encourage community bank
consolidation. And despite the provisions of the Dodd-Frank Act
to end ``too-big-to-fail,'' community banks will continue to
face higher costs of capital and deposits until investors are
convinced that advantage has ended. The community banks have
always faced these challenges, and survived and prospered
despite them. If allowed to compete on a fair and level playing
field, the community bank model is a winner and will continue
to serve our communities well.
Thank you.
[The prepared statement of Mr. Hoenig can be found on page
52 of the appendix.]
Chairman Moore of Kansas. Thank you, Mr. Hoenig. I now
recognize myself for 5 minutes for questions.
Mr. Hoenig, from your perspective, would you please
describe the major differences and advantages that smaller to
medium-sized financial institutions may have over the largest
financial firms in the United States? And you have spoken to
this in your opening statement, but if you have additional--for
example, it seems like a smaller financial firm would be easier
to manage while also increasing the likelihood that the firm
really knows their customers. Is there something unique to the
business model and practices utilized by Midwest banks and
credit unions that Wall Street banks maybe could learn from?
Mr. Hoenig. I think that the advantage of the regional and
community bank is, in a sense, their size. They are of a size
that can be managed. We know economies-of-scale advantage cuts
off long before $50 billion, so that there is the ability to
manage across functions within the bank. There is a greater
opportunity, and I think you will hear about that more today,
about the fact that you do build your customer relationships
with a medium-sized business line, I think, more easily. And so
those are extremely important in this country.
I have been told time and time again about other models
where you only have three or four banks across the country and
that seems to work. And I say this country is the greatest
country in part because it has had a greater availability of
credit through community banking across the United States over
the past 200 years. I think we should change that great model
with great care as we look forward. So I have a lot of
confidence in this model.
Chairman Moore of Kansas. Thank you, sir.
Do you have any concerns that we may see greater
consolidation in the banking and credit union sector in the
next few years as more smaller institutions may fail? And what
impact might that have on the stability of the financial
system? For example, would fewer and larger banks and credit
unions create additional systemic risks that might outweigh any
benefits enjoyed from economies of scale?
Mr. Hoenig. I think that, first of all, there are going to
be more consolidations. I think the cost, the carry cost for a
community bank is going to grow per dollar of assets and,
therefore, you will want to get the size up in order to spread
that cost over more assets. So I think that will be the trend.
I do not think that necessarily means the end of community
banking. It does mean you are going to have a smaller number of
banks, but I think we will still have thousands of banks in
this country for some time to come.
As far as looking ahead, I think we have to be careful
because the cost of capital is to the advantage of the largest
institutions. And so, that will work away at the competitive
position of the smaller banks over time and we need to be
mindful of that.
Chairman Moore of Kansas. Thank you.
You testified before the subcommittee in Washington on the
topic of reversing our dependence on leverage and debt. To be
clear, Midwest banks and credit unions never had the levels of
leverage that firms like AIG and Lehman Brothers had; is that
correct? And if so, why do you think that is and what can we
learn from smaller financial firms that are not overleveraged?
Mr. Hoenig. I think first of all, it is correct. The
largest banks in this country, as I testified, increased their
real leverage, what I call true equity capital, to assets from
about 17 to 1 to over 30 to 1 from the early 1990's through to
2007 when the crisis began. Smaller community banks' real
leverage ratio did not rise significantly above their original
16 to 1. Part of that is that they were not thought of as being
``too-big-to-fail.'' They knew that they had to have the
capital base and the market expected that of them. And
therefore, they had an incentive to maintain their capital
levels at higher amounts. I think that is important to remember
going forward. That is why we spent important time on this
issue of resolution in the Dodd-Frank bill to make sure that
advantage was at least mitigated, if not eliminated. Only time
will tell whether this ``too-big-to-fail'' will go away and
whether this will, through the market as much as regulatory,
force them to reduce their leverage levels not only within this
country but on a global basis. That is a huge issue coming up
for the regulatory authorities, both in the United States and
internationally and that is what should be the leverage
restrictions on the largest banks. And that is not settled, at
this point.
Chairman Moore of Kansas. Thank you, sir.
I now recognize for up to 5 minutes Representative Jenkins
for questions.
Ms. Jenkins. Thank you, Mr. Chairman.
In your statement, you said that the community bank model
is a viable one but only if they are not put at a competitive
disadvantage by policies which would favor the larger
institutions.
Mr. Hoenig. Yes.
Ms. Jenkins. So I am just curious if you think that the
Dodd-Frank bill puts the community banks at a competitive
disadvantage, and if so, how?
Mr. Hoenig. The Dodd-Frank bill is designed to, as I said,
mitigate that advantage by--it calls for a resolution of the
largest banks should they fail, should they become insolvent or
unable to meet their obligations. So it is designed to
eliminate that advantage. But the only way we will know that is
how the market reacts and whether the market thinks that is a
viable resolution process. And that is not a foregone
conclusion, because I will tell you that if you have a trillion
dollar institution and it is in difficulty and you have a
weekend in which to make a decision, so you are on a Friday, it
is incurring a huge liquidity problem, people are running from
this largest institution.
And you know that the impact of its failure, of the
liquidity crisis, will be to affect the broader economy, and
you have only a weekend. You have to have it resolved by Sunday
night before the Asian markets open. Will you actually be able
to get two-thirds votes from the FDIC, two-thirds votes from
the Federal Reserve, get a court to agree to it, get the
Secretary of the Treasury to agree to it and actually take it
into receivership, which will be a very disruptive process--I
think only time will tell.
The markets are trying to figure that out right now. If
they are convinced that it will be taken into receivership,
then I think the advantage to the largest institution will be
reduced. It will not be eliminated, but it will be reduced. And
that will make it a more equal, more level playing field for
the community bank.
If it does not take it, then that largest bank, number one,
will be thought of still as ``too-big-to-fail.'' So, number
one, if a large firm or a medium-sized firm has to have a
payroll account that is, say, several million dollars, it will
not put it in a community bank that it knows can fail, but will
put it in the largest bank where it may not fail. Secondly,
knowing that and the markets who are issuing the debt to the
largest banks know that they will get bailed out in a crisis,
even though it is not supposed to happen, then they will
provide funding to those banks at a less costly level. And so
that will give them a cost of capital advantage.
So those things have to go away. And that can only happen
if the markets are absolutely convinced that ``too-big-to-
fail'' has finally been ended, and only time will tell. So it
is an open question. I am sorry I cannot answer yes or no.
Ms. Jenkins. Okay. I guess to follow up on that,
considering the Dodd-Frank reform bill seems to perpetuate the
``too-big-to-fail'' problem, is it not likely that the leverage
problems will even get worse in the future and those ``too-big-
to-fail'' institutions will continue to have funding advantages
over the institutions like the ones that we have here today, so
that the big will get bigger? Can you just comment on that
potential problem?
Mr. Hoenig. That is a risk. One of the things in the early
parts of the discussions that I was actually in favor of was
breaking up the largest institutions so it would become clear
that they were not ``too-big-to-fail.'' But that is not what
was done and we do have this resolution process. And I think it
all depends on how carefully we enforce the Dodd-Frank bill in
terms of eliminating ``too-big-to-fail'' or they will continue
with an advantage over the regional and the community banks. So
it is a major concern of mine, yes.
Ms. Jenkins. Okay, thank you. I yield back.
Chairman Moore of Kansas. Thank you. Now, I recognize
Representative Cleaver for up to 5 minutes, sir.
Mr. Cleaver. Thank you, Mr. Chairman.
Mr. Hoenig, I was in the room, and my colleague Dennis
Moore was there, when President Bush sent over his Treasury
Secretary Hank Paulson. Ben Bernanke was there, Christopher Cox
from the SEC was there, and Sheila Bair from the FDIC. Most of
us had no idea what would fall from their lips and we were in
horror when they told us exactly what you just mentioned, that
if we failed to act--or if they failed to act, then by Monday,
we could have one of the worst economic crises in history. And
I do not know about Congressman Moore, but I was shaking under
the table. I have always been fascinated when I go to townhall
meetings and people who majored in geography say, ``That was
stupid, you people are stupid.
Retrospectively, do you think we acted correctly in
responding to the Bush Administration's call for action?
Mr. Hoenig. I think that under the circumstances, there
were not a whole lot of choices. And one of the things that you
have to keep in mind is there was no contingency. For example,
one of my arguments was not that you did not take actions to
make sure our financial system and our economy did not
collapse, but that in doing so, we bailed out the stockholders
of the largest institutions, whose responsibility it was to
oversee these institutions by their selection of directors and
so forth. And there were models--the Continental Illinois
failure, which was itself ``too-big-to-fail,'' but at least the
stockholders were not wiped out and the market did have some
discipline back on those institutions. In this instance, there
was not that kind of ability to pre-plan and, therefore, you
ended up with this very chaotic weekend.
What I am also saying though, is what is the lesson from
that? We have a new bill and it has a resolution process. And I
encourage all the authorities--the Federal Reserve, the FDIC
and others--to say all right, let us say very clearly, let us
make sure we have rules that will be in place should we have a
crisis 10 years from now or whenever it is, that says when this
happens, we have enough notice, we set up who will be the
management who comes in as we wipe out the other management,
the directors who come in as we wipe out the directors who are
responsible for this, make sure that we are in fact putting it
into a receivership with an operating unit so that it does not
have to be shut down, it can be run but with new ownership. And
that we have in place how we are going to hold the debtholders
who loaned maybe at very good rates to these institutions, so
that they share the burden rather than the taxpayer.
The main thing we ought to take from this is it was a
crisis, we went through it as we did, but let us not repeat
that process the next time through. That is my best advice
going forward.
Mr. Cleaver. Thank you. I agree with you absolutely.
Last night, I re-read this article by Kurt Anderson that
was written in March of 2009, ``The End of Excess.'' In a very
interesting part of this, he says, ``I don't pretend we didn't
see this coming for a long time.'' And now when you look back,
there were those who suggested that we were heading for the
precipice. Six months before this weekend that we all
experienced in terror, we had the Fed Chairman, we had the SEC
Chairman, we had the FDIC Chairman, and the heads of the three
credit rating agencies before our committee. And not one of
them--not one--expressed concern about the direction of the
economy. People criticize John McCain for making some comments
about the economy being healthy. He was simply reporting what
the financial services oversight group said we were
experiencing. And yet, there are those who said that they saw
this coming for a long, long time.
I guess my question is, is there something in the financial
reform or is there anything that we can do to take the long
view of the U.S. economy to prevent us from a weekend collapse?
Mr. Hoenig. I think that there is not only in the
legislation, but in the regulatory scheme, there is a mechanism
there to give warning. For example, financial stability,
oversight committee and the researchers around that, the
economists at the Federal Reserve, others. There is the
mechanism, but I will tell you that the real test is in whether
you can act in the face of an economy, a broad populace who at
the moment feels everything is very good. And just to give you
examples, these people that you are talking about saw this
coming in 2005 and 2006 and 2007, saying there is this leverage
and so forth. And in fact, the regulatory authorities put out
proposed guidelines to begin to put some kind of guideline
limit around exposures to certain kinds of real estate--land
development, commercial real estate. And the blowback on that
was enormous. You cannot do this because we want everyone to
have a home. We want to make sure that the economy stays strong
and the only way you do that is have it continue.
I do not think it will be--I do not think we will miss it
again in the sense of seeing where there is risk. We may not
identify specifically when the economy will go into a slowdown,
but the ability to go against the wind and against the forces
that are in play is overwhelming in any economy, and certainly
in the United States. So that will be the real test: can we
step up to it and say I know you think things are really good,
but we are going to put some limits on this because we do not
want another bubble and we do not want the leverage to
continue. And that will be a lot harder than any of us realize
right now.
Mr. Cleaver. So measuring the systemic risk--thank you,
Mr. Chairman.
Chairman Moore of Kansas. Thank you. The gentleman's time
has expired.
Mr. Hoenig, if you are available, we have time for a second
round of questions, if you are available for just one more
round of questions, please?
Mr. Hoenig. Sure, I would be happy to stay.
Chairman Moore of Kansas. Thank you.
Mr. Hoenig, you testified before this subcommittee in
Washington on the topic of reversing our dependence on leverage
and debt earlier this year. To be clear, Midwest banks and
credit unions never have had the level of leverage that firms
like AIG and Lehman Brothers had; is that correct? And if so,
what can we learn from the smaller financial firms that are not
overleveraged?
Mr. Hoenig. I think we can learn about the principles of
leverage regardless of firm. It is just a fact that as you
leverage up to--if you really run a normal leverage of about 15
to 1 and you leverage up to 30, you have that much less capital
to absorb any losses. And therefore, your margin of error slims
out increasingly as you leverage up. And the thing about it is
when you get the economy going into a downturn on asset value,
those values fall immediately. That debt stays there with all
that cash flow. And it is inevitably a crisis. When you have
more capital, you have the ability to weather a downturn for a
longer period. You still may fail if you have too many bad
assets on your books, but certainly the margin of error is in
your favor. That is what we have to learn going forward. And it
is a huge issue because a lot of the issue right now is maybe
what Representative Cleaver was referring to, when you talk
now--and there is a lot of discussion about raising the capital
level for the largest institutions, in other words, lower the
leverage that we will accept. The first thing that is talked
about is you are going to cause a credit crisis because as you
have to build capital, you have to constrain your asset growth
or bring in new capital and that will slow the ability to fund
new loans. Right away, you are in a conflict. You know you need
to get to a stronger position but you know it is not a free
choice. It is going to cost something else and how you work
through that, my suggestion has been you put the leverage
number out there that is the right number, 15 or 16 to 1, and
you give the industry time to get there. And it is part of the
very harsh--it is painful. And that is the deleveraging of the
country, which I am afraid has to take place.
Chairman Moore of Kansas. Right. Thank you. You have used
the word ``painful'' referring to the recession and it has been
very painful for a lot of people in our country. According to
the New York Times, the popular belief is that as housing
prices rebound, they will continue to go up forever. The
article cites a recent survey by Case-Shiller where many people
said they still believe, ``prices would rise about 10 percent a
year for the next decade.'' Yale economist Shiller was quoted
saying, ``People think it's a law of nature.'' Should people
have new expectations for the housing market in the next
generation? Should we believe that the housing market is going
to continue to rise and rise?
Mr. Hoenig. If the American people are looking for the
housing market to be their investment opportunity, I think they
are making a mistake. I do not think that the economics of the
housing industry, as Professor Shiller is suggesting, is really
designed for that. And right now, the facts are we have an
excess supply and we created that by providing financing
leverage that was almost nonsense. So now we have to adjust
from that. Housing may eventually start to rise again, as other
assets across the country begin to rise again; but it is not
something that I think that the American consumer should be
speculating on in terms of investment.
I would like everyone to have a home, but not everyone can
afford a home, and if we try and make it so when it is not
possible, you create the next problem. So that is the challenge
going ahead.
Chairman Moore of Kansas. Thank you, sir.
Reform of Fannie Mae and Freddie Mac will be hotly debated
in the next Congress. How will those reforms in the housing
market generally affect Midwest banks and credit unions?
Mr. Hoenig. It will vary widely depending on what they in
fact decide. If, as I read some of the discussions that went on
here very recently, it is determined that this is not the way
to go with government guarantees where you privatize the gains
and socialize the losses and if you try and bring the financing
in housing back to the private industry banks, credit unions,
thrifts and so forth, whatever it is, and they take both sides
of the risk, then it will have profound effects, because it
will take and put I think additional opportunity on regional
and community banks, but also additional risk. You cannot just
sell it off your books. But if they then--on the other hand, if
they decide to merely make this a government agency that does
it, you make Fannie and Freddie like Ginnie and it is all
guaranteed, then you will have a different outcome. So I think
it is really in the hands of the Congress and the
Administration right now as they define what should be the
future of how you finance housing in America. It is more than
just what do you do with Fannie and Freddie. That is hard
enough. But it is how you are going to decide to finance
housing in America in the future that will define what impact
it has on regional and community banks.
Chairman Moore of Kansas. Thank you. My time has expired.
Representative Jenkins, if you have any additional
questions, you have 5 minutes.
Ms. Jenkins. Thank you, Mr. Chairman.
I really just have one final question for you today. If I
have heard one thing in the last 20 months since I have been in
office, it has been from my local financial institutions who
are frustrated that they are getting mixed messages. They hear
from policymakers that they need to lend and regulators tell
them that they need to tighten lending standards and increase
their balance sheets. So I am just curious as to what steps you
suggest that we all take to ensure that undue pressure is not
placed on our financial institutions during these hard times,
but that it allows them to continue to make worthy loans to our
constituents?
Mr. Hoenig. That is one question that is a very difficult
question. The first thing about it is the amount of pressure
across community banks, regional banks, will vary very much
depending on the condition therein. If you have a bank that has
had a heavy portfolio of commercial land development loans,
they are under pressure and the examiners are probably going to
be saying, you need to build your capital up, you need to
prepare for that. And there will be impediments to lending,
because that institution is under real stress.
On the other hand, if you are a bank that has been more
conservative during that period, then I think there is clearly
less pressure on you from the examiner to hold down your
lending. They would, I think, be in favor. And I tell people no
examiner that I know, no examiner worth their salt would ever
say we want a bank to fail. It is just not in anyone's
interest, even that examiner's, as tough as they may be. So
that is not the goal. The goal is to separate out those banks
that can lend and those that have to rebuild their capital.
The other thing about it is, and this is where I think
leadership within the agencies, the Federal Reserve, the FDIC,
the Comptroller, has to be. What we tell our examiners is if
you go into a bank and it has a portfolio, it has some stress--
it is hard not to have some stress--but you see the loans and
they have structured them in a way that can work, you do not
have to come down on them harshly. It would serve no useful
purpose, and I will stand--as the leadership of this
institution, I will stand behind you in your judgments
regarding that institution. That is important for me and for
the leadership to say because I will assure you that if a bank
does in fact fail, whether it is large or small, there is an IG
review of how well you supervised. And that examiner, just like
any other human being, does not want to be the one to say, you
were too easy on them and that is why they failed. So you have
this very important balance and that is why we train our
examiners well and why we do give them discretion in the field
and stand behind them. And I think that is critical going
forward.
There is still going to be pressure, many banks still are
under earnings pressure. But I think there is the ability now
beginning to emerge to lend and we want to encourage them to do
that.
Ms. Jenkins. So you would not have any advice and counsel
for things that we could do?
Mr. Hoenig. I think you have passed the law. I think you
need to let the regulatory authorities carry it out, with good
oversight. I think we need to be accountable to you, answer
questions specific to the issue that may come up before you.
Our bank gets calls from various Representatives around the
district and we try and answer their questions about the bank
to the extent that we can in terms of confidentiality. So we
have to be responsive to you and I think you have to give us
some benefit of the doubt, given where we are today in this
economy of ours.
Ms. Jenkins. Thank you.
Chairman Moore of Kansas. Congressman Cleaver, you are
recognized for 5 minutes, sir.
Mr. Cleaver. Thank you, Mr. Chairman.
I want to stick with this article, I just think it is so
fascinating, Kurt Anderson's article, ``The End of Excess: Is
this Crisis Good for America?'' And he goes on to write, ``We
are in a state of shock. In a matter of months, half the value
of the stock market and more than half of Wall Street's
corporate pillars have disappeared along with several million
jobs. Venerable corporate enterprises are teetering, but as we
gasp in terror at our half glass of water, we really can--we
must--come to see it as half full as well as half empty. Now
that we are accustomed to the unthinkable suddenly becoming not
just thinkable but actual, we ought to be able to think the
unthinkable on the upside, as America plots its reconstruction
and reinvention.''
Do you think with all of our new financial structure and
practices laid out in the Wall Street Reform bill that the
United States is now in a position where we are able to think
the unthinkable on the upside as we plot our reconstruction and
reinvention?
Mr. Hoenig. I think one of our country's strongest points
has been that we have always been optimistic and I think we
will continue to be so.
We do have in the meantime though--I do not consider a
crisis a good thing. It is sometimes unavoidable when you do
not take necessary steps, and that is the nature of capitalism,
it gets very enthusiastic on the upside and then overdoes it
and then has to adjust. And that is part of the process. It is
what you learn from that. One of the things we need to do--and
to answer your question, yes, I think the economy will continue
to improve. I think we will have new opportunities and I think
we will prosper. However, we have some things to get through.
First of all, we have a great deal of uncertainty. I have
no other opinion other than we have new pieces of legislation
we have to learn. And that takes time. And so we have to learn
about both the healthcare bill, about the regulatory reform
bill and as we do that, then that will be put behind us and we
will build going forward from here. So that is the process we
are in right now. And we are also in the process of
deleveraging.
An economy that is well capitalized, which has a high
savings rate, at least a reasonable savings rate,
systematically does better than an economy that has a very low
savings rate and is highly leveraged. We are adjusting, and as
we adjust, new opportunities will present themselves and I
think, given our basic capitalistic system, that we have every
reason to be optimistic long term. But we have, as I have
talked about before this committee actually, we have to think
about what we are going to do with our national debt in a
systematic fashion that gives the American people confidence
that we will not try and solve it all in one year, but that we
will get on a path that will solve it and, therefore, they can
make decisions, both consumers and businesses can make
decisions that are long-term oriented. And then we can think
about very optimistic outcomes for the U.S. economy.
Mr. Cleaver. Thank you.
Chairman Moore of Kansas. Thank you Congressman Cleaver.
And thank you, President Hoenig, for your testimony and your
years of public service.
You are now excused and I will invite the second panel of
witnesses to please take your seats and we will have about a 3-
minute recess while the panelists change. Thank you, sir.
Mr. Hoenig. Thank you very much.
[recess]
Chairman Moore of Kansas. The committee will come to
order. I am pleased to introduce our second witness panel: Mr.
Chuck Stones, president, Kansas Bankers Association; Mr. David
Herndon, president and CEO, First State Bank; Mr. Mariner
Kemper, chairman and CEO, UMB Financial Corporation; Mr.
Jonathan Kemper, chairman and CEO, Commerce Bank, Kansas City,
and vice chairman, Commerce Bancshares, Inc.; Ms. Marla Marsh,
president and CEO, Kansas Credit Union Association; and Mr.
John Beverlin, president and CEO, Mainstreet Credit Union.
I want to thank our panelists for being on the panel today
and sharing your information with us and your wisdom with us.
Without objection, your written statements will be made a part
of the record and you will each have up to 5 minutes to
summarize your written statements.
We will start with Mr. Stones. You are recognized, sir, for
5 minutes.
STATEMENT OF CHARLES A. STONES, PRESIDENT, KANSAS BANKERS
ASSOCIATION
Mr. Stones. Thank you, Mr. Chairman, Representative
Jenkins, and Representative Cleaver. It is a pleasure to be
here. I think it is appropriate that we are in the Capital
Federal Auditorium within the Regnier Center at the Johnson
County Community College. It is a pleasure to be here.
My name is Chuck Stones, and I am the president of the
Kansas Bankers Association. Just a few comments on banking in
Kansas to start off with, and these statistics early on are
meant to represent commercial banks, not savings banks or
credit unions.
The Kansas Bankers Association represents 320 traditional
community banks in Kansas. Kansas is a State with a large
number of community banks. As of 12/31/09, there were 323
chartered banks in the State, ranging from $4.5 million in
assets to $3.7 billion in assets. The average size of a Kansas
chartered bank is $155 million, and 36 percent of all chartered
banks in Kansas have less than $100 million in assets. The
total assets of all chartered banks in Kansas is just a little
over $50 billion. So it is not surprising that a high
percentage of our Kansas banks can be found in rural
communities. Nearly 20 percent of all Kansas chartered banks
are located in towns of fewer than 500 people, and 60 percent
of all Kansas banks are located in towns of fewer than 5,000
population. It is also important to understand that nearly two-
thirds of all Kansas banks have 14 or fewer employees.
The overwhelming majority of Kansas banks--or banks in the
Midwest and specifically in Kansas--were performing well
leading up to the current economic downturn and continue to do
so. The agriculture economy has been very strong and banks in
rural areas continue to be strong and profitable. However, as
Tom Hoenig said, some banks in the few metropolitan areas of
Kansas that experienced rapid commercial and residential
development growth in the early part of the decade are now
experiencing some distress and are attempting to address those
issues to the best of their abilities. They are dealing with
declining value of collateral and the slow market causing their
customers to be unable to remain current on their loans. It is
important to remember that banks are reliant on their
customers' ability to repay the loan commitments in order to
remain profitable and well capitalized.
Traditional banking has been the backbone of our Nation's
economy and yet the term ``bank'' has been misused by almost
everyone in the media and in Washington, D.C. Kansas banks
still adhere to the 3-C's of credit--capacity, character, and
collateral--when making loans. The extension of credit is in
essence the evaluation of risk. We believe government
intervention into this process altered decision making by many
lenders and allowed loans to be made that never would have been
in a free market system. The Community Reinvestment Act is one
example of this type of intervention, as is the relaxed
underwriting standards of Fannie Mae and Freddie Mac. While
homeownership is a worthy goal, encouraging people to purchase
homes they cannot afford is much worse, in the long run, for
everyone. Government intervention in the lending process
altered decision-making and interfered with the free market
system on the front end of many transactions. Expecting that
same free market system to work on the back end is unrealistic.
Traditional banking needs to be strengthened and encouraged
because, as in years past, it will be the engine that drives
any economic recovery. Traditional bankers are just like any
other small business men and women trying to keep their
communities strong.
Too big has failed. There are no chartered banks in Kansas
that meet the criteria of ``too-big-to-fail.'' In fact, at $50
billion in assets, the entire State of Kansas probably fails to
meet that test. In some people's eyes, that makes Kansas and
Kansas banks insignificant. Yet when you look at the thousands
of individuals, small businesses, and agricultural operations
that are financed by the traditional community banks in Kansas,
one could hardly call it insignificant. However, the 325 banks
in Kansas are negatively impacted by the policy of ``too-big-
to-fail.''
When megabanks are systematically bailed out time after
time, they no longer see downside to their overly risky
behavior, yet traditional community banks in the whole country
are hurt by the economic downturn that inevitably follows. It
has been my view for quite some time that business lines,
operations, and functions outside of the traditional banking
function of taking deposits and making loans have put the FDIC
Deposit Insurance Fund at risk. Those functions need to be
identified, segregated and capitalized separately; thereby,
reducing the risk to the entire banking system. Will the new
systemic risk council and other policies put in place by the
Dodd-Frank bill work? As Tom Hoenig said, time will tell. It
will take a great amount of fortitude by policymakers and
regulators to see if that does ultimately work.
In the last part of my testimony, I would like to focus on
regulatory burden and its effects on banks, on consumers, and
on the economy as a whole. There are some policymakers who
believe there is no such thing as too much regulation.
Traditional banks feel the burden of regulation. With a typical
small bank, more than $1 out of every $4 of operating expense
goes to pay for governmental regulation and that was before the
Dodd-Frank bill.
We are aware that traditional community banks have a
growing list of regulatory burden. I have brought a list of
those new rules and regs that have been put in place the last 2
years. The customers are hurt by overregulation. Banks in
Kansas have told me that they are trying to decide whether it
is just impossible or not to remain in business after the Dodd-
Frank bill takes effect. And the realities of lending,
especially in the mortgage area in the rural area are not given
consideration when new rules are implemented.
Chairman Moore of Kansas. The gentleman's time has
expired. Can you wind up, sir?
Mr. Stones. Yes, thank you.
Just briefly, everyone should be concerned about
overregulation and an efficient banking industry. The term
``financial intermediation'' from economics 101, from my
economics textbooks, ``commercial banks also perform an
additional function which other financial institutions and
businesses do not. That unique function is to create money by
taking deposits and making loans. Because of their unique
money-creating abilities, commercial banks are unique and
highly strategic institutions in our economy.''
It should be important to all of you, policymakers and
consumers and business people alike, to maintain a highly
efficient banking system.
Thank you.
[The prepared statement of Mr. Stones can be found on page
84 of the appendix.]
Chairman Moore of Kansas. Thank you, Mr. Stones.
Mr. Herndon, you are recognized for 5 minutes, sir.
STATEMENT OF DAVID L. HERNDON, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, FIRST STATE BANK OF KANSAS CITY, KANSAS
Mr. Herndon. Good morning, Chairman Moore, Representative
Jenkins, and Representative Cleaver. My name is David Herndon,
and I am the president and chief executive officer of First
State Bank in Kansas City, Kansas. I am also the immediate past
chairman of the Kansas Bankers Association.
First State Bank was founded in 1901. We celebrated our
109th anniversary on July 1st of this year. Special uniqueness
to our bank is that it was founded and remains headquartered in
Kansas City, Kansas, and it has always been privately and
locally owned. I have been associated with the bank since 1978
and served as its President and CEO since 1990.
Based on asset size, First State Bank is one of the
smallest banks in the Kansas City metropolitan area. Yet we
offer a full range of bank services and delivery systems
directed to our customers and to our community. Our trade area
is primarily southeast and south central Wyandotte County,
Kansas, northeast and north central Johnson County, Kansas, and
west central Jackson County, Missouri. This area includes a
sizable portion of the urban core of Kansas City, Kansas, and
it represents a significant number of our customers. Our
business customers are primarily manufacturing, transportation,
warehousing, distribution, and subcontracting businesses. The
consumers that we serve are historically employees of these
businesses as well as other low- to moderate-income, urban core
residents.
Our business model reflects our clients' banking
requirements. When depositors and borrowers are enjoying good
times, so do we. The challenge is just the same when those
times are not so good.
Throughout the 1990's and the early 2000's, First State
Bank led its peers in nearly all measures of financial
performance. Following 12 consecutive years of increasing net
income and asset growth, profits suffered a decline but
remained positive after the terrorist attacks of September
11th. The bank worked with its business customers at that time
to help them recover from the far-reaching economic shocks and
business setbacks from this event. But some of our clients did
not make it and were unable to repay their borrowings. The
result was that we were forced to boost our reserves, increase
our capital, and slow our asset growth. Despite the adverse
impact to the earnings, we still remained profitable and we
still remained well capitalized.
We rebounded our earnings in 2005 and returned to the pre
9/11 levels in 2006 and 2007. Then 2008 hit and the world
changed again. But they changed and led to headlines that
reported that banks were in trouble, that banks were failing,
that banks were not going to be able to help their clients.
Unfortunately, many of those reports were true.
But they were not true at First State Bank and they were
not true at other Kansas banks.
First State Bank, like it has for 109 years, still makes
loans to qualified borrowers, still offers professional banking
services, and strives to build the same strong relationships
with its clients. And those relationships allow us to adjust
our business model and work with the bank clients as their
business models change, whether it be by economic circumstances
or other circumstances. That adaptability has allowed us to
survive through the Depression of the 1930's, the 1980's, the
post-9/11 economy, and it is allowing us to survive today.
We are trying to position ourselves to persevere in this
economy just as the other banks throughout the Midwest are
doing. To put it simply, we are healthy, and we are profitable
and we remain cornerstones in our communities. But as you heard
before, many banks and bankers and directors of small banks are
judging whether they can stay in business and feel that they
are needlessly under attack. Too many feel that they are being
punished for actions which they never undertook. For example,
we never participated in any subprime lending and never relaxed
our lending standards, yet we were brushed into that group when
it was in vogue to do so.
Most of our borrowers are repaying their loans, but some
are not. And we are working diligently to work with those who
are struggling. It usually takes a long time to turn around a
troubled debt but we are not being granted that time in too
many cases. Banks should not have to write down loans to
legitimate borrowers who are working through a financial crisis
they have never seen before but yet they are required to do
that.
Additionally, our profits of small and medium-sized banks
are being attacked. Recent legislative and regulatory actions
have dramatically decreased income sources and increased
operating expenses. Increased deposit insurance premiums,
compliance costs, and restricting interchange fees are
certainly examples. It appears that many of the banks in this
area are concerned that government regulators have begun
choosing winners and losers and if so, the small and medium-
sized banks will regrettably be those losers.
We were well equipped to meet the requirements of our
clients, both depositors and borrowers. Liquidity at our bank
and throughout Kansas banks is and has been significantly
higher than our peers in several areas of the country. And most
certainly higher than many of those non-regulated or lesser-
regulated institutions that are mistakenly referred to by so
many as banks. We are profitable, we have strong reserves, and
we have aggressively added to those reserves since the economy
turned sour, further protecting our clients. Our capital is
strong. First State has and will as long as the current
ownership is involved always be well capitalized or above based
on the regulatory definitions. And the majority of bankers
throughout this region have the same attitudes. Our clients
have confidence in us and because they know we are their
financial partners in their success, their success will breed
our success.
That mutual process will prove to be the catalyst for an
economic recovery, I believe. The sources will create and
sustain jobs.
Chairman Moore of Kansas. The gentleman's time has
expired. If you can wind up, sir.
Mr. Herndon. I can, thank you.
The risk of unsubsided legislative and regulatory burdens
will have unintended adverse consequences. Too many of us will
be put out of business. We respectfully request the continued
work--we are anxious to work with regulators and legislators to
make that happen. But only through persevering in a diverse
financial industry will our economy sustain.
Thank you.
[The prepared statement of Mr. Herndon can be found on page
45 of the appendix.]
Chairman Moore of Kansas. Thank you, sir.
Mr. Mariner Kemper, you are recognized, sir, for 5 minutes.
STATEMENT OF MARINER KEMPER, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, UMB FINANCIAL CORPORATION
Mr. Mariner Kemper. Thank you, Chairman Moore,
Representative Jenkins, and Representative Cleaver. We are
pleased to be with you today to join in this dialogue along
with my colleagues here in the credit union arena and the
banking sector. The country is entering a new era for financial
services after a very rough time for many in the financial
sector, as well as consumers and businesses.
I particularly appreciate the comments by Tom Hoenig. Tom
has shown outstanding leadership, both in the Federal Reserve's
relationship with banks here in the Tenth Fed District, as well
as a sound voice for reasoned policy nationally.
From our interactions with customers, we can tell you that
many businesses and consumers continue to face a challenging
economy, whether through unemployment or weak demand for
products and services. This makes it especially important that
we are having this conversation today.
We believe, as you do, that solid Midwestern businesses
like UMB and our colleagues here today are very much a part of
the solution. It is critical that policymakers focus on
constructive actions now to strengthen business, create private
sector jobs, and restore growth in places like Kansas and
Missouri.
Let me comment briefly on UMB's approach to banking. Unlike
some financial institutions, UMB did not plunge into the bubble
mentality. UMB has pursued three goals as pillars of our
business strategy--quality, diversity, and stability. These
goals have served us, our customers and our shareholders very
well over the years.
UMB ranks as number two in the United States, according to
a study by Forbes magazine ranking banks on asset quality,
capital adequacy, and profitability. We take great pride in the
fact that relative to industry averages, UMB has posted strong
and consistent earnings year over year through the financial
crisis. Throughout the crisis, we have had no need or desire to
seek government bailouts or outside capital infusions.
In 2010, the Nation is entering a new financial era in what
we call the ``new normal.'' There is a hangover from this
period of financial excess, which is hindering the lending
environment and there is an increase in regulatory involvement
with banks and other financial institutions, which has only
begun.
The lending environment is a topic of much concern. Let me
assure you, UMB Bank never stopped making loans and has plenty
of liquidity to meet the needs of any qualified prospective
borrower. We have increased our total loan balances through
2007 to the mid-2010 period an average of 5 percent per year
and our total commercial loan commitment figures have increased
40 percent since 2007.
As the economy has slowed down, however, we have
experienced a decline in demand for commercial and industrial
loans. The strains of the recession have caused many businesses
to scale back their plans. We believe it would be a mistake for
banks to loosen underwriting standards now and take speculative
loans on in an attempt to return to what we perceive as normal
levels.
If our goal is to stimulate prosperity, I encourage
political leadership to act on the counsel from leaders in the
private sector who identify specific constructive actions to
help restore a more vibrant economy. For instance, the Business
Roundtable has called on Congress for tax reform to help U.S.
corporations stay competitive and get on a path of expansion.
The Roundtable has spelled out specific provisions of the Tax
Code that create a drag on growth and competitiveness. To bring
on economic recovery and put people to work, we need to
stimulate business spending, not by increasing government
spending or pressuring banks to lend, but by reducing the
burden on businesses.
Another example of constructive action involves the
regulation of banking and finance. Passage of the Dodd-Frank
Act this summer was just the beginning, not the end of this
process. And many, many questions remain unanswered.
As further changes are made and rules are developed, we
support the strengthening of bank capital requirements,
including both the tiered and risk-based capital levels. But
this approach should be risk-based to start with, and should
focus on incentives rather than regulatory penalties. Deposit
insurance rates also could be incorporated into a set of
incentives. That is, the higher the risk profile in an
institution, the higher the insurance rate they should pay. The
reverse should be true. This distinction between both
categories is very slight today. This would drive the principal
behavior that poses less systemic risk such as that
demonstrated by UMB and others today.
Although the Dodd-Frank Act was designed with good
intention of addressing excessive leverage and the ``too-big-
to-fail'' issue, it has unfortunately become a mechanism to
regulate bank profitability as well as product design and
competition. History tells us that a lack of regulation is not
the catalyst for a financial crisis. Rather, the stability of a
system rests on the will of business and political leadership
to do what is right when it is right.
If we truly wish to change behavior and counter the forces
of human nature, we need to provide incentives for financial
discipline. We believe banks and other players in the financial
system, including policymakers and regulators, would do well to
pay attention to quality, diversity, and stability. We will
achieve long-term recovery by encouraging sound financial
practices at every level from banks to business to consumer and
even government.
I am happy to discuss the particulars with you as we move
forward. I will leave you with one of my favorite quotes from
President Truman, and it seems to apply to shaping this new era
for our financial system: ``Men make history, not the other way
around. In periods where there is no leadership, society stands
still. Progress occurs when courageous, skillful leaders seize
the opportunity to change things for the better.''
Thank you again for having me with you today.
[The prepared statement of Mr. Mariner Kemper can be found
on page 72 of the appendix.]
Chairman Moore of Kansas. Thank you, Mr. Kemper.
And Mr. Jonathan Kemper, sir, you are recognized for 5
minutes.
STATEMENT OF JONATHAN M. KEMPER, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, COMMERCE BANK, KANSAS CITY, AND VICE CHAIRMAN,
COMMERCE BANCSHARES, INC.
Mr. Jonathan Kemper. Thank you, Chairman Moore,
Representative Jenkins, and Representative Cleaver. I always
love it when my cousin quotes our former employee, Harry
Truman.
[laughter]
Mr. Jonathan Kemper. I am Jonathan Kemper and, as
mentioned previously, I am vice chairman of Commerce Bancshares
and chairman of Commerce Bank of Kansas City.
In the interest of time, rather than recite my formal
testimony and repeat those of the co-panelists which I
certainly endorse, I will attempt to keep to a few major
points, which I believe are of critical importance, especially
given Representative Jenkins' comments of taking lessons back
to Washington.
As has been said, we really appreciate your efforts in
setting the record straight, because much of the financial
crisis stemmed from the very largest financial services
companies and not the community-oriented banks that you have
heard from already. The banks have been lumped together without
distinction and we find ourselves blamed for a financial
meltdown that we actually warned people about and had no part
of. This has been the biggest financial crisis since the Great
Depression and has caused sweeping changes in the banking
business, not all of which are complete now.
In the discussion of the questions, I would expand small
and medium-sized Midwestern banks to traditional banks in my
remarks and I would say that except for the top four banks in
our country, the rest of us are all small banks in many of the
ways that have been described today. I have put a graph into my
testimony, and I think you have a copy of it, which shows where
Commerce Bank fits. And when I put this together, I just could
not believe that there are really two orders of magnitude
between us and the largest banks.
To give you a sense of what is going on here, the four
largest banks are in a world all unto themselves in the
trillion dollar club. It falls off from Wells Fargo to U.S.
Bank by a factor of four. So there really has been a complete
sea change and Tom Hoenig went through that, about how much
banking has been concentrated in the very, very top. Those
trillion dollar clubs of megabanks and brokers differ from
traditional banks both in size, in business style, and on their
individual impact on the national and global financial systems.
So we have resisted and certainly would caution against lumping
us in that pot.
It has also been fashionable, many have said that the
government bailed out the banks with TARP. And just to set the
record straight on that one, not only did traditional banks not
cause the crisis, but the government will in fact make a profit
on the money placed into the traditional banks and the bad
actors who caused the large bailouts, AIG and GMAC, are going
to have us pay their bills, which is really galling.
Commerce Bank today is $18 billion. We have operations in
five States, primarily Missouri and Kansas. Our success--and
you have seen this in our testimony--is really because we have
stronger customer focus. Our growth has been a solid organic
basis and a knowledge and involvement in our communities. We
would characterize ourselves as a good bank and a good
corporate citizen. We are among the best capitalized banks, we
declined TARP funds, and we did not contribute to the crisis,
but we are paying the cost and bearing the extraordinary
regulatory burdens. And I will just mention a comment made in
the press in the signing of the Dodd-Frank bill, President
Obama said, ``Unless your business model depends on cutting
corners and bilking your customers, you have nothing to fear
from this reform.'' I respectfully submit we are concerned and
we do not believe that is a true statement. We think that the
FDIC insurance costs have increased already and are now going
to increase on banks of $10 billion and above. That is clearly
something that is going to affect our bank. The Consumer
Financial Protection Bureau has potential to add substantial
cost and restrict business and the price setting as established
by the Durbin amendment significantly affects future fee
income. In fact, there are more than 200 new regulations in the
Dodd-Frank bill that are going to tax our staff and increase
our costs.
I am going to skip over the comments about the last few
years. I think they have been well summarized previously. All I
can say is that we, as has been mentioned before, saw what was
going on in the excesses and did not make the mistakes that
others did, but we are tremendously affected by it, that the
growth in borrowing taught by the hedge funds using leverage
and credit default swaps still is out there and we still have a
very difficult and ugly picture.
In fact, in 2007, we had--financial services represented
over 25 percent of all the profits in the United States.
In conclusion, I just wanted to say that there is terrible
trouble if the government gets involved in the level of pushing
the scale in favor of the largest banks and against us. And I
have given you a recent--in fact, it is coming out next month--
a Harvard Business Review on where the judgment deficit is
going to be and I recommend it for your reading. It was done by
a classmate of mine at the Harvard Business School, and talks
about the need and importance of local decision-making, and if
we see the disincentives to the community-oriented banks that
are represented by the panel and by mid-sized banks and small
banks, we are going to see a deficit in judgment in the field
that will provide the future for the economy that we need to
see grow.
Thank you so much.
[The prepared statement of Mr. Jonathan Kemper can be found
on page 60 of the appendix.]
Chairman Moore of Kansas. Thank you for your testimony,
Mr. Kemper.
Next, the Chair recognizes Ms. Marsh for 5 minutes.
STATEMENT OF MARLA S. MARSH, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, KANSAS CREDIT UNION ASSOCIATION
Ms. Marsh. Chairman Moore and members of the subcommittee,
I appreciate the opportunity to appear before you today on
behalf of the Kansas Credit Union Association. Kansas has 103
credit unions serving 590,000-plus member owners.
Heavy focus has been placed on the risky practices that
contributed to the great recession and what the government
needs to do to prevent systemic failures in the future. We
appreciate your willingness to also look at the players that
did not contribute to the recession and are helping to restore
economic stability. Much can be learned from credit unions with
their philosophy of putting people before profit. My written
testimony provides pertinent statistics on the State of Kansas'
economy and Kansas credit unions in general.
Here are a few highlights:
The economy and Kansas credit unions have fared better on
many economic indicators without the dramatic boom-and-bust
experienced in other regions. However, we have felt the effects
of actions by those less cautious and/or more greedy. A flight
to the safety of a trusted partner is evidenced by our sizable
asset growth over the past 18 months. Loan growth remains
strong at over 5 percent as of March. Overall, credit unions
are healthy and well capitalized at an average 10.8 percent net
worth to assets ratio. And any consolidation since 2008 can be
attributed more to the increasing marketplace complexity and
the escalating compliance and regulatory burden than the
recession. We hope that the committee will monitor the overall
impact of new and current regulations and how the Dodd-Frank
law is implemented.
As far as systemic risk, no credit union or group of credit
unions is large enough to negatively impact the entire
financial system and, therefore, the cost of any credit union
failures would be contained within the credit union system
itself.
The greatest risk to credit unions comes from collateral
damage caused by the ``too-big-to-fail'' institutions. The
devaluing of property, the decrease in consumer confidence and
the increase in unemployment all negatively impact our member
owners.
A second and equally damaging result of ``too-big-to-fail''
is the rise in regulatory burden, an examiner one-size-fits-all
approach that stifles our efforts to provide solutions that
meet member needs and help grow local economies.
So what lessons can be learned from Kansas credit unions?
First, structure matters. The biggest difference between the
Wall Street business model and the credit union business model
is the member ownership component. When the institution is
owned by the customer, there is a mutual responsibility to act
in the best interest of each party. The large degree of
separation from decision maker to end user seen in large
financial firms encourages an internal profit focus and
excessive risk-taking.
Second, business practices matter. Credit unions have solid
underwriting processes, hold most of their loans on their
books, and their loan decisions rely on character and capacity
to repay, not just collateral or a credit score.
Third, people matter. Credit unions focus on member needs,
not greed, offering solutions such as restructuring loans,
deferring payments, and providing financial education and
counseling.
In summary, credit unions are a small portion of the
overall marketplace. In Kansas, it is only 6 percent. They have
a strong role to play in financial services as a solid
alternative to for-profit banking. Even though credit unions
did not cause the problem, they face steep compliance costs as
part of the clean-up. We urge Congress to recognize the
enormous challenges these regulatory changes present to small
and mid-sized institutions. We also urge Congress to allow
flexibility and to increase options for credit unions to serve
their members, such as passing legislation to increase the
statutory credit union member business lending cap.
The credit union mission of putting people before profits
has been good for Kansas. Please help us to continue to deliver
on that mission. On behalf of Kansas credit unions and their
member owners, I thank you for inviting us to testify.
[The prepared statement of Ms. Marsh can be found on page
79 of the appendix.]
Chairman Moore of Kansas. Thank you.
The Chair next recognizes Mr. Beverlin for 5 minutes, sir.
STATEMENT OF JOHN D. BEVERLIN, Sr., PRESIDENT AND CHIEF
EXECUTIVE OFFICER, MAINSTREET CREDIT UNION
Mr. Beverlin. Chairman Moore, and members of the
subcommittee, I am John Beverlin, president and CEO of
Mainstreet Credit Union, formerly the Credit Union of Johnson
County, a $260 million cooperative serving over 52,000 members.
We were chartered in 1953 by a group of school teachers who
wanted to control their own financial destiny. We currently
have branches in Johnson County, Lawrence, Leavenworth, and
Kansas City, Missouri. We serve employees of the community
college where this meeting is being held, employees of the
Shawnee Mission Medical Center and the Honeywell plant in
Olathe, and over 100 employee groups.
Mainstreet has had employee groups that have faced
employment uncertainty and layoffs. This continues today. I
share this information so that you understand the diverse group
we serve. In 2009, Mainstreet was making adjustments to our
operations to better survive the economic downturn. We faced
assessments from NCUA for the year 2009 of over $627,000, over
a third of our anticipated net income for the year. We did,
nevertheless, record a positive bottom line for 2009 and
remained very well capitalized.
We continue to review expenses. We froze management
salaries, reduced the amount of employee raises, and cut
contributions to employee retirement.
Some good things did happen in 2009, loans grew as a result
of larger lenders exiting the lending market. Auto loans issued
increased over 195 percent, mortgage loans over 75 percent. In
the end, we survived 2009. A good part of it has to do with
Mainstreet's conservative approach to business, including a
diversified loan portfolio, avoiding concentrations in any one
area.
Another part of it has to do with the nature of a credit
union. As a financial cooperative, a member is an owner of
their credit union. We get to know our member owners and will
work with members when they are faced with financial
difficulty.
So far, we have faced continuing challenges in 2010. We
have had an assessment of $295,000 from NCUA with an additional
of up to $400,000 expected. Mortgage lending continues to be on
the increase; however, auto loans are down. Large national auto
lenders have re-entered the market utilizing subsidized rates
as low as zero percent. To date, we have not laid off any
employees and have refrained from increasing fees to our
members.
We continue to review expenses looking for ways to lend
money, our main source of income and ways to better serve our
members. We anticipate additional premiums for several years to
come from NCUA. NCUA assessments aside, these are things we do
every year. What was unique for this past year and will pose
additional concerns for us in the future are legislative and
regulatory burdens. It seems to me that the mere presence of
this subcommittee and the topic of today's discussion, that
there is agreement that Midwest banks and credit unions did not
cause the financial crisis we are dealing with. Yet all
financial institutions seem to be grouped together when any
attempt is made to look for solutions to the crisis.
This past year, Mainstreet has had to deal with credit card
legislation, spend almost $50,000 educating our members because
of imposed regulatory changes to overdraft protection, and the
recent passing of an amendment on debit/credit card interchange
will result in additional lost income.
We are concerned with where it will all stop. The impact of
these regulatory changes will ultimately fall on the shoulders
of our members and Kansas consumers.
One area where I think credit unions can help is in the
area of business lending to members. Mainstreet does not
currently do business lending by definition of regulation. An
arbitrary business lending cap of 12.25 percent of assets was
legislated in 1998 and it is hard to justify putting the needed
resources in place with a cap at the current level. Legislation
has been imposed that would increase this cap to 27.5 percent
of assets. An alternative, it would seem to me, would be let
our regulator determine the cap. The regulator is in a better
position, while examining a credit union for risk, to determine
the cap.
Mainstreet will survive and continue to serve our members.
We are anticipating continued pressure on our bottom line,
reducing our net income for the next 3 to 5 years. It is
important to note that as a not-for-profit cooperative, we are
not after net income just for its own sake. Retained earnings
are our only source of capital.
In conclusion, Mr. Chairman, I appreciate the subcommittee
taking the time to explore these important issues. And thank
you for inviting us to testify.
[The prepared statement of Mr. Beverlin can be found on
page 40 of the appendix.]
Chairman Moore of Kansas. Thank you, Mr. Beverlin. And I
thank the panelists for their testimony. I am going to start
with questions.
Mr. Hoenig testified that community banks will survive the
crisis and recession and will continue to play their role as
the economy recovers. The more lasting threat to their
survival, though, concerns whether this model will continue to
be placed at a competitive disadvantage to larger banks. I
would like to ask each of the panelists if you would care to
comment, and please keep your responses kind of short so
everybody will have a chance to comment. Do you believe that is
a concern? I would like to hear your opinion, please.
Mr. Stones. Absolutely, we think that is a concern. Thank
you for the question. We think that in the long run, the
regulatory burden placed on all banks by this law and laws in
the past have placed an undue burden, a more heavily
concentrated burden, on community banks. They just simply do
not have the resources to hire new people, to do whatever it
takes to comply, to try to comply with the new laws and
regulations.
Chairman Moore of Kansas. Thank you, sir. Mr. Herndon?
Mr. Herndon. I would concur. Our bank has 26 people who
work for it. Other banks have departments of 260 people to
absorb that. So it is absolutely tilted--we need to level the
playing field.
Chairman Moore of Kansas. Thank you, sir. Mr. Kemper,
Mariner Kemper?
Mr. Mariner Kemper. There are a couple of areas I think to
focus on. One is just the pure compliance costs of living with
the new bill. I think we will all be finding out what that is
over the coming years, there are what, 2,000 pages of it. There
is a tremendous amount of that we do not know what it looks
like yet, it is going to cost the industry a great deal and the
smaller banks obviously have a harder time shouldering that
burden.
Additionally, I still have a hard time bringing together
the intended purpose of Dodd-Frank to end or affect the crisis,
in a lot of the things that have ended up in there like the
Durbin bill and things like that, that have really nothing to
do with the crisis and will cost us. I think that is really
where the greatest fear for the industry is, is the fee income
that will disappear over the next few years.
Mr. Jonathan Kemper. Without question, the Dodd-Frank bill
disadvantages community banks and it is going to add to their
cost and restrict their activities. I think this is a very
valid concern and should be looked into, especially as it
affects the Midwest.
Chairman Moore of Kansas. Ms. Marsh?
Ms. Marsh. I think the complexity of the Dodd-Frank bill
leaves us all kind of wondering exactly what is going to affect
each of us. It is very complex, 200 new rules, and we know at
least 35 affect credit unions at this time. Debit interchange
is a major cost for our credit unions and the Fed sitting on
identifying what those tier levels will be is very important
for us. The Consumer Protection Agency and who heads that is
going to be very important out of that bill. Mortgage lending
and disclosures and then payments and settlements are also
contained in there, and that will have a direct impact on us
too.
Chairman Moore of Kansas. Thank you. Mr. Beverlin?
Mr. Beverlin. I think overall the credit unions' concern
has always been that because of our size, we sometimes are
forgotten. And the impact that regulation has on us is not, a
lot of times, looked at. I know Mainstreet, for the very first
time 2 months ago, we now have a full time VP of Risk
Management or Regulation and Compliance. A lot of small credit
unions cannot afford to do that. So they rely on other sources
and sometimes, it is the manager of that credit union who has
to fill that need and it takes him away from doing other things
and helping his members.
Chairman Moore of Kansas. Thank you.
I talked to Mr. Hoenig about this and would like to ask
your reaction, if you have reaction to this. Despite the
painful recession, according to today's New York Times, the
popular belief is that as housing prices rebound, they will
continue to go up forever. The article cites a recent survey by
Case-Shiller where many people said they still believe prices
would rise about 10 percent a year for the next decade. Yale
economist Bob Shiller was quoted, saying, ``People think it's a
law of nature.'' Should people have new expectations for the
housing market for the next generation? Mr. Mariner Kemper, do
you have any thoughts about that?
Mr. Mariner Kemper. I absolutely concur with Mr. Hoenig.
What goes up must come down. We have had 36 some-odd recessions
since the mid-1850's, most caused by a real estate crisis. That
is the only fact out of this whole thing is we will see it
again.
Chairman Moore of Kansas. Mr. Jonathan Kemper?
Mr. Jonathan Kemper. Housing is one of the most important
industries as well as important feature in America. And we
would like to be supportive of responsible resurgence of
housing, but as you say, there is an unrealistic--as Tom said,
there is an unrealistic expectation that it is going to recover
and bounce back. I think the new normal is going to be related
much more to the value of housing relative to income. It got
way out of whack and as Tom said, we had several years' supply
that created a damping effect. As that is worked off, I think
the valuation of housing will be much more reflective of the
income available to support it and with the increases in energy
prices and changes in living, we are going to have to look at
our housing stock that is fit more for what our Nation's needs
are.
Chairman Moore of Kansas. Thank you. My time has expired,
and I would ask the other panelists if you have some comment
you would like to make, if you would submit those please in
writing, I would appreciate that very much.
The Chair next recognizes Representative Jenkins for 5
minutes.
Ms. Jenkins. Thank you, Mr. Chairman, and thank you all
for your words this morning.
I will start with Mr. Stones. Your written testimony
indicates that a majority of traditional community banks in
Kansas serve towns of fewer than 5,000 citizens and operate
with just a few employees. Given that regulatory costs already
represent more than 25 percent of the operating budgets of
these community banks, can you just summarize again for us how
the Dodd-Frank bill will add to these banks' operating costs?
Mr. Stones. As I think Mr. Mariner Kemper mentioned, there
are over 240 new regulations that will come out of the Dodd-
Frank bill. It is estimated based on historical legislation to
regulation that there is going to be in excess of 5,000 to
10,000 new pages of regulation that banks are going to have to
comply with. Obviously, it would be speculation on my part to
say how much additional cost that would be, but obviously with
those kinds of numbers, the amount will be significant. KBA
employs four full-time attorneys whose job is to answer
compliance questions for our members. They answer--currently in
the past few years, they answer somewhere around 5,000
inquiries per year. That is starting to exponentially increase.
Most of those are obviously from community banks, but some of
the larger banks in our State like to just kind of ask
questions of other attorneys to kind of make sure they are
thinking along the same lines, but we are trying the best we
can to help our smaller banks comply with all the laws and get
ready for the new Dodd-Frank legislation.
Thank you.
Ms. Jenkins. Okay, thank you.
Moving right down the table, I guess I will address this
one to Mr. Herndon, but certainly if anybody has anything to
add, please do. You mentioned in your written testimony that
many bankers and directors of small to medium-sized financial
institutions in the Midwest feel that they are needlessly under
attack and many feel that they are being punished for the
actions for which they never took and that government and
regulators are choosing winners and losers and it seems that
small and mid-sized banks are the losers.
What can Washington do or could we have done differently to
treat traditional community banks better and what can we do in
the future to ensure that this very reliable sector of banking
is not the recipient of further unintended consequences?
Mr. Herndon. It seems that every time that we mention
that--we being small and medium-sized banks throughout the
country--did not participate in the events that led to the
crisis, that the response was, ``Yes, we know, you were not
part of the problem.'' In fact, the legislation has directed
the cure to those that were not part of the problem. We did not
participate in those new and exotic financial instruments, most
of them, and probably those that did create them do not
understand the consequences.
So, despite the fact that we were doing our jobs serving
our communities, serving our customers, the new regulations are
going to have a tremendous adverse unintended consequence on
the banks of my size, in my opinion. We cannot absorb the cost
of compliance; the burden is just too great to stay in
business. So I think that had the direction been to those that
were responsible instead of the easy target that we turned out
to be, it would have been more effective.
Ms. Jenkins. Okay, thank you.
Mariner, I think you mentioned in your testimony that your
bank has expanded further into the financial services sector in
order to hedge and diversify your profit centers. How will the
enactment of the financial regulatory reform bill affect the
way you and other banks do business?
Mr. Mariner Kemper. For the most part, our furthering of
our diversity actually stabilizes that. It helps minimize the
impact of the bill because most of our diversity comes from
non-consumer oriented business lines. Most of the pain in the
bill is directed at the products and services that we provide
for consumers as an industry and our diversity actually moves
us away from that. So as a particular institution, our
diversity helps us.
I guess my greatest concern is that the bill has moved away
from what its intended purpose was, and that was to address
excess in the system and ``too-big-to-fail.'' The ``too-big-to-
fail'' has many loopholes in it still. I think that would be
something I would have you focus on, as to how you tighten--as
Mr. Hoenig mentioned, it is going to be awfully hard to see
what can happen over a weekend. So I think we focus on the
``too-big-to-fail'' issue and then as it relates to the excess,
bringing in the unregulated is great, but there are too many
things in that bill that have absolutely nothing to do with the
problems that came about. And I would ask that we try to
minimize the impact of those things and focus on the crisis
oriented issues.
Ms. Jenkins. Thank you, I yield back.
Chairman Moore of Kansas. I thank the gentlelady. The
Chair next recognizes Congressman Cleaver for 5 minutes, sir.
Mr. Cleaver. Thank you, Mr. Chairman.
Let me thank all of you for giving this kind of time to us
today, and your testimony has been much appreciated.
Mr. Stones, in your testimony, I agree with almost all of
your comments, with a slight disagreement that the most misused
word in the English language for the last 18 months is
``banks.'' I agree we misuse it. I think the most misused word
for the last 18 months and the last 18 centuries is ``love.''
[laughter]
Mr. Stones. I defer to that, thank you.
Mr. Cleaver. But my concern centers on your comments on
page 2 and they relate to the Community Reinvestment Act. The
Community Reinvestment Act was approved long before any of us
were here. In fact, I think most of us were just getting out of
school when it was passed, but it was enacted because there was
a severe shortage of credit in low- to moderate-income
communities. And during this financial meltdown--actually
before, from time to time, we have people who say, as did you,
that CRA was somehow connected to the financial collapse.
All the evidence points to the contrary. In fact, I debated
this issue on the Floor for 1 hour, and it is one of those
things that just continues to roll in spite of the evidence.
The Federal Reserve conducted a study which showed that only 6
percent of the mortgages that were made just prior to the
collapse were made in CRA assessment areas.
The language in the bill, and I am paraphrasing it, I did
not know I would end up talking about it, but the language in
the bill says something like ``and loans should be made with
the highest possible prudence'' and so forth. In hearing after
hearing after hearing, we have asked experts, we have asked
Treasury Secretaries, FDIC Chairs, economists who appear before
our committee, and we have never had anyone from the expert
community say that CRA contributed. But it is still one of
those things that floats around out here and is said
repeatedly.
So I am just curious about your comment.
Mr. Stones. Thank you, Representative Cleaver. I guess my
comment is meant to talk about a broader issue. I agree with
you, I am not convinced that Community Reinvestment Act loans
in and of themselves were a large contributing factor to the
crisis. The point I was trying to make was that there were laws
and regulations put in place, like the Community Reinvestment
Act, that took over the free market system, in that loans were
made--and again, not necessarily created the crisis--but loans
were made, and just one example was the CRA.
Loans were made that would not necessarily have been made
otherwise, that loans were made in order to comply, to make
sure your bank complies with CRA and, as you said, low- to
moderate-income areas, that those individuals might not qualify
for a loan. Now if you take that out into California and
Florida and Arizona, and I agree these were not CRA loans that
were involved in the crisis necessarily, but they were the same
kind of loan that were talked about by the theory and the wont
of Administration--and the Bush Administration was part of this
also--was that homeownership is the American dream and that
every person should have the ability to own a home. That just
is not going to happen in a real free market system. I saw
evidence and stories about people making $100,000 in California
who were purchasing $800,000 and $1 million dollar houses that
in Kansas, there is not a bank in Kansas that would have made
that loan. Yet, these were loans that were being made, piling
subprime loans on top of each other to these consumers who had
no business having those kinds of loans. And they were being
told--and this goes to Chairman Moore's question to Ton
Hoenig--they were told that asset value of that collateral
would continue to grow and that even when they decided to sell,
if they could no longer make those payments, that the value of
that home would be high enough that they could sell the home,
pay off the loan and still come away with some value in their
property. When the bubble collapsed, that just went away.
And so the general philosophical economic point I was
trying to make is there were policies put into place that in a
totally free--that allowed loans to be made that would not have
been made in a totally free market system.
Mr. Cleaver. I would agree, everyone should not own a
home. I think that was a big mistake. I have a cousin, Herman,
Junior, and I would not sell him a $200,000 home for $200. So I
agree.
I guess my deep concern is that it has leached into the
community that somehow poor people being addressed in CRA
caused the collapse, and so I understand what you are saying.
You are saying that in general, pushing toward giving everybody
a home loan, helped. But I am just--I have been pushing back
against this, along with other members of our committee and the
Fed Chairman and everybody else, because the Community
Reinvestment Act has contributed to this issue.
And I yield back no time.
[laughter]
Chairman Moore of Kansas. I have one more question. The
other panelists up here may have another question as well, the
other members of our committee.
I appreciate the concern about new rules from the Dodd-
Frank Act, and one number used is that there are 250 new rules
from it. Many of these rules relate to derivatives, securities
and insurance regulation. Many only apply to the very biggest
financial firms in the United States.
Mr. Stones, most banks in Kansas are not engaged in
derivatives or securities transactions; is that correct? So
those rules would not apply to the smaller banks. Is that also
correct, sir?
Mr. Stones. I think the rules on derivatives are one of
the big question marks in the bill. I think you are correct
that the majority of banks in Kansas do not deal in the kinds
of derivatives that were addressed in the law. However--and I
am basing this on another Wall Street Journal article which
talked about the agricultural community that does deal in the
kinds of derivatives that possibly could be affected. And
those, while they are not affected directly within the bank,
are going to affect our agricultural customers in their ability
to address the risk within their crops.
Chairman Moore of Kansas. Thank you. Ms. Jenkins, do you
have any questions?
Ms. Jenkins. Thank you, Mr. Chairman. If I could maybe
just ask one more at this end of the table.
Ms. Marsh, you expressed concern in your written testimony
that a one-size-fits-all view towards regulation stifles our
efforts to do what we do best, which is to provide solutions to
meet the financial needs of our members and to help grow
economies.
I happen to share that concern and, in fact, that was one
of the many reasons that I did oppose the financial reform bill
when it was before the House. But I would like to know, and I
am just curious, is it your belief that this Dodd-Frank bill is
guilty of imposing a one-size-fits-all view towards credit
unions and could perhaps provide a competitive advantage to the
larger institutions? And then, Mr. Beverlin, if you would like
to comment on that as well, then I would yield back. Thank you.
Ms. Marsh. I think that the devil is in the details and it
will depend upon the regulations that are promulgated out of
the law itself. It has all indications that we will have some
negative impact, but until we see the actual regulations--right
now, the Credit Union National Association, our national trade
association, is saying that although there are over 200
sections of the law that could impact financial institutions,
just as Chairman Moore said, some of them are dealing with
large institution issues like derivatives. We estimate that it
is more in the 30s to 40s that will be actually directly
impacting our credit unions.
But there are also auxiliary issues that come out of this
and that is, right now, you being a CPA in a former life know
that they are looking at mark-to-market of loans. Of course, we
were also having the impact of the OTTI for us. And so things
that start out simple in the law have a tendency to balloon and
even though we really do not need to have mark-to-market on our
loans, I think that will be something that will be extended out
on this. And the same thing will happen on other parts of the
Dodd-Frank.
Mr. Beverlin. Just this morning, before heading over to
this hearing, KCUA did put out an email that they feel that
there are, as Marla said, about 35 areas that could affect
credit unions. But it really does come down to what regulation
ends up being written to impose those 35. And again, our fear
is that we are such a small part of the market, that we will
not be heard, we will not be looked at and how it might affect
us versus larger financial institutions.
Chairman Moore of Kansas. Thank you.
The Chair next recognizes Representative Cleaver for 5
minutes.
Mr. Cleaver. I do think that we have to be vigilant now. I
think most people--you obviously know the difference but most
people believe that when we pass legislation, that is it. We
pass a broad overview of the legislation and then these various
regulators will put all of the rules together. And I think we
have to be vigilant during that process.
But I love to brag about UMB and Commerce in front of our
committee and in Washington. It is a great story, I think. One
of the responses that I have gotten from some of my colleagues
is that the Midwest is simply more conservative and some of the
residue from the Great Depression seems to linger around in the
Midwest and so the truth of the matter is, they did nothing
special, they just practiced the same conservatism and that in
fact prevented them from experiencing a problem.
Do you think that it was just the conservative nature of
banks in the Midwest that enabled you to have such a good
record? And if that is the case, how do we export it?
Either or both of you?
Mr. Mariner Kemper. I will take a stab at it.
First of all, I guess if conservative is a bad word, shame
on me. I think that I look at it as sound business practices
and, if not participating in subprime is somehow conservative,
then I guess we are conservative. And if knowing that asset
values go up and down is conservative, then we are
conservative. Selling products we understand, if that is
conservative, we are conservative. It is just sound business, I
guess, and if that is Midwestern or conservative, then I guess
that is what we are.
Mr. Jonathan Kemper. That is a good question. I think you
should just go back to them and tell them that we are the
heartland of America and they should not criticize us because
they are criticizing what we are all about. Our basic business
model is customer oriented, community-oriented banking. And as
Mariner said, we handle the money as if it were our own. It is
backed by our own capital. We do not get involved in things we
do not understand and we stress long-term relationships. That
may be conservative, but it also happens to be best for our
shareholders and best for our customers and best for the
communities we serve and we are going to make no apologies for
it.
Mr. Cleaver. I am a non-conservative, and I appreciate and
celebrate your conservative nature, and I think it has made not
only the State and this community look good, but I think we
have some valuable lessons for the rest of the country.
Thank you, Mr. Chairman.
Chairman Moore of Kansas. Thanks to our panel and thanks
to our members who appeared here today for this hearing.
I ask unanimous consent that the following documents be
made part of the hearing record: a letter from the National
Association of Federal Credit Unions; a letter from Dennis
McKinney, the Treasurer for the State of Kansas, who will be
testifying at our hearing tomorrow at the Dole Institute in
Lawrence on the topic of financial literacy; and a two-page
document my office put together on a list of provisions where
community banks, credit unions, and small businesses were
shielded from excessive regulation in the Dodd-Frank Act.
Without objection, these documents will be made a part of
the record.
Again, I would like to thank our first and second panel of
witnesses for your testimony today. I know my colleagues and I
will take what we learned from today's hearing back to
Washington with us and share it with our colleagues.
I also want to thank Johnson County Community College for
being such an excellent host for us today.
I will also want to invite everyone here to attend a second
field hearing we are doing in Kansas this week, and that will
be on the topic of financial literacy. The hearing is open to
the public and will begin at 10 a.m. tomorrow at the Dole
Institute in Lawrence, Kansas.
Finally, the Chair notes that some members may have
additional questions for our witnesses which they may wish to
submit in writing. Without objection, the hearing record will
be kept open for 30 days for members to submit written
questions to these witnesses and to place their responses in
the record.
This hearing is adjourned, and again, I thank all of our
panel members and I thank our colleagues up here. Thank you
all.
[Whereupon, at 10:50 a.m., the hearing was adjourned.]
A P P E N D I X
August 23, 2010
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