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ORLANDO — Florida's unfolding commercial real estate crisis is washing over community banks on the Gulf Coast like a hurricane surge.
But veteran community bankers from the Midwest have seen this storm before, just not based in commercial real estate and construction problems. And they are worried that today's hyper-regulatory environment and fearful examiners could result in a less happy ending.
Sitting down the with the Business Review and a few other media outlets here last week, leaders of the Independent Community Bankers of America explained the parallels and the worrisome departure from the historical norm of examiners offering latitude to banks.
“We're asking agencies for forbearance ... We need flexibility and forbearance in the system,” says Cam Fine, president and CEO of the ICBA and a former community banker in Missouri. “Among banking regulatory agencies, many of the policies are too pro-cyclical.”
The policies tend to exaggerate the ups and the downs and make a deep recession like we are in much worse on banks. But forbearance — the temporary relief a regulator grants a bank from minimum capital requirements and other regulations — takes the edge off the cyclical trough.
In the 1970s, the agriculture industry in the Midwest was in full-scale boom times. Russia became a major buyer of food commodities, and the economy was strong. Because inflation was roaring ahead, it seemed to make sense to borrow money at a fixed rate, and farmers and ag implement manufacturers and dealers did just that. New and efficient John Deere and Caterpillar implements were in every field.
The easy credit extended to farmers in the 1970s sounds eerily similar to the terms extended to construction firms and developers on the Gulf Coast during the recent real estate boom. Even land values were soaring to heights they had not before in the rural Midwest.
Like all bubbles, it popped. A confluence of events sent the nation's economy into a sharp recession in the early 1980s, and this knocked the legs out from under the ag industry. Land values plummeted, commodity prices fell and suddenly the heavily leveraged farmers were at risk of massive default.
But the crisis in agriculture did not generate a concomitant crisis in banking, says Jim MacPhee, chairman of the ICBA and CEO of Kalamazoo County State Bank in rural Southwest Michigan. Sure, some banks went under and others were bought up, but not on the scale that seems to be unfolding today.
Bank examiners acted with forbearance. That is, they understood that the land still had its full productive value, that it tended to cycle through peaks and troughs and that most farmers were still able to make payments — albeit the banks sometimes had to offer forbearance to borrowers to renegotiate terms.
Both MacPhee and Fine say bank examiners no longer offer forbearance. And several bankers at the Orlando conference, who did not want to talk on the record, all sang the same song: Bank examiners are running scared and are applying rules legalistically because they fear for their jobs if a bank makes a bad loan under their watch or if the financial institution fails and they did not demand more capital be raised.
Fine calls them “robo-cops” and said the ICBA is pushing them to look at the entire health of a bank and not just apply rules without case-by-case consideration. And he said the feds need to relax rules because of the examiner atmosphere.
However, asked specifically what rules they are pushing to change, Fine only says the ICBA was working with regulatory agencies to modify the now-infamous mark-to-market rule, which requires banks to keep marking down assets to the market even if it is being warped by massive foreclosure sale prices. That has caused a spiral of mark-downs, capital raising, fire-sale bank prices and failures, some of which probably did not need to happen.
He says that is an example of a pro-cyclical rule that magnifies a decline. But that appears to be the only solid rule change ICBA is after.
Fine says the mammoth and complex financial regulatory reform slogging through the system in the shadow of the health-care overhaul may not even happen this year. Or it may.
“The sand is shifting hourly on this issue,” he says. “It's bad for community banks if there is no bill. That is the status quo, and the status quo is what got us into this.”
A major part of the financial reform would deal with the major institutions that grew so large and complex they were deemed too big too fail and bailed out — while the small community banks that contributed less to the meltdown have not received the same kind of financial aid.
In the eyes of community bankers, the Wall Street financial firms and mega national banks that nearly brought down the whole system are the major demons in the current financial drama.
These are the institutions that created securitized mortgage packages and resold them, then made a secondary market in credit default swaps to bet against the securities, ultimately lost the gamble and cost the nation its financial stability for several months.
In fact, community bankers' animosity toward the giant firms that put the country in danger was palpable when thousands of community bankers gave Federal Reserve Board Chairman Ben Bernanke a standing ovation after he told them the system must be changed so it never happens again.
But if it is changed, and if financial regulatory reform goes through, MacPhee and Fine both say it will likely be too late to save community banks that are vulnerable today. That would require examiner forbearance.
And prospects for that are looking mighty dim.
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