Banking Law

My recent post that floated the idea for federal legislation that would permit community banks to amortize losses on commercial real estate and commercial real estate loans over a 10-year period, as opposed to current GAAP accounting rules that require an immediate, full hit to capital, struck a nerve in community banking circles. I heard from representatives of a group of community bankers who?ve been pushing such legislation. It?s a grass roots effort, and the folks I spoke with are small bank owners and officers located in Illinois, although support extends beyond that region.

The basic proposal is for a short, simpler piece of federal legislation that would allow privately held banks to amortize, on a straight line basis over 10 years, losses on property acquired by banks via foreclosure or on impaired loans secured by real estate for purposes of calculating regulatory capital. Instead of plummeting down a self-propelling circular drain into oblivion, many community banks would be able to weather the storm, and, while doing so, to use the capital that is preserved to make loans to small businesses, sustain earnings, pay taxes, and absorb the gradual amortizing losses against future earnings. This not only preserves jobs (at both the bank and borrower levels) and lending capacity to help the larger economy, it keeps the FDIC from having to absorb these losses through resolution of more failed banks, and it does this with no cash outlay from the Treasury, as is the case with TARP and its progeny.

Supporters also correctly point out that there is precedent for this approach. The Competitive Equality Banking Act of 1987 enacted a similar plan for agricultural banks. Such banks that the FDIC deemed able to survive with such assistance (to avoid the problem of the ?zombification? of certain banks that would have failed even with this forbearance) were allowed a 7-year period to amortize losses.

For GAAP fetishists, the plan doesn?t change GAAP. Moreover, it would not apply to publicly-traded banks, so the too-big-to-fail boys don?t get a break they don?t need and the SEC rules on GAAP accounting aren?t impacted in any manner. Instead, for smaller, privately-owned banks burdened by commercial real estate woes not of their own making, there is a ?decoupling? of GAAP and regulatory capital calculations with respect to this limited illiquid asset class, for a limited time only.

As to how long the period might be where this treatment would be accorded to qualified losses incurred by qualified community banks, the supporters of this proposal suggest the four-year period from January 1, 2009 through December 31, 2013, which is the period that temporary relief has been given by federal legislation on the deposit side of the balance sheet, in the form of increased FDIC insurance coverage for insured accounts. The asset side of the balance sheet and, more importantly, the capital accounts of community banks, more urgently require relief.

This idea is so simple and so relatively inexpensive and risk-free, that it?s amazing to me that it hasn?t been embraced by banking regulators. The reasons for that failure are not clear to me and may be the subject for another post. In any event, the ultimate solution will require a change in federal law, which means that it has to come from Congress. In my personal opinion (and I speak only for myself in this respect, not the community bankers who support this proposed legislation), in a year in which partisan dysfunctionality has been raised to an art form in Washington, D.C., community banks and their trade associations and other supporters are going to have to do the heavy lifting. The pressure is going to have to come from the ground up in order to ?incentivize? both Democrats and Republicans to rise above business-as-usual bickering and hop on board what ought to be a bipartisan effort to help small banks survive the current economic crisis and to help free up capital for small business lending. It?s also a sad fact of life in 2010 that politicians who want to do the right thing may have to be given the ?cover? of bending to constituent pressure if they are to survive sniping from within their own ranks that they?re ?helping? members of the opposition in an election year.

So, let?s give our elected representatives the cover they need by pushing them hard to support this idea. I spoke briefly about this proposed legislative solution with David Schroeder, Vice President of Federal Government Relations for the Community Bankers Association of Illinois, who has agreed to act as ?point man? for community bankers and trade association representatives (and other ?civilians? like me) who want further information about this proposal and what they can do to support it, and who may want to help to coordinate efforts to make this legislation a reality. His email address is davids@cbai.com. Mr. Schroeder does not necessarily endorse any of the bloviations of your truly set forth in this post, inasmuch as he operates in a world where people have to actually get things done, rather than just rant and rave about them. On the other hand, I don't think he'd disagree with me regarding the benefits of this legislative proposal or the reasons community bankers and members of Congress should support it.

If community bankers want to push this idea forward, they and their trade associations should contact their US senators and congressional representatives to educate them about this idea, how they they think it will benefit banks, borrowers, and local communities, and how important it is to them. They should also emphasize to their elected representatives that they don?t want what should be a short, simple, and sweet solution to a critical problem bogged down in partisan wrangling over other issues.

Special attention should be give to members of the House Financial Services Committee and to the Senate Banking, Housing & Urban Affairs Committee.  However, my personal opinion is that support is needed from all quarters, so don't neglect any "target of opportunity."

As I said in my previous post, a 10-year amortization schedule for commercial real estate losses isn?t going to save every community bank that?s in trouble. However, it will save enough of them to make a difference, especially to the local communities involved. Therefore, let?s get up off our chair-warmers and make this happen.