Pub. 1 2012 Issue 5

July 2012 7 l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s Washington Update: May 2012 Value-Added Supervision O ne of the most common complaints Kansas bankers have told me about since the financial crisis is how the dynamic between banks and their regulators has changed. For many bankers, this im- portant relationship has become increasingly strained and adversarial. This is an important issue because bank regulators have such a huge impact on how banks serve their customers and build their communi- ties. We asked two industry experts, Dr. Robert Litan of the Kaufman Foundation and the Brookings Institution, and former Comptroller of the Currency Jerry Hawke, to survey a cross-section of the industry, and to report their findings and make recommendations to improve the bank-regulator relationship. The findings of their study focus on the fact that supervision should add value. Agood comparison is to ask why people have an annual physi- cal examination. Like a bank examination, an annual check-up is hardly something you look forward to and is clearly intrusive. Yet, as Litan and Hawke observe, people go through them because we know they can prolong and improve the quality of our lives. In other words, annual physicals add value. And so should bank examinations. The study – “Value-Added Bank Supervision: A Framework for Safely Fostering Economic Growth” – provides a framework to encourage policymakers to restore the value of the bank supervision and examination process and return it to its mission of strengthening the banking system and enhancing banks’ ability to serve their customers. For example, the study found that bank exams and rules were often a bad fit for the banks examined – a sentiment expressed by both big and small banks. Rather than shoe-horning banks into nifty boxes that are incompatible with banks’ diversity in size and business models, Litan and Hawke recommend, among other things, customized supervision. This approach – when joined with the study’s recommendation that supervision look at the big picture rather than nitpick about details that don’t mean much for safety and soundness – would, they say, better enable bankers to conduct their core business function: to make judgments about the creditworthiness of borrowers and to serve their customers. Litan and Hawke also recommend that regulators: provide clarity in capital requirements; rely to a greater extent on well-designed stress tests for larger banks as a substitute for second-guessing loan classifica - tions; recognize banks’ risk management of loan losses; train and retain experienced examiners; improve cooperation between state and federal examiners; and practice self-reviews. The study notes bankers’ growing concern that the post-crisis exam regime will permanently chill lending in the future, either by making it more expensive for borrowers or by forcing bankers to deny loans they believe would be sound but run excessive risk of regulatory criticism. We need to make sure that doesn’t happen. We will use our white paper as a guide as we advocate for value-added supervision. More con- sultation and less “gotcha” will help banks better serve their customers and their communities. © 2011 American Bankers Association. All rights reserved. Reprinted with permission. E-mail Frank Keating at keating@aba.com Frank Keating, President and CEOAmerican Bankers Association Bank regulators have a huge impact on how banks serve their customers and build their communities