House Unanimously Approves Bill to Review Economic Impact of FDIC Practices

The U.S. House of Representatives has approved legislation to thoroughly review the causes of recent bank failures as well as the impact of the FDIC’s practices and procedures on community banks.

H.R. 2056, introduced by Financial Services Committee Member Rep. Lynn Westmoreland, requires the Inspector General of the FDIC to study issues raised by recent bank failures and report back to Congress.  The bill also calls on the Government Accountability Office to study the causes of high levels of bank failures and the counter cyclical impact of fair value accounting standards.

An Executive Summary issued by GOP.gov provides the key features of the bill.  Specifically, H.R. 2056 would require the study to detail:

- The impact of loss-sharing agreements (LSAs) on the insured depository institutions that survive and the borrowers of insured depository institutions that fail;

- The effect of FDIC policies and procedures regarding maturing LSAs;

- The methods of ensuring the orderly end of expiring LSAs to prevent any adverse impact on borrowing, the real estate industry, and the Depositors Insurance Fund;

- The significance of certain paper losses;

- The success of FDIC field examiners in implementing specified FDIC guidelines regarding workouts and commercial real estate loans;

- The application and impact of consent orders and cease and desist orders;

- The application and impact of FDIC policies; and

- The FDIC’s handling of potential investment from private equity companies in insured depository institutions.

The bill would require the FDIC make available from the portion of the FDIC budget allocated to management expenses, sums allowing the FDIC Inspector General to complete this study.

After a six-year period in which only 35 banks failed nationwide, the pace of bank failures increased dramatically in the past two years:  140 institutions failed in 2009 and another 157 failed in 2010. These failures have been concentrated in certain states.  Since 2008, 10 states have had more than 10 bank failures. The rash of bank failures has led some to question whether the FDIC’s procedures for resolving troubled banks are appropriate in light of current economic conditions and whether these procedures have been consistently applied in the wake of the financial crisis.

Rep. Westmoreland said, “I understand that some of these banks failed because they needed to fail.  But when you see high failure rates like we have in Georgia – with 25 percent of our banks failing since 2008 – you have to look for the underlying causes.  According to the bankers I’ve spoken to, some of the blame lies with overly zealous regulators.  My bill will allow the proper authorities to look into the policies used by the FDIC and determine whether those policies are doing more harm than good.”

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