Bankers are concerned that the post-financial crisis examination regime could permanently chill lending in the future, either by making it more expensive or by denying loans that could face regulatory criticism, a new survey from the American Bankers Association reveals.
The report noted that “in dangerous ways distance has developed between the bank supervisory program and its value-added mission,” the study, Value-Added Bank Supervision: A Framework for Safely Fostering Economic Growth, says.
According to the survey, 73 percent of respondents felt bank examinations added value before the financial crisis, whereas only 45 percent felt this was the case post-crisis. Meanwhile, 34 percent of bankers felt examinations post-crisis were actually counter-productive, compared to 3 percent with the same view prior to the crisis. The study notes that the change in attitude reflects the various concerns that emerged during in-depth interview with bank executives.
Other findings in the survey show: 49 percent of respondents indicating that changes in examination practices would toughen underwriting standards permanently; 48 percent agreeing that changes would require borrowers to have more equity in their deals; and 48 percent stating that changes would reduce their willingness to lend to borrowers that previously they would have considered creditworthy.
The study offers a number of recommendations to reinforce the concept of value-added examinations and supervision. Those recommendations include greater customization of examinations, and more concentration on the “big picture,” rather than focusing on technicalities and minor issues that have little bearing on the safety and soundness of an institution.
Other recommendations include increased clarity about effective minimum capital standards, with regulators weighing the costs of even higher capital standards. Also, the study advocates giving more banks the option of going through a stress test rather than relying on loan classifications. Meanwhile, the study also supports the use of experienced examiners, as well as cooperation with state bank examiners, and self-review by regulators.
Commenting in the report, Frank Keating, ABA president and CEO said, “When it works well, bank examination and supervision helps ensure the safety and soundness of the overall financial system, and can help individual banks better serve their customers and communities. Unfortunately, too many banks in recent years are reporting they are actually worse off as a result of their exams, when our industry firmly believes the exact opposite should be true.”