From the Top

By R. Michael S. Menzies Sr., Chairman of ICBA

EXAMINATION STRESS

Last month, 11 FDIC bank examiners came striding up the sidewalk and through the doors of Easton Bank and Trust Co. As always, that’s one examiner for every five associates at my community bank. (That equates to 65,400 examiners arriving at Citigroup based on its 327,000 associates.) Examiners set up shop for three weeks, probing everything from capital, asset quality, and management to earnings, liquidity,sensitivity tointerest rate risk, and technology security.

The prospect of such a detailed, all-encompassing examination might strike fear into the hearts of most community bankers. At the least, it’s unnerving to have all these government officials take over desks and have you at their beck and call all day long.

We all know that every year there is some new threat or challenge to our industry. Seasoned bankers understand this is the price we pay to receive the FDIC guarantee.But regulatory intensity varies by geography.The areas of the country where regulatory exams are extreme are the areas where the mortgage brokerage industry and Wall Street produced real estate meltdowns.

Likewise, the consequences of an FDIC examination are a direct reflection of the economy in which each community bank resides. Here in EasternMaryland we’ve had some stress associated with the economy, but it’s relatively mild — and at Easton Bank and Trust, we enjoy a partnership relationship with our FDIC regulators. Where the markets have had it worse, regulators are questioning bankers and appraisers and forcing large-scale write-downs of loans, even when borrowers pay on time and don’t intend to sell for years.

It’s the irony — and difficulty — of a pro-cyclical industry: When times are good, we should have the right to build excessreserves.(Believe it or not, a bank in Maryland was sued by a government agency because its reserves were considered too high — and the bank lost.)When times are bad and we should be spending those reserves, we don’t have enough.

Sure, some writing-down is necessary. Sure, regulators don’t want to be criticized if a bank later runs into problems. But the accounting profession shouldn’t keep community banks from building a nest egg when they can. In a free market, community banks that want to protect their futures — and their abilityies to help small businesses — should be allowed to do so.

Likewise there is inadequate differentiation between big and small.Smaller banks are closer to their customers, markets and economy and have an intuitive basis for increasing or reducing loan-loss reserves.Megabanks are driven by algorithms and simulation models and B-school gurus. We need a two-tier system that ICBA has advocated for years to differentiate between transaction-driven, get-the-income, earnings-up-every-quarter lenders and the smaller, local lenders that take reasonable risks and a longer-term view — just as their customers do.

I’ve been receiving bank examiners for over 40 years now, and to this day I am still nervous when they show up at the front door.I can honestly say I have been relieved with the results and pleased that every exam has taught me how to be a better banker.

R. Michael S. Menzies Sr. is ICBA chairman and the president and CEO of Easton Bank and Trust Co. in Easton, MD.d.