Yesterday, the Subcommittee on Financial Institutions and Consumer Credit of the House Committee on Financial Services held a hearing entitled “The Condition of Financial Institutions: Examining the Failure and Seizure of an American Bank.” Participants in the hearing examined the current state of U.S. lending and specifically studied the failure of Park National Bank, its affiliated banks and their parent bank holding company, FBOP Corporation. In connection with the failures of seven other FBOP bank subsidiaries, the FDIC assessed cross-guaranty liability against, and demanded immediate payment from, Park National Bank and another FBOP bank subsidiary, Citizens National Bank, resulting in their closure.

Testifying before the subcommittee were:

Panel 1

Panel 2

  • David Miller, Director of Investments, U.S. Department of the Treasury
  • Jennifer Kelly, Senior Deputy Comptroller for Midsize/Community Bank Supervision, Office of the Comptroller of the Currency
  • Mitchell Glassman, Director, Division of Resolutions and Receiverships, Federal Deposit Insurance Corporation  

Subcommittee Chairman Luis Gutierrez (D-IL) opened the hearing by noting that the objective was to provide banks with better insight into factors used by regulators when making decisions with respect to bank failures and to help regulators better understand the impact of such closures on banks and communities.

Mr. McCullough criticized the FDIC’s takeover of FBOP, noting that Park National Bank was not only financially successful, but also committed to the community, contributing roughly 27% of its annual profits to charitable organizations in the community. He called on Congress to reign in “overly powerful and unaccountable regulators” to prevent failures of similar community-based banks.

Mr. Kelly provided a short summary of the events that led to the closure of FBOP, and expressed his hope that the FBOP story would “challenge elected officials, policy makers and regulators to better understand the contributions and challenges of community banks.” When asked by Jeb Hensarling (R-TX) if FBOP’s concentration in Fannie Mae and Freddie Mac preferred stock led to its failure, Mr. Kelly stated that regulators encouraged the bank to purchase such securities and provided incentives for such investments. Rep. Hensarling then posited whether the bank would have survived had it not purchased Fannie and Freddie securities, to which Mr. Kelly responded that such securities resulted in “a $900 million loss that wiped out half of [the bank’s] capital.”

Mr. Hartnack spoke of U.S. Bank’s involvement in the post-failure acquisition of the deposit franchise of the FBOP subsidiaries, including Park National Bank, noting his belief that the FDIC bidding process for failing banks is “well run, transparent and very business-like in all regards.” When pressed by Chairman Gutierrez to detail what U.S. Bank has done since its acquisition to keep the community activities of FBOP alive, Mr. Hartnack agreed to provide the subcommittee with a written report of the same. Erik Paulson (R-MN) further questioned what U.S. Bank could do to be an effective partner in the community, to which Mr. Hartnack responded, “we tell our story in every possible place and let communities know we are open for business to make loans.”

Mr. Austin expressed frustration that regulatory practices often disadvantage community banks in favor of larger institutions and non-banks, making it harder for community banks to serve their communities. He called on Congress to separate the traditional banking model from the investment banking model and to reign in penalties imposed on community banks, often included in the group of institutions held responsible for recent failures. When pressed by Rep. Hensarling to elaborate on the impact of regulatory intervention, Mr. Austin opined that regulatory examinations are “tedious” and “take banks away from lending money.”

Mr. Miller and Ms. Kelly both expressed their belief that community banks play a vital role in the banking system, but also cautioned that seriously troubled banks cannot effectively serve the needs of their communities. When pressed by Rep. Spencer Bachus (R-AL) whether the OCC became concerned with banks’ concentrations in Fannie and Freddie securities and whether there had been a regulatory bias favoring Fannie and Freddie investments, Ms. Kelly conceded that the OCC has “a different view now” of Fannie and Freddie. Ms. Kelly defended the OCC’s handling of failed banks, noting, “we do not close banks that are well-capitalized,” to which Rep. Tom Price (R-GA) responded “not true.”

Mr. Glassman described the FDIC’s basic process for handling the failure of insured depository institutions and defended such policies when questioned by subcommittee members, including the FDIC’s actions with respect to FBOP’s subsidiaries.