DANVILLE, Ky. – Community banks across Kentucky are finding the general economic slowdown and federal regulations their biggest challenges, not foreclosures and other mortgage-related issues, a panel of lawmakers heard.
The Interim Joint Committee on Banking and Insurance, meeting at Centre College, heard testimony both from industry leaders as well as state regulators on the conditions of banks in the Commonwealth.
"Kentucky banks are some of the strongest in the nation," said Debra Stamper, general counsel to the Kentucky Bankers Association.
"Kentucky banks hold firm to a long history of conservative, well-managed banking practices." The result, she said, is that state banks do not show the headlining results of major banks in other states, both in good times and bad.
Charles Vice, who heads the state’s Department of Financial Institutions, detailed various measures of financial stability for state banks. While Kentucky’s nonperforming assets — generally loans delinquent for 90 days or more — have increased by about three-fourths since the end of 2007, the number across the nation has tripled, he noted.
Both KBA and DFI pointed to the economy rather than irresponsible loan practices as a prime reason for the increase in foreclosures in Kentucky. The nationwide economic meltdown caused in part by Wall Street’s downturn has caused a spike in unemployment, harming otherwise reasonable loans in Kentucky, the Midwest, and other manufacturing-heavy regions.
Rep. Steve Riggs, D-Jeffersontown, asked why subprime mortgages got most of the media attention even though they composed only about 10 percent of all home loans in the state.
"What’s being gained by pointing fingers at the wrong group?" he asked. Vice responded that the subprime percentage was higher in some states and that subprime borrowers made convenient scapegoats while noting that subprime borrowers were not necessarily lower-income borrowers, an important distinction that many have failed to note.
The one Kentucky bank failure this year, Vice pointed out, involved an institution that had only moved its headquarters to Louisville this year and was federally chartered and regulated. Of the more than 150 banks the state regulates, he said, about 20 percent are facing some sort of action plan that may be as simple as developing their own program for improvement.
Only 12 Kentucky institutions have received federal TARP funding aimed at troubled banks, with $191 million spread among them — less than the nationwide average for a single bank.
Vice also pointed to a new bank that opened in Kentucky earlier this year, with another group inquiring about opening a new bank despite the increased capital requirements that now are mandated on new banks. "That’s a positive sign," he said.
Vice, Stamper, and KBA’s Jim Cooper also pointed to increased FDIC requirements as putting a crimp in banks’ profits. Vice noted that the FDIC’s reserves, collected as a fee from member banks and used to cover the assets of banks that go out of business, was down to $10 billion, or 0.22 percent of nationwide assets, because the number of failing banks has sapped the reserve fund. The FDIC minimum is 1.15 percent. As a result, the FDIC has instituted a special supplement that banks must pay along with requiring pre-payment of their insurance premiums through 2012.
"The FDIC assessment is taking 30 or 40 percent of bank profits in some cases," said Rep. Mike Denham, D-Maysville.
Stamper also railed against federal legislation, not yet passed by the U.S. House of Representatives, to create a Consumer Financial Protection Agency. Such a law would overburden an industry that is largely working well, she said.
Denham and House Majority Caucus Chair Bob Damron, D-Nicholasville, said legislation to regulate credit default swaps and other derivatives was a more pressing need. "If we don’t fix this core problem, we’ll have another financial crisis in the future," Denham said.
Damron said the National Conference of Insurance Legislators, of which he is president-elect, will likely pass model legislation in November to put pressure on Congress in that area.
