No lifeline for community banks…yet

You may have missed the Federal Deposit Insurance Corporation’s (FDIC) quarterly report on Tuesday, on the state of FDIC-insured financial institutions. The report is summarized in a news release available here.

FDIC chair Sheila Bair took reporters’ questions following  a quick verbal summation of the quarterly report. The very last media query put to Bair on Tuesday pressed her on what the FDIC is doing to help smaller community banks.

Bair delivered a well-rehearsed answer. She praised community banks for their perseverance in working through the problems created by their “troubled assets” (i.e., real estate loans gone bad). She also poured cold water on the idea that any “new programs” are needed to help these smaller banks. She said this, despite the fact that to date in 2010, 118 mainly smaller-sized US community banks have failed.

The discussion of smaller banks continued during a brief question-and-answer period between reporters and some FDIC experts following Bair’s words. One FDIC representative noted that the balance sheets of many community banks are heavy with commercial real estate loans. Due to current economic trends, he said, these loans will weigh on the community bank sector for some time.

How banks of all sizes should value these real estate loans and other financial assets that have gone down in value is contentious.

As Bloomberg News reported earlier this summer, some larger banks are even trying to recruit investors to join the fight against government efforts to force more openness about bank asset value declines.

These banks say that such measures are counter-productive, because they can push financial institutions to take actions at the request of overzealous regulators that end up hurting investors’ portfolios.

(Perhaps a reporter will ask about the FDIC’s perspective on this campaign at the next FDIC quarterly report.)

Tuesday’s FDIC report raises a few questions, but the most interesting one might be this: where does the political responsibility to respond to FDIC reports and findings fall, particularly when it comes to the fate of US community banks?

Is it up to President Obama? Is it his economic advisors, like Larry Summers?

Is it Congress?

Or should it be for the current occupants of statehouses and governors’ mansions? Community banks are local institutions, after all.

Sheila Bair and the 7,000 people who work at the FDIC are public servants, rather than members of the executive branch, legislators or judges. They issue reports on the state of the US banking sector, they close troubled banks, but they do not set the Washington banking policy agenda or enact laws.

It’s great that editors are willing to assign reporters to cover Sheila Bair’s press conferences. What’s needed next time is for those reporters to seek comment on Bair’s remarks from those legislators, cabinet officials and others who are in a position to influence banking policy.

Fingers crossed – perhaps that’s what we’ll see, come the next quarterly report.

Bay Area NewsTransittransportation

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