Senate Banking Chair Urges Regulators to Take Action

By Sarah Borchersen-Keto, CCH Washington News Bureau.

Senate Banking, Housing & Urban Affairs Committee Chairman Christopher J. Dodd, D-Conn., urged banking regulators to move beyond merely studying the problems sparked by the subprime mortgage crisis, and to produce “meaningful and substantial action” as soon as possible.

At a March 4 committee hearing into current conditions in the banking industry, Dodd pledged to reconvene the panel of regulators within 60 days in order to hear what steps are being taken to address lax oversight of underwriting standards. Other issues that regulators need to consider are whether the assumptions underlying Basel II need to be reconsidered prior to its implementation, and whether changes need to be made to supervision in bank risk management.

“My sense of urgency about this is pretty strong,” Dodd said. He also questioned the role that regulators played as the subprime mortgage crisis became evident. “Where were the regulators – were they asleep at the switch and when the alarm went off did they hit the snooze button?” Dodd asked.

Meanwhile, regulators told members that while challenges are expected to continue for the industry through 2008, the safety and soundness of the banking system is likely to remain intact.

Federal Deposit Insurance Corporation (FDIC) Chairman Sheila C. Bair told the committee that given the current slowdown in financial and economic activity, the challenging bank environment of 2007 is expected to continue into 2008.

Credit losses will continue to “tick up,” Bair said, and this will result in some increase in the number of troubled banks. However, Bair stressed that the FDIC currently has 76 institutions on its troubled bank list, which she noted was historically a very low number. Most of those 76 institutions will not fail, Bair said, adding, “people should not worry.” Bair noted that about 99 percent of banks are well-capitalized, and while challenges lie ahead, “we’ve taken the supervisory steps we need to take.”

Donald L. Kohn, Vice Chairman of the Federal Reserve Board, said that the banking system is facing challenges, but remains in sound overall condition as a result of entering the current period of financial turmoil with solid capital and strong earnings. “The problems in the mortgage and housing markets have been highly unusual and clearly some banking organizations have failed to manage their exposures well and have suffered losses as a result.  But in general these losses should not threaten their viability,” Kohn said.

Comptroller of the Currency John C. Dugan mentioned that “thus far national banks have been able to address a number of significant problems that have arisen while continuing to supply credit and other banking services to the U.S. economy—although there is no doubt that credit standards have tightened.”