State senators get industry overview at four-hour hearing

Four hours of testimony presented by 10 banking industry experts Oct. 6 before the Senate Commerce and Consumer Protection Committee at the Minnesota Capitol is unlikely to result in new legislation, according to the committee chairman, Sen. Linda Scheid.. "Are we doing enough in our bank examination regimen, is that adequate?" Scheid asked rhetorically during an interview after the hearing. "I think the answer is yes, it seems to me it works really well.". Scheid called the hearing after the Minneapolis newspaper ran a series of articles last July that suggested Minnesota fails to regulate and examine its banks to the extent other states do.. Deputy Commissioner of Commerce Kevin Murphy, who testified for an hour and 24 minutes, pointed out that his department has 31 examiners who are responsible for 321 state-chartered banks. "It would be nice to have more staff, but we do believe our current level is adequate. Having a little bit less staff than you would like will force you to prioritize. We focus our attention on the most important things," Murphy said.. Murphy said there currently are two openings for examiners on his staff. During the last five years, he said he has hired "10 or 11" examiners.. Murphy also reported that 71 Minnesota banks currently are on the Commerce Department's watch list, up from 50 at the end of last year. At the end of the second quarter, there were 416 banks on the FDIC's problem bank list, reported James LaPierre, FDIC regional director-Kansas City, who also testified.. Murphy provided an umbrella lecture on how the banking industry works. He even provided a sample balance sheet and income statement. Murphy explained how banks are examined, explained the CAMELS rating system, talked about the procedure for dealing with troubled institutions, and described the process by which failed institutions typically are absorbed into healthy ones.. "In the 1980s, it took about a week to fail a bank," Murphy explained. "Today, it takes four or five weeks. The goal is to transfer as many assets as possible into the private sector.". As he described the condition of the industry in Minnesota, he said 41 banks have a CAMELS rating of 3, and 30 have a rating of 4 or 5. Twenty-two percent of the state-chartered banks are on the department's watch list. About half the banks on the watch list are located in the Twin Cities and the remainder is located in Greater Minnesota. Furthermore, 21 credit unions, all rated 3, are on the watch list. Two-thirds of the credit unions on the watch list are located in Greater Minnesota.. Scheid asked several questions throughout Murphy's presentation. She asked what the Commerce Department does when a bank triggers a red flag indicating a problem. "Our primary tool is sending examiners into the bank to see what's happening," Murphy responded.. Murphy concluded his testimony by advocating for efforts to promote financial literacy. "If I were in charge of the world, I would spend more money on financial literacy," he said.. "That is an interesting comment," Scheid responded.. Among others who testified were Joe Witt, president and CEO of the Minnesota Bankers Association; Steve Huston, president of BankWest, Rockford, Minn.; Marshall MacKay, president and CEO of the Independent Community Bankers of Minnesota; Noah Wilcox, president and CEO of Grand Rapids State Bank, and Bill Raker, president and CEO of U.S. Federal Credit Union, Burnsville, Minn.. Witt, in a passionate delivery, criticized the media for the way it has covered the banking industry during the past year. He noted that Minnesota banks have performed better than banks across the country. "I am not trying to put a positive spin on that; it's a fact that some banks are losing money. But it is also a fact that we are beating the national averages and you wouldn't know that from reading some of the stories that are out there in the papers," Witt said.. "There have been a lot of media reports lately containing references to 'risky' lending," Witt continued. "'This bank, that bank, gets into trouble for risky lending.' This term is never really defined but the story writers repeat it so often that they start to think that it's true. I think you have to be really careful about these undefined terms.". MacKay focused on regulation, saying Minnesota banks are closely scrutinized by several observers. "Is more bank regulation needed or would more examiners have made a difference?" MacKay asked. "The answer is 'no' for the vast majority of banks – Minnesota's community banks. The answer is much closer to 'yes' if you are addressing regulation of the many non-bank financial firms and the challenges posed by systemically risky and too-big-to-fail institutions. But those institutions today primarily exist outside Minnesota.". Huston explained that bankers don't make bad loans, but that sometimes good loans go bad. "What I will submit to you is that it was not a risky loan when it was made. This was a good, sound loan. The bank that made these loans went through all the right procedures but it still has a problem today," Huston said after providing examples of good loans made in 2005 that are non-performing today.. Huston said that the media is really missing the point when it blames bankers for making bad loans. "Traditional, community bankers make loans to their neighbors in the community," he said. "The problems we are having are because our communities are suffering. My bank will continue to make good loans. We don't need more regulations or regulators to get our communities back on track.". Wilcox said he has a close relationship with his regulators; he worries, however, that the FDIC's effort to pull money out of the banking industry to replenish the Deposit Insurance Fund will be too much for some banks. He said his bank paid less than $30,000 for deposit insurance in 2008, but that in 2009 his bank will pay just under $1 million, "which is two-thirds of my income for the year.". Raker said regulators could not have prevented the financial industry's problems. "Did some financial institutions, credit unions included, make some loans they shouldn't have? Probably. That is part of taking prudent risks to serve members and help the community. To cover such risks is why we have capital and how we use it. But this recession is so wide and so deep, it has sucked in innocent bystanders," he said.. "Another analogy is that of a far distant quake and the tsunami that destroys a small village thousands of miles away. The quake was on Wall Street. The tsunami wiped out or seriously damaged unsuspecting smaller financial providers all over the country," Raker said. "It is understandable our regulators and examiners here in Minnesota didn't — couldn't have — seen the devastating collapse deep in the intricate, unregulated workings of Wall Street."