ABA Testifies on Legislation Designed to Promote Bank Liquidity and Lending

The American Bankers Association expressed its support today for legislation introduced by Rep. Barney Frank (D-MA) that would promote bank liquidity and lending by permanently increasing deposit insurance coverage, improving the HOPE for Homeowners Program and promptly making Capital Purchase Program (CPP) funds available for small community banks.

Testifying before the House Financial Services Committee, ABA President and CEO Edward L. Yingling offered ABA’s support for the bill, stating that it “provides important improvements that will help enhance liquidity and capital in the banking industry and make the HOPE for Homeowners Program a more viable option to assist troubled borrowers.”

With regard to FDIC deposit insurance, Yingling said that the temporary increase in coverage from $100,000 to $250,000 helped boost consumer and small business confidence and resulted in additional funding for banks. However, he also said that Congress should move swiftly to make the change permanent, noting the increasing difficulty for banks to offer long-term certificates of deposit because the temporary increase is set to expire in December.

“By June, banks will only be able to offer six-month CDs in the $100,000 to $250,000 range that are fully insured,” he said. “The expiration date and differing levels of insurance on CDs will be confusing to customers and may create a large funding problem at year-end as CDs are being written to correspond to the expiration date.”

Yingling also expressed support for enlarging the FDIC’s borrowing authority with the Treasury Department.

“This is a reasonable change giving the FDIC more flexibility to manage cash flows related to bank failures and to back-stop the insurance fund if necessary,” he said. “We would emphasize that this is a line of credit, and any draws on it by the FDIC constitute a borrowing that must be repaid by the banking industry.”

Regarding the HOPE for Homeowners Program, Yingling reiterated the banking industry’s support for the program and for the changes to it recently announced by the Department of Housing and Urban Development. Yingling also offered support for further changes, some of which are contained in Mr. Frank’s legislation.

These include streamlining the underwriting process, giving second lien holders greater incentive to extinguish or subordinate their interests, incentivizing servicers to allow for loan restructurings, incentivizing borrowers with no equity to participate in the program, and offering a safe harbor provision for lenders and services that act in good faith to implement loss mitigation efforts.

As to this last issue, Yingling stated that “it is widely agreed that legal liability issues relating to securitization are inhibiting foreclosure prevention.” He also said the safe harbor provision should be made applicable to trustees and offered to provide a specific proposal on how to do so.

Yingling also offered support for the bill’s provisions directing the Treasury to take all necessary steps to provide capital under the CPP for community banks and to do so under comparable terms afforded to other CPP recipients.

“We believe strongly that the current commitment should be fulfilled in order to prevent competitive disparities from occurring and to assure that every community has the same opportunity for its banks to participate, so that increased credit availability will spread across the country.”

Finally, Yingling took the opportunity to urge the Committee to address the problems with mark-to-market accounting and make accounting policy a part of its reform agenda.

“While this Committee works tirelessly to aid the economy, mark-to-market accounting continues to undermine any progress,” said Yingling. “As the Congress works to enhance bank capital, mark-to-market eats it up like Pac Man,” he said.