>> what i understand i haven't seen the report, i don't think it is out yet, but -- okay, but what all i saw was the press release where they said that he did not violate the rules of the house. and i think that's an important statement that they made. there's more to mr. rangel situation and we look forward to hearing from the ethics committee on that. >> they said that his staff knew about this corporate funding for these trips. >> and they said that he did not. and they said this press release shall stand as the admonishment. that's what i read. do you think and write there? >> no, i think, obviously they have other issues to do with, but i thank them for taking this action. i hope that they will have other actions soon, but they did not take action against him.

they just said he did not willfully break the rules. we will just a what happens next, what comes out of the ethics committee next. >> madam speaker? >> yes. >> you talk about abortion funding yesterday. >> yes. >> base in your assessment would you say mr. stupak is wrong when he looks at the present language and says it's also not fitting his standard and also do you think that's going to be a problem in the weeks to come? >> let me say this would. there are three -- i want to say principles -- but three standards that we are using as we go forward, and i talked to the catholic bishops about this, people on all sides of the choice issue. wall prevents federal funding. the federal law prevents that are funding of abortion. there is no federal funding of abortion in this bill. that we no expansion or diminution of a woman's right to choose, and that does not happen

in this bill. and we're determined that we're going to pass healthcare reform. this bill that passed the senate does not have federal funding of abortion. that will be the language. >> at least you and senator reid our export a competent process to get a bill to the presidents desk for reconciliation. you have said in the past that you're not sure the house can pass a senate bill. where does that stand out? do think it is possible along with the changes that your reconciliation and how is that process working? >> well, what you call competent process is called a simple majority. and that's what we're asking the senate to act upon. well, it's up to them. here are the three steps. what is a substance, and that's what we will be putting together and we do want to do that before we will hear from our republicans college history. second, what is a sin able to do with a simple majority.

and then we will upon that. but i believe that we have good prospects for passing legislation in light of the recognition of the president gave to the concerns on the house members. that would be affordability for the middle-class, closing the donut hole for seniors, ending the nebraska fix, and having state equity for all states, and fourth, just to name the major ones, changing the pay for from the excise tax. so that was a very big -- we were eager to see what the president would put forth that we did know exactly what it would be until, as you did at the same time, so it on the internet. that's a big step forward yesterday. took us further down the path. now we will put something together. harry will see, reid we'll see what he has to what he can get the votes for. and then we'll go from there.

>> do you think that you be able to pass a bill to the how? >> when we see what the senate will be able to do. but those really were the major differences between the house and senate bill. remember, 75 percent of the bills are the same underneath. >> can you it's going to is what the process look like over the next week or 10 days and try to find ways to accommodate other ideas or republican ideas? >> some of the ideas that were put forth yesterday have some possibilities. and as i say, i don't everything that i don't know, i would hope we can get the republican votes. but it doesn't matter if they have a good idea that works to the american people, we should try to incorporate it. quite frankly, largely what we heard from republicans yesterday was about process and let's start all over. but for those who are making

suggestions, they talked about selling insurance across state lines, talked about the nature of the exchanges. wasn't even a question. whether they would be an exchange. what are some other changes we could make in the exchanges. and that gives me good opportunity to say, we've come a long way since last march 5. on this legislation. i don't know if all of you recall, but senator grassley at that question the merits of a public auction, which as you know what still remains very popular in the public. the president said at that time, i believe the public option is a good way to keep the insurance companies honest and to create competition. if you have a better idea, put it on the table. well, whether it is -- i don't think it's a better idea. but it is an idea to have the

exchanges, and it does some much of what we want to do. it doesn't say the same kind of money that have had public option would. and so yesterday was interesting to me, that while we know olympia snowe and dick durbin had an exchange, senator india was talking about some changes. so maybe we can find some positive suggestions from what they were talking about there. as well as any language that might be helpful across state lines. and and we will see what else. it really did have many other ideas except let's start over, i don't like the process, that wasn't shy we say fertile territory for us to incorporate. into what we're doing. so it would go from freezing the design on the substance, without the substance of you asked me if you have the votes or this or that, without the substance we can't go to the next step.

and the next step would require to see what the senate will do. but we have voted on a bill that we like, and we will see if they can accommodate the changes that the president has put forth and do we can go to the next step. but we will keep you posted a longer way. >> on the jobs bill, do you plan to proceed -- how do you plan to proceed with the senate jobs? how do see the broader jobs agenda developing given the difficulties it seems you're having? >> well, as you know we passed our jobs bill before christmas. we thought it was urgent at the time and it is urgent now. i think what, i know what you will see, is a segmentation. there will be this jobs bill that we started i mentioned, that i mentioned with investments in infrastructure, energy, transportation, with the tax credits for hiring, for

small businesses as well as the accelerated depreciation, in that bill. to help small businesses. the next bill we have to address in the next bills that come up, we have to address the fact that the unemployment insurance is expiring now. and that has to be, we have to pass legislation to do, to correct that, to extend that. and really, it is really hard to understand why one senator in the united states senate is holding up the extension of unemployment insurance at this time. but he is, and i pleased that the senate democrats are trying to make him move to dislodge that. but instead of one big ago, you will see some segmentation and it. i guess -- will, you would have to ask them why they're going that route, but it is okay with us as long as we get the bills over here to send back. i believe we will have this

higher bill up next week. >> last question. >> i do you said you're waiting for the ethics committee. but doesn't this hairsplitting over whether it was transit to know this or his staff, and just i guess the appearance of impropriety's of all these matters of the ethics committee is looking into, doesn't that kind of damage or promise to drain the swamp? >> no, i think every member is entitled to have his day before the ethics committee. they have said he did not knowingly violate the rules. and again, if this were the end of it, that would be one thing. but there's odyssey more to come and we will see what happens with that. but every member has that right. i think it is quite a statement to hold members accountable for what their staffs new. and i will be anxious to see how that reverberates. we have to place our confidence a properly and held responsible for the. >> thank you, folks. >> thank you all very much. [inaudible conversations]

[inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations] >> and we're going to take you live now to a joint house hearing. financial services committee and small business committees looking at commercial real estate lending. and small business mortgages. this is the second of three

panels. testified opening statement out of elizabeth duke who is a cover on the board of governors of the federal reserve. live coverage here on c-span2. >> that tightening of credit stand for small business lending no longer outnumber the banks that reported an easing of lending standards. federal reserve has been working with banks to foster improve access to credit and prudent underwriting of new loans and we will continue to do so. i believe that the considerable support we get to bank lending to accommodate monetary policy and borrowing facilities has been critically important. in addition to which are that supervisor policy does not inhibit lending, federal reserve join with the other banking agencies and supervisory guidance emphasizes need for banks to continue to make a credit needs of credit worthy borrowers while maintaining appropriate prudence in lending decisions. raising guidance covering commercial real estate lending also encourages back to work with borrowers to restructure troubled commercial real state loans in a prudent manner and remind examiners that absent other adverse factors a loan should not be classified as an.

basalt on a decline and collateral value. the federal reserve has supplemented and reinforced this guidance throughout region banks and training for bank examiners in a variety of forms. the reserve banks are also conducting a series of regional and topical meson small business access to credit. some such as the ones held this week on minority entrepreneurship and as be a lending will focus on specific topics. others will focus on identifying regional differences and credit availability. meetings will be followed by capstone event at the board of governors. in some of the federal reserve is committed to using all available tools to maintain the flow of credit to the economy, especially the critical it important small business market. we thank you for holding this important hearing and i look forward to hearing the question. >> thank you, mr. chairman. ranking member grades and members of the committees, i appreciate this opportunity to discuss the lending activities

of national banks and the occ's action to maintain a supervisor climate that facilitates sound money to consumers and businesses. access to credit is critical to the health of our nations economy and national banks play a vital role in meeting this need. the occ has always encouraged national banks to lend to credit worthy borrowers. in fact, banks cannot be healthy and profitable if they do not continue to focus on making sound loans to businesses and consumers. while there are signs that the economy is beginning to recover, significant stresses continue to restrain both the demand for credit and its supply. the result has been a sharp reduction in the outstanding loans of commercial banks of all sizes, and across nearly all loan categories. in terms of demand, businesses have sharply curtailed capital expenditures and reduced inventories, the typical drivers for commercial bank loans. indeed, the recent cutbacks in fixed investment in inventories

and accounts receivable by u.s. nonfinancial companies is unprecedented in the past 55 years for which we have historical data. consumers likewise have cut back on spending and are sitting at larger share of their income. the resulting reduction in low demand has been pronounced, including for small businesses. reports issued by the national federation of independent business over the past two years have consistently shown that underlying business conditions rather than access to credit is the primary issue facing many small business owners. still, the decline in loans also reflects the reduced supply of credit. as the deteriorating economy has taken a toll on consumers and businesses, bankers have also become more cautious. loan underwriting standards generally have tightened across the industry, reflecting in part a return to more prudent practices and in part becoming more conservative. these changes have resulted in higher down payment, additional

collateral, and other requirements that occluded affected the ability of some borrowers to obtain credit. we recognize that this and private presents particular challenges to the occ and the other banking regulators. it is imperative that we take a balanced and consistent supervisory approach to ensure that our actions do not discourage banks from making loans to credit worthy borrowers. many have questioned whether the regulatory pendulum has swung too far to the point where regulators and examiners are impeding banks ability to make even prudent loans. this is a matter we take very seriously, and we have taken numerous steps and are continuing to take such steps throughout the credit cycle to ensure that examiners are taking a balanced, fair and consistent approach across the country. these actions have included an interagency statement on commercial real estate loan workouts and small business lending, both of which clarify our expectations, and underscore the examiners will not criticize

banks for prudent lending activities. we have reinforced these messages through regular and repeated communications with our examination staff. for example, we have consistently instructed examiners not to tell bankers which loans to approve and which to deny. and not to criticize loans based simply on collateral values or a borrowers association with a particular industry or geographic location. instead, we continue to stress the national bank should do the following. naked sound loans to credit worthy borrowers, work with borrowers who are facing difficulties and recognize and address a problem credit by maintaining appropriate reserves and taking charge of when repayment is unlikely. we also continue to work with congress, the administration and industry on programs that can provide additional assistance to the hardest hit sectors. we support a number of small business lending initiatives and we have worked hard to help

bankers understand and more fully choose the various programs offered by the sba. finally, let the offer one cautionary note. why we should be very careful not to encourage the banks we supervise to become excessively conservative, we simply cannot turn a blind eye to increasing losses and mounting credit problems. 185 banks have failed since the start of the crisis. including 33 national banks. estimated losses to the fdic exceed $57 billion already, and we are likely to have even more failures in 20109140 that we had last year. in this environment, we need to avoid the kind of forbearance that put off problems that cause of such huge losses in the savings and loan crisis. and expense that led congress to enact the prompt corrective action regular regime in 1991. that regime reenforced supervisors how important it is for institutions to

realistically recognize losses and deal with them. both to avoid further problems, and even more important, to put themselves in a better position going forward to make loans to credit worthy borrowers. thank you. >> next, the vice chair of the board of directors of the fdic. >> thank you, mr. chairman. ranking member office. ranking member grades and nevers of the committee. i appreciate the opportunity to testify on behalf of the fdic on the state of lending and credit availability for small business and commercial real estate. adverse credit conditions on stressed balance sheet have great a difficult environment for borrowers and lenders. large banks have significantly cut back on lines of credit to consumers and to small business. in addition, small and midsized institutions would tend to make

business loans secured by residential and commercial real estate are dealing with the effects of large declines in real estate values. which tend to reduce the collateral coverage of existing loans and make it more difficult for household and small business borrowers to qualify for new credit. in response to these challenging economic circumstances, banks are clearly taking more care in evaluating applications for credit. while this more conservative approach to underwriting may mean that some borrowers have received credit in past years will have more difficulty receiving credit going forward, it should not mean that credit worthy borrowers are denied loans. as a bank supervisors, we have a responsibly to encourage institutions regularly and clearly to continue to make soundly structured and underwritten loans. acknowledging this responsibility, the fdic and the

other bank regulators, supplemented prior guidance in issue the interagency on the credit needs of credit worthy small business borrowers earlier this month. to emphasize examiners follow a balanced approach consisting small business lending. the statement recognizes that many small businesses are expecting difficulty in obtaining and renewing credit to support their operations. it is clear that for a number of reasons, small business credit availability has tightened. the fdic and the other bank regulars believe that continued sound lending to credit worthy borrowers is critical to the long-term success and health of the small business sector, and their lenders. the statement indicates that financial institutions should understand the long-term viability of a borrowers business. and focus on the strength of a

borrowers business plan to manage risk. rather than using portfolio management models that rely primarily on general inputs such as borrowers geographic location or industry. this new guidance states examiners will not adversely classify loans sold on the basis of a decline in the collateral value, below the loan balance, or the borrowers association with a particular stressed industry, or geographic region. i would note that the fdic has also reached out to the industry to help us frame policies and supervisory procedures that will help lenders navigate through this credit cycle. and become more comfortable extending and renewing loans. one of the first steps in this process was to establish the fdic's advisory committee on community banking in may 2009. to better enable our board and senior management to have a

dialogue with the industry on how we can improve our supervisory programs, and foster improved availability of credit. the advisory committee met most really on january 28 where we discussed many of the issues we are discussing today in this testimony. including credit availability and access to capital markets. the advisory committee will continue to meet regularly and provide direct input from community bankers on the many critical issues we face. over the past year, through guidance, the examination process and other methods, the fdic has sought to encourage banks to maintain the availability of credit while striving to balance these considerations with potential safety and soundness requirements. striking the appropriate balance remains our greatest challenge. thank you very much. >> now the acting director.

>> good afternoon, chairman frank. ranking member baucus, ranking member grades and the nevers of the committee. figure for the opportunity to testify today on behalf of the office of thrift supervision. i think we all recognize that banks and thrift remained under tremendous stress to continued decline in home prices, high unemployment rates, pressures on commercial real estate, and the improving but still hobbled secondary market for second mortgage. we need look no further than the high levels of delinquent loans at home foreclosures in the increasing number of financial institutions that are troubled or fitting under the strain. as a counterweight to the stress financial institutions are building capital levels and loan loss reserves, thereby making fewer dollars available to lend to consumers and businesses. no one wants to return to the days before the recession, when too many loans were made using underwriting criteria based not on the borrowers ability to repay, but on the fight of the

collateral. value that we now know was fleeting. but we also recognize the economy will not recover fully until financial institutions resumed lending at levels that can help sustain a thriving economy. many sources of credit before the recession, such as heidi leveraged and underrated non-bank businesses, have gone out of business. their departure from the marketplace leaves a borrowers more dependent than ever on reagan laid banks and thrift, and as a result, lending by these institutions is more essential. the question before us today is whether banks and thrift are tightening credit to an unreasonable level beyond what is prudent for safety and soundness, and what regulators can do to ensure that the financial institutions they regulate strike the right balance between lending and safety and soundness.

i have seen some executives at banking institutions quoted as saying that they want to lend more, but that the regulars won't let them. in some cases that is certainly true. an institution with a sword levels of bad loans and insufficient capital faces of the all too real prospect of failure if capital and loan loss reserves do not increase. and to state the obvious, a closed institution doesn't make any more loans. the regulator might be painted as the culprit in restricting lending, but on the other hand, the regulator might also succeed in helping the institution return to a healthy condition so it can resume eating the financial services needs of families and businesses and its community. for healthy institutions, let me make clear that the ot as he is encouraging all types of loans allowed under the thrift

charter. as long as thrift follow prudent underwriting standards to ensure each borrowers ability to repay. the transit and other regulars have made this position very clear to regulate institutions twice in recent guidance, and at the ots we have taken several steps to outlined in my written testimony to make sure our regional offices and examiners in the field are in lockstep with washington on this issue. i also noted in my written test with a small businessman is fully consistent with the mission of the thrift industry. however, threats are limited by law in the amount of small business lending they can do. this restriction makes less credit of able to small businesses, and although the house financial services committee has voted three times to remove the cap on small business lending, and the full house has passed it twice, this provision has never been enacted into law.

thank you again for having here today and i'm happy to answer your questions. >> we have an hour and 35 minutes or this panel, and i'm going to forgo my own questions in the interest of the members. and we are next on to mr. foster going forward. >> thank you all for appearing today. to start by saying that i am not a big fan of loan incentives for viable businesses in the existing conditions that i think that's something we just have to do. and i concur with administrator bill's conclusions that we must work with existing institutions that there's simply no time to bootstrap a new loan, new direct loan program because of the staff, the staff issues. and so my first question is, do you think that the programs that are being talked about are dealing adequately with the moral hazard that particularly when you start getting into issues of like refinancing, debt

of five under for program and so on, that banks may have an incentive to push off their problem loans unto as the a refinancing? and do you think that moral hazard is being adequately addressed? >> thank you for your question. we have proposed a series of activities that are built on what has been successful so far. so in the past year, we raise our loan guarantees to 90%. and we took very seriously this issue, would we experienced this a moral hazard that you described. instead, we have found that, number one, there is great demand because banks want to make good loans, but for various reasons can't take those risks. and that's their credit box moved up, ours moved up under them. and in fact, the credit scores on the loans that we did, disappointed billion over this last year, are actually higher than the credit scores from

2007-2008. in the case of the 500 for proposal, we're looking at refinancing owner-occupied real estate, not commercial real estate that's been speculative, but that did it to him dentist office, and manufacture who might on the warehouse. and that those loans be in good standing. we know there are significant amount of them that were done in 2005, 2006, 2007 with five your bullet refinancing provisions, that will come due 2010, 11 and 12. and this proposal is constructed to meet the needs of those who have been owner-occupied and not been in default, but for various reasons their banks won't be able to take on the refinancing. >> thank you. do any of the other panel have comments on the moral hazard problem? okay.

i guess the second general question i have is the rightsizing of these programs. it's obvious and efficiently design program the larger the program, the deeper you will have to reach into less credit with a borrowers that at some point that will increase the risk of the government running these programs at a loss. but however, stripped from the point of the view of the greedy taxpayer, it may make sense for the government to operate at a loss, particularly because in the case of refinancing for example the hole in the economy that exists when company fails, puts people on to unemployment, on food stands and so on and so forth. . .

funded by congress, we could increase lending we think, but at least 10%. we think that's a reasonable amount. it's prudent. we think the costs of this program, let me stress, this would be an investment this banks. we expect to get almost all that money back. the cost to the taxpayer we think will be quite low. >> in which case it's too small by the line of logic that i just went through. >> let me say though, that we would be lending to, we would be investing in viable banks, deemed by the regulators to be viable and that's the vast ma majority of these banks today. we already have experience in investing in banks. we've invested through the tarp in 700 banks and to

date the taxpayer has obtained a profit, even though that was a very large amount. >> would it be possible for you to get back with us with some sort of estimate with the other part of that equation that went through? >> certainly. >> it would be very valuable understanding what the rights are. the third point -- >> won't be much time. >> sorry. yield back. >> gentleman from illinois. -- gentle woman from illinois. >> thank you, mr. cheryl. appreciate you being here. seems unfortunate what you're saying in washington is very different from what's happening with your examiners and regional supervisors on the ground and what i hear from them. and let let me give you a couple

examples. one of my constituents said, overzealous regulators have swung the pendulum too far towards regulatory overkill compounding lack of available credit that otherwise would be available to the public. the bank regulators are forcing arbitrary write-downs on forming performing loans, excess selfly high loan loss reserve and capital liquidity requirements. all these actions reduce amount of available credit that might otherwise be available. every day the bankers are told by regulators not to make loans and reduce their existing loan portfolios. the only viable and practical way to increase bank lending activities is get regulators to common sense and realistic approach of their examinations. and secondly, another bank, we have encountered an issue during our last always been and continues to remain current on its payments. due to the lack of collateral and borrower's tight cash flow we fully reserved the loan. thanks to our being so

prudent the examiners made us charge the loan off as a complete loss so fully reserved so why not? keep in mind we are v. sieving timely payments but can't return the reserves to capital as payments are received for the loan. we have to wait until the full loan is paid off. i've heard multiple times about this. particularly the concern that they have is, where they are asked to devalue a loan that they are receiving full payment on the loan and, continuing but they say, and the regulator will say, well, it's going to go down maybe next year. so you need to devalue it now. put that on top of the increase for the fdc in the assessments. we're seeing so many banks, their ratings are lowered. so if you could briefly comment on that. maybe, miss duke or mr. dugan. >> thank you, congresswoman. i hear the same stories over and over and over again and

we are incredibly focused on trying to run down specific instances to make sure that we are communicating with the examiner in the field to make sure the examiner in the field knows what to do. that was one of the reasons there are so many exam pelsz in the commercial real estate guidance. in fact i sat down with examination staff and played the part of banker and we argued each one of he is loans as if it were a loan in my bank. we've got to communicate with it. to the extent you hear from people in your district and you can identified who the regulator is, we would very much like to know the specific instances so we can follow them up. >> good. when will we receive the results of the guidelines and work that you've done recently? they're not old but they're, not yesterday. are you going to see, will we see a change in that? >> it's very difficult to measure and we're working on ways we might be able to measure it. but we do have one sort of

preliminary thing, troubled debt restruck turks. loans restructured and shed off balance sheets of the bank, increased 32% in fourth quarter of 2009. this guidance came out in october. that is one small encouraging sign that some workouts are taking place. >> there is one case where i have where the, field operator was, okayed everything they did. then the supervisor came in and changed it. and that, you know, taking away the capital that they had. so i am concerned about that. could anybody really define credit worthy? is there a standard definition? that you all mentioned it but, is there? i won't waste time then. mr. dugan, could you respond and maybe mr. gruenberg. to the question of the that

we've been discussing. >> to the more general question, not the definition of credit worthy, i agree with governor dukes's remarks. we've spent an awful lot of time trying to walk through individual examples with our examiners. let's say we've been spending time not just now, but coming into the crisis, an awful lot of time, dealing with anticipating, and then working with our examiners to work through those. i can't emphasize however enough, individual circumstances really do matter. remember, we have a ton of banks failing now and, not number problem bank list of fdic is now over 700 banks. so you really do have to look hard at the individual circumstances to figure out which is places where there might be some undue stress in the examiner maybe takes an issue and others where the bankers are not realistically recognizing the problems they're confronting. >> i'm going to ask unanimous consent for one

minute to ranking member. i had a conversation. mr. bowman you jogged our memory. you're right, this committee three times, twice under republic can majority and twice under democratic majority voted give additional 10% lending to the qualified thrift lender if it was to small business. the additional 10%. we passed it twice through the committee. once with the house. we, what i just spoke to the ranking member. we're going to give that very favorable consideration. i'm sorry. >> mr. chairman, what i would suggest is that the bill that passed provided that small business lending would be unlimited. there would be no cap on it. as you know thrift -- >> that may not be more than we can do. >> understood. >> still the increase i think there is agreement as we've done three times before, ranking member was chairman of the subcommittee when it was done in the committee in one case. so an increase in the small business lending cap for thrifts will be given very serious consideration. i thank you for call it to us.

>> thank you. >> chairmanship has just moved. >> comptroller dugan, i'm curious about administrative response to congressman foster from illinois when she emphasized that administration series refinancing proposal would only be for performing loans. those, loans past performance fully indicate a borrower's ability to repay, particularly on cre loans? >> okay. i'm sorry, and, the question is whether -- >> if past performance by itself will indicate a borrower's ability to repay so that could use the 504 to

refinance? >> i don't know that the particulars of the 504 standards but, at least the way we look at loans it is certainly very relevant what the past performance is. >> sure. >> but it's not the only thing. it has to do what is current projection of the cash flows to support repayment on the project is critical to understanding whether it's a viable. >> mr. dugan? >> i would agree standards for 504 program are different when we look at it. but there are provisions in the cre guidance. loan for million dollars. cash flow would support 800,000. to refinance that loan into performing piece, the a piece, and then the less performing piece, the b piece, and treat those two pieces separately. >> well, in addition i will remind the administration that the 504 loans can not be used for refinancing of maturing debt.

mr. allison, here we are because the banks are saying that you, the regulators, are responsible for the lack of financing provided to small businesses by financial institutions. and the administration $30 billion proposal, for small business lending, and we all expect that this is going to trickle down and that it will incentivize institutions to lend to small businesses. given that, in the past, when we discussed the t.a.r.p. money, when we didn't see the results that money trickling down to small businesses, what will keep lenders from hoarding this money or using it to cover potential losses from

commercial real estate? i guess that you were all looking and listening to chairman bernanke when he talked about the next wave of defaults in the real estate area. >> yes. chair come well last questions, thank you very much -- develop last request questions. new loan fund than they did under the t.a.r.p. capital programs. one very important difference is that tarp was intended to provide capital for banks to assure their viability under conditions. this is powerful program designed to get banks to lend because as you know the dividend rate on this new capital can drop dramatically if and only if

banks lend beyond where they are lending today. couple other points. the small banks we're talking about, have done a pretty good job of maintaining lending balances during this very difficult recession. we think many of them are eager to lend, and by providing them with more capital, in this case capital that could increase their tier 1 capital by 30 to 50% they should be more confident about able to support existing assets and increase their lending at the same time. >> it just brings me back memories when chairman paulson was sitting right there, telling us, don't worry, don't put any restrictions on any of these bonds because i can guaranty that lending from financial institutions will happen for small businesses, and today, a year later, we are seeing consequences. let me ask you, what will be plan-b if the $30 billion doesn't provide, doesn't

produce what you are expecting? >> chairwoman velasquez, we provided program after consultation with many banks around the country and banking original organizations. we are viewed by emthat this the plan with would be very different. this lending fund be authorized outside of t.a.r.p. because as i mentioned in my testimony, many banks are extremely reluctant to take part in any t.a.r.p. program because of what's called the t.a.r.p. stigma. i think and i am the person who's responsible for the t.a.r.p.. i can tell you that a t.a.r.p. program will not be nearly as effective to achieve your goal of stimulating lending as a program would be outside of t.a.r.p.. so i would urge respectfully the congress to enact the new legislation so the banks would be willing to take the money. >> mr. chairman, could i just ask for a clarification? >> yes. >> you were talking about responsible for the t.a.r.p.. are you talking about the capital purchase plan?

are you talking about the whole t.a.r.p.? >> sir, i managed the office of financial stability within the treasury, which oversees all of the tarp programs. >> i think it is up to republican side on small business --. >> thank you. mr. graves, i think my question is, let me express a concern first, i think, some of you have stated that we have to achieve a regulatory balance and that is very difficult to do. but it seems as if we've shifted in a way that, where we're trying to establish a risk-free environment and i'm not sure in a free market system if you can do that. and i think that, you know, when i hear from some of but the range of options available, that that when there is a, the underlying

asset has gone down in value but the loan is performing loan that you don't need to write down that loan but a lot of the regulators, from my understanding at least in my congressional district are. i've worked with, myself and congressman perfectly multer did a -- pearl mutter, did a doesn't roundtable where they expressed concern of regulatory environment with their ability to loan to small business. i like to defer my time to congressman perlmutter. to talk about what we're working on here. >> thank you. and we have, and mr. dugan, you hit right on it, about forbearance. and, we have one bill that would allow, if, somebody has continued to pay on time, and, hasn't missed anything, but their collateral has

been written down, that they still continue to, that there be forbearance against the bank so the bank can forebear with their customers so they can get to the light at the end of the tunnel. i would just say to you, if we were operating under the same standards, in the 1980s which you mentioned in colorado, that we are today, we wouldn't have any banks in colorado. they would have all been gone. there was a forbearance opportunity. we ended up with half of our banks. we lost half our banks and we kept half our banks. i think congressman coffman and i, based on our roundtable and what we have experienced here we think there ought to be some kind of forbearance. i'm going to let you respond because i know you don't agree, but, let the committee know why i don't agree? >> okay. i'm happy to do that. i guess i disagree with the conclusion that you would, wouldn't have had any banks. i think the conclusion that most of us took who lived through that time in the

1980s was that the forbearance caused problems to be delayed and not resolved on time. and as a result, the cost escalated dramatically to over $200 billion. >> but i would respond and say, virtually every bank that stayed alive was operating under a memorandum of understanding. so there was forbearance. then you had your rtc costs but we've already put00 billion through the -- $700 billion through the t.a.r.p. program to try to keep things alive so we can get to the light at the end of the tunnel. mr. coffman and i had a little company called big papas. they had two restaurants. they were going for a third restaurant. they went to 40 banks to get a $250,000 line of credit and they couldn't get it because of tightened regulations. i would turn to miss mills, even under sba, for whatever reason they couldn't get it. eventually because of the work we did they got it. we got 50 new jobs.

this isn't just a credit cycle issue. this is a demand cycle jobs issue and we've got to get our people back to work. i know you and i have had this debate probably over the last year now. the balance between prudence and lending, but there's whole another thing that the congress has to consider and that is getting people back to work! so, miss mills, have your sba guidelines tight ened up over the last year-and-a-half? or have they eased up at all? >> our job at the sba is actually to provide credit elsewhere. so we come in when a bank can't make the loan without a little bit of help. we have continued to do that. and as you can see from our charts, expanded to really fill a large part of the gaps as banks have pulled back on their credit. the second thing, i would just say in answer to your issue, we share the concern that banks at the ground

level need to fully know these communications that we're hearing here because we hear the same issues and confusions but we stand ready to help them mitigate the risks because with a 90% guaranty, that portion is not considered to be risk capital on the bank's books, therefore with an sba guaranty they can take a lot of that risk out. we just need to be able to, with the increased loan size, do something, for instance, for a third restaurant. that is very usually a loan size issue for us. >> gentleman another 15 seconds. >> i would yield back to my friend for colorado. >> you yielded back nothing. >> sorry. when it comes to my time, then i will yield to him. >> okay. >> i'm going to recognize now the gentleman from illinois. i just want to say, i have to say, to, first of all i know people are coached from

time to time, say thank you for that question. if all the witnesses would stop saying thank you for the question we would get another question in. secondly, because we don't believe you anyway that you are grateful and you shouldn't be. more importantly, i tell you this is my frustration. when we raise any one question, they're running your agencies, we're listening to people you can make a very good defense of every single thing you did. but if all we're get something defense of every single thing you've ever done there is no change in the status quo and we've got a problem. i urge you not to be totally defensive. it is entirely possible you've done very good things in a very difficult situation but we need you to do a little extra. the frustration we get as i said, issue by issue, decision by decision, a perfectly plausible and rational defense what's happened and then people go away saying i guess there is no change. gentlewoman from illinois. >> thank you, mr. chairman. thank you all for sharing your expertise and experience on such an

important topic. i particularly want to acknowledge the great work and effort you've done at sba, karen mills. your staff does a really good job. in chicago and illinois when we've done in the suburban district i represent, forums which i regularly do with area businesses we invited the sba to participate. they educate people on the loan programs that are available. they direct them to increasing number of banks that are now participating in the sba loans. i've been advocating for a new and improved sba since i came to congress. i think you're really delivering against that. and i'm glad you're asking for additional resource. what is most disconcerting about your testimony was when you talked about the $90 million that's already been approved in the queue but you're running out of funds. so we need to continue to provide that support so those loans can continue. in your testimony, you talked about your principles for supporting job growth and economic growth, build on what works, maximize effectiveness, protect

taxpayer dollars and make targeted changes quickly. given that, my understanding is that to build the type of infrastructure that you would need to support the direct loan program that some are advocating for, would not only take longer, in other words, to establish the necessary organization but it would cost 15 times more, am i correct on that? how does that align with what we're all trying to do, getting as you've already gotten $20 billion since the stimulus out to small business? does this align with those goals? >> as you mentioned, our principle is try to build on what works and, what's been working is the recovery act, 90% guaranty and fee reductions but, there's still a gap. and that's why we've taken each piece of the gap and tried to fill it with a program that addresses what

we have heard as we've gone around the country and gotten the problems from the banks. so there are still gaps out there and we have an array of things we want to get at. we have a pretty good track record so far in going through our 75,000 banks. we've got 1,000 of them that step back up. that's why we are saying we can get out faster, using the tools we have. our issue is not really direct lending. borrower doesn't care where the money comes from. they care that they're not getting right now. and so we want to really push the throttle forward on this direct access issue. which is we need to get those banks connected, those borrowers connected to the bank networks that are lending in the communities. that's why the capital helps us. that's why the increase guaranties help us. that is why the increased loan sizes help us. if we do that, and we still

have somebody who is not bankable, we want to get them into our network of counseling. we found in north carolina, 60% of the people who we got into our small business development centers who were rejected from the banks, we could actually get them bankable by helping them with their package. they might not have done their business plan so correctly. and, maybe two years ago you didn't need a business plan to get a loan. now you need, you need that. so we are going to accelerate those efforts. >> i have one other question for you. then i'd like to comptroller dugan. my other question for you is, that it is estimated that sba-backed loans account for 10% of the small business lending marketplace. how would you categorize recent changes in, with your plan, of what overall share of lending in the small business market place has been in the past year and moving forward? >> well, as chairman frank has suggested, i will take this opportunity to identify something we'd like to have that we don't have today, which is more data. we actually have very little

data to size the small business lending market. that said, we estimate that we used to be about 10%. we think we're a much greater share at this moment. and with these programs as, it's hard to differentiate what's demand-driven and what's supply-driven. we estimate with these programs we should be able to close those gaps and be a larger share of the market. >> thank you. for comptroller dugan, the administration has proposed temporarily opening up sba 504 mortgage to commercial mortgage refinancing, givening growing concerns over what's happening with commercial real estate market and number of maturing loans on the books about to come due, many of which have fallen in value and may continue to nall. -- fall. is there more we should be doing to address that? >> congressman, i do think

there is more. the bankers we talk to think that increased sba lending limits and on the 504 program in particular would be something that would cause them to do more lending than they otherwise would. and we have gotten our bankers together to sit down with twreshry as they have tried to suggest what are real world practical issues with the sba program that could be addressed that was a helpful set of discussions that i think led to productive proposed changes. >> i appreciate it. i yield back. >> gentleman from california. mr. royce. >> thank you, mr. chairman. i was going to ask mr. gruenberg a question. i heard from several banks in california they're concerned with the treatment of real estate commercial loans. i think you're roughly talking 3 trillion in commercial real estate loans right now that are either on the books of the banks balance sheets or securitized through mbs. and if the figures are right, i think roughly 1.4 trillion

across the country is scheduled to roll over between now and 2013. would that be -- >> i don't know that. i don't know that number congressman. >> maybe mr. dugan would know. but what i've heard from local banks is that once the term of a loan rolls over, let's say typically five years, the lender is required to do a new appraisal of the property's value and some of the banks have conveyed to me that while they would like to roll the loan over, because the revenue coming, you know from the property remains strong, they're being discouraged from doing so by the examiners because, frankly the appraisal value obviously of the property is, is not coming in. that what it was. i'd like to get your assessment of this potential dilemma here. if a property has dropped in value but the revenue stream coming from the property is

consistent, how should the loan be treated? i understand these loans need to be treated on a case-by-case basis but in general, i'd like to ask mr. dugan and mr. gruenberg of the fdic, should, should the bank make that asassessment or is that a question for the bank's judgement or do we suggest instead that because of the current appraisal, that we basically have the regulators lean in and send a message to the bank that -- let me just ask you this forthrightly. how do you think that should be resolved if you have that judgment question? >> in the first instance of an individual loan we would defer to the judgment of the bank. it is really the bank's responsibility to make an

assessment on quality and creditworthiness of a loan and a judgment to how to proceed if the term is expiring. as a general matter, this is really one of the key issues in the guidance that we've issued, we've tried to send a clear message to examiners, that if there's a drop in the collateral value but the, borrower is otherwise in a position to carry the loan, the guidance is very clear that the collateral loan should not be the basis for evaluating the borrower's position. that's the message we have gone to great lengths to communicate to our examiners across the country. there may be individual cases where that is not being followed. it is our impression examiners are trying hard to work with borrowers on that issue. >> there are certainly some individual cases or at least as represented to me there were. i don't know exactly, i wasn't there to hear how it was communicated but, maybe there was just an insistence things be better capitalized

in there. but the representation i heard was that there was this message. i'd ask mr. dugan for his thoughts on this too comptroller dugan. >> i think the way i agree with director gruenberg said. i think the issue that we will always look at and we would expect the banks to look at in the first instance is, is the cash flow adequate accompanied by the secondary sources, if there are gurantors to repay the loan. that is the key issue . .

>> there's certainly no policy to say that because of a speculative future drop in income that the examiner says that is because of why you have to write this down. but we also do expect our banks to stress their portfolios, make sure they're taking into account potential real-world issues that are going on currently in the marketplace. and it is hard to respond without having the particular instance in front of us, but i would say we welcome that

discussion. and if it's not happening in the field level, we welcomed them taking it up the chain both informally and also, if necessary, to our ombudsman. because i do the same issues and i am constantly talking to our supervisors and examiners, are we getting this right? and we constantly been will go back ask questions. i think this recent guidance did try to get at a number of these specific things with real-world examples that i hope would be good once that if i can just say one other thing. i think there was also we have a hard time getting across the message that even if a loan is criticized, it doesn't mean you still don't continue to work with the borrower. we expect loans, criticism of loans, that's a technical term, to go up during tough times. it doesn't mean that we expect bar was not to be. >> thank you, mr. chairman. thank you. i thought we would let that one go. mr. boone, you are correct in your recollection.

in the 109th congress under republican majority, a bill of mr. hensarling we took the cap off small business lending an entirely. it was at 10% business cap but not for small business. that passed the house in the 109th congress when the republican majority. than in the previous congress with the democrats a majority, mr. kanjorski was a sponsor of it and it also past. the house is now set to the senate. may the third time will be determined. i think we make it bipartisan effort to do that. no charm is not my special area. [laughter] >> we will see if it works. i believe we are now up to be. >> thank you, mr. chairman. thank you to the witness for being here today and certainly this is an issue of great importance to my district,

pennsylvania, and small business access to capital across this country. during these difficult times i think it's paramount to the american economy to help our small businesses access this capital. ms. mills, as you're aware, i along with congresswoman been introducing legislation aimed at increasing access to capital to the small business administration expressed loan program. i want to ask a couple of questions regarding that program. first of all, what is the sba's view on increasing the loan size for the seven a express program, and how do you see this as the into the larger picture of the sba lending programs? >> the sba express loan program is designed for businesses to get them working capital. and as you know, and as in the bill you introduced, one of the most severe problems right now is that small businesses have had their lines of credit withdrawn or cut back.

and now as they begin to see that next order, they don't have the inventory and i don't have the cash flow to expand and take that on without working capital lines. the sba express program is very popular because it actually has allows the bank to use its own paperwork. there's no incremental paperwork. and that allows a much faster results for the bar where. so we see that as a very good vehicle that is up and ready today. it is currently about 55% used by community banks, and we see community banks as a very important conduit to these a small businesses who are. we asked for an increase in size to $1 million. the current cap is $350,000. i want to point out that the default rates on the sba express are higher than usual and a small amounts, and they are

actually lower than usual in the larger loans up to the 350,000-dollar. so for modeling and expectation is that the guy she will have default rates that our 7a program. >> were is the cutoff using the difference in terms of default rates? >> well, there is a chart in your materials, go and i think we had up on the screen earlier. and i think, if we look at that, we can see it's about in the middle. so it is below -- we have data up to 350,000, but this is the chart in the sort of line going down is -- and it is about, it looks like it's about at the 100,000-dollar level. specs are moving from the 350 up to the million which is what our legislation has, you would to a lower default rate according to your research? >> that's what the data

indicates. >> one of the question on that, is there anything that would keep our committee banks or credit unions from fully participating in the 7a express boat if they choose the? no, they participate right robustly now. and in 2009 as we brought these 1000 committee banks back to many, they participate in this as well. >> is there an outcry for the larger amount from business? >> is yes, absolutely. there's a real gap in the credit market right now for working lines of credit, and there is demand there. we are seeing it both in a sba express increasing volumes and in our 7a increase in volumes. >> i have one final question. and i would like, it is about credit unions and i certainly talk to the credit unions and my area who are very well capitalized. they would like to see their ability to let go from 12.5 to 25. what some like to address that in terms of what you think that could do in terms of getting credit out to our small

businesses throughout our communities? >> speaking for treasure, we are in a dialogue with the credit union's right now. to understand their needs better, and we're going to continue that dialogue in the days to come. and that we can get back to you about that. >> and what my credit unions them is they have millions of dollars ready to lend today if allowed to. i yield back the remainder of my time. >> thank you, mr. chairman. appreciate the opportunity to discuss with you this afternoon something i think is important with regards to our small business folks being able to access capital. as a formulated myself for a banking center, that's interesting. i can understand what you're talking about, i think, and i have concerns from the standpoint that it's nice to see that you fully acknowledged that we have a huge disconnect going on here in d.c., what's been

going on in the field that because i brought this matter to the attention of all the regulators last spring and after a meeting with all three. and fdic was the only one who accepted the invitation to come to our office and discuss this matter with our entire banking association. i think you, mr. gruenberg, for showing a. the other ones didn't take advantage of that. i'm very disappointed. from the standpoint that congressman royce made a very good point a while ago and was very articulate about explaining the problem that we have which is going on still get today. and that is that the examiners are coming in with little or no forbearance. and taking a look at the thing we're talking about today, which is commercial real estate lending. and just blanket classifying everything there. and you guys know that if there is not a watch list, you know what watchlist is, automatically are going to have to include more capital which means it takes money out of the profits that has to be stuck wake in additional capital itself to be able to keep the bank afloat.

this is devastating to the small businesses which banks are, as well as who told into. i think that it's very concerning to me, and mr. gruenberg, if you could answer how we address this right now. >> well, congressman, there's nothing we spend more time on than trying to work with and communicate without examiners in the field. but it's not a perfect process. we have a couple of thousand examiners to do with, but i can say we have 85 field offices around the country, the fdic does. last week we brought the supervisor of each of those offices to washington for a week. we spent time working through with them all the directives and guidance that we've issued to our examiners, particularly in regard to see artie and commercial loans, directing them to exercise flexibility and

judgment, and especially can assist in the work out of these loans. you can't always get the result through the institution and the borrower that you would like. but today's issue of but the disconnect between washington and the field that's something we always hear. i guess have been on the board now for almost four years. to a certain extent it's in the water. i think there's always sort of a part part of the nature of having a large national operation. but i can do we really made every effort to communicate and work on irregular basis. to make clear to our examiners what they're supposed to be doing. i'm sure you're aware as an examiner myself, i know very responsive to supervisors over you, all the way of the line from the standpoint that if you don't do a good job on examining the facility, then you miss a lot of stuff, it's a reflection on your ability to do your job.

right now with the economy going in the wrong direction, it's pretty easy to go in there and see what you and his of it happening rather than what is happening right now. i think that's where the problems we are doing a lot anticipating which is very concerning to me. from the standpoint that you have anecdotally there's been a lot of this already discussed with regard to folks who are doing a good job with the business, hanging on, deposito depositors, bars of the bank and no problems in the past. now all of a sudden they are in trouble because of collateral values. to me, without a little forbearance and a little discretion on the part of examiners, you exacerbate the problem from the standpoint that by going in and restricting the ability of these folks to lend, you cause less money to happen which causes less demand for the real estate which lowers the price was something of the collateral by other everything goes down and have a spiral going the wrong direction. and quite frankly you guys are part of the problem.

it's very concerning to me that we don't have some sort of effort to try and work out of program. i hope you guys are doing just that i am concerned because i keep following up with my local institutions at home, the examiners have still not really gotten to the point where they're working with the banks. so in my judgment, the best interest, not of the banks but the committee and the holy, as a whole, i'm very concerned. ms. mills, one of the statement you made a minute ago was with regard to the sba's job as to make credit available elsewhere. one of the earlier witnesses -- the gentleman's time has expired so if we can get a quick response, can you wrap this up? >> my questions and was one of the witnesses made a comment, and odyssey from your comment you will be guaranteeing the loan versus directly pick your response. >> yes, our job is to make loans and loan guarantees when the

market is not providing it. so therefore the number of market gaps that are out there today. as i said earlier we did assess direct lending. it ended up with the cost of 15 times as much, and we would have to trade a new force. it's been suggested we use our disaster force, but our disaster force is not trained for business loans and is busy doing disasters. so we have looked at that option fairly closely, but believe that we've got a very strong infrastructure in our network of banks, and if we can increase our ability to do crud elsewhere, we can meet again. >> gentleman from florida. >> at least you got forbearance from somewhere. >> thank you, mr. chairman. thank you to the presenters today. i too am concerned about the issues raised about forbearance and particularly the impending $1.4 trillion of commercial lending much of which is

performing an compliant and is stuck in the gap that has been argued disgust. so i sort we hope that i know mr. dugan, you set up a tent avoid forebears. the economist we talked yesterday said forbearance is necessary. some way we have to write find the right balance. but i have a specific question for you, mr. dugan. in october 2008 you advise the national bank of visors along the following lines, and this is a quote from you, i think it's wrong to say that any bank that fails and caused the deposit insurance fund money could have been closed center at less cost. why the assertion could be true with respect to a particular bank, it is just as possible and frankly more likely that the latter option of letting a bank remained open sometimes produces a positive result that avoid failure and loss altogether. i just want to suggest to that i'd been hearing reports in my community and throughout the state that in practice the occ has not been exercising

discretion, not to close banks whatever they fall into the great area of the capital deficiency. with the escalation of the number of banks on the fdic troubles list now totaling 702, and with many of them if not most of them, committee banks or the recognition that community banks are the main source of small business lending, how can we be sure that those who actually make the life or death decision for a bank are following your advice to weigh both options? >> well, all i can say is we spent an awful lot of time on this. with that 183 banks fail, 33 of them have been national banks. the quote that you were taking out of was a notion that there is judgment at times because there are circumstances in which even a very troubled bank may have potential buyers. and if we can find a circumstance in which we can control the risk of that institution, because the one lesson we did learn from the s&l crisis was when institutions have little capital and not much

downside risk from taking risk, that's when you have to be most careful with those institutions. sometimes, sometimes buyers can come in and will help the bank at around. but if they are not available, it is the policy of the agency to close the institution. and we, it is a judgment call. and we do a, we have a lot of experts in this. we work very closely with the fdic and their department of resolutions division of resolutions when we do this. and we tried very hard to call them as we see them. >> i guess as a follow-up, either to you or to mr. gruenberg, when you find a bank in this situation and they are required to raise capital within certain time frames, how much lex billy do you actually use in determining other factors for the potential to succeed rather than to be bought out or to be

closed out? because there are many who feel that their operations are good, and they might have a quarter during which their capital drops below some standard, which also is a problem because sometimes it seems arbitrary and hard to determine what is the fact is that you choose to determine the capital requirement? and so, i guess the question is two-parter. what is it going to do to use in order to determine that capital requirement, and wise it different for some institutions than for others? and how much discretion really do you use in analyzing other operating procedures and income streams and assets that would, given a little bit of time, allow these banks to continue to operate to be profitable and to succeed? >> so i will start. and be happy to turn it over to director gruenberg.

in 1991, congress passed the geisha, the federal deposit and corporation improvement act that they put together a statutory regime to force regulators to take action when capital drops below certain levels. called the prompt corrective to be is this something you think maybe should be updated? >> well, we have as many people criticizing us for not going fast enough as for going to quickly. all the way from inspectors general to others. and so we do try to call this. but in answer to your question, we look at all different ways with the fdic and viable plans to see if there is some way to get the institution to survive without fdi assistance and potentially other kinds of government assistance. we exhaust all of those remedies on a routine basis. work very hard and close with the fdic to do the. >> time is a. mr. gruenberg, we probably like

to have you comment on this as well. >> there are statutory requirements relating if the bank calls to a critically undercapitalized position. we don't have a lot of discretion in that scenario. i will tell you, closure of the bank is the last recourse as far as the fdic is concerned because an open bank solution will avoid a loss to the deposit insurance fund. and we really go to exceptional lengths in working with the institution in seeing if there are investors available on an open databases to raise the capital to keep the institution functioning. if the institution is not any position to raise the capital, if it has reached a critically undercapitalized position, then when the law is clear, it is probably the public interest of moving directly to address this situation. >> the gentleman from alabama. >> thank you. let me ask the regulators, you

heard a statement i made a little earlier that we are hearing from the banks that their job is bank complicated by examiners, and i know you are folding your arms, mr. gruenberg. but we hear this everyday. and as ranking member, our members refer bankers to me, or small businessmen, and they actually -- >> one of the more fun parts of the job. [laughter] >> and i had three yesterday, one from mr. mica's office, one from an iowa congressman, and they mentioned various things like for instance, one banker, i've heard this twice in the last week said that the xander said you have to many owner-occupied loans.

another one, got too much commercial real estate. different things of that nature, but generally if they've got it, they've got it. and the other thing that i have noticed is, you do, you actually say they are not healthy so you restrict their lending. but i'm just wondering if they are not healthy, and i guess by not healthy i don't know what capital in your assigning them, but what that would mean whether that is a four or five. but there are areas of the country where there are tremendous amount of banks. i would say in florida there's not that many one or two big banks, are there? but my question i guess is, you are all now saying and a lot of things you said today would be very helpful what you said we asked that they not, you know, if the appraisal is dropped on

the property or, that we won't call that loan or whatever. how are you communicating that to the examiners? to show some leniency? because i think it is very, very, very important. >> i will start, mr. bachus. we get on nationwide conference calls. on a frequent basis with our examiners. to go over very significant nuts and bolts issues about exactly the kinds of questions that you are getting, because just as you get all these questions, i get them, too. i do my own set of banker outreaches to banks of all sizes and get a number of these questions. and so we try to structure the cause to reflect the kinds of questions we're getting, to give the advice to communicate the message of balance as best we can pick and as i said before, it's not something new that we've been doing. we've really been concerned about the buildup of commercial real estate in the risk that

would happen if we started to have a real state recession like we're having now. so we started down a path to try to get banks to be aware from several years ago that they're going to need to do more things to get ready for what was coming. and as the problems have had, and as we get issues, we have a very quick system for getting back up the chain, collecting information about what our problems, and having a call to talk about the issues that are there. i don't know any other way than the hard blocking attack of just keeping at it, hearing the things, going back to them and trying to get -- >> but i'm talking about with your own examiners. >> this is with their own examiners. >> and are you getting feedback from some of the banks? are they able to call you and say look, i'm not talking about this exhibit, i don't want to. >> i welcome that. as i said i just went to a meeting with 20 bankers in denver of two years ago, stephen, a few weeks ago in our

western district where we, had very good candid discussion with him about some of the problems that it was a mixture frankly of stronger and less strong banks. we had a quite robust discussion. and i always get things out of those meetings that i try to bring back to the supervisors and incorporate into what we tell our examiners. >> let me ask one other thing. the small business lending fund, will that again, there are regions of the country where many of the banks are forced in size. and you know, those are probably the reasons with a small businesses are hurting the worst. i would imagine they're probably some correlation there. what banks will be eligible for these funds? >> congressman, all the banks are eligible to apply. they have to apply through the regulators.

and the regulators makes a determination as to whether that bank is viable and can then be referred to treasury for funding. >> you know, with some of the largest institutions we injected money into them, or loaned the money because they were fading. you know, some of the smaller institutions they didn't get money because they were in problems. and i think there is a feeling out there that there was a double standard. and i wish you all would look very carefully and if you're going to do that, you know, some of the banks that need the most help of those that are not healthy. >> mac quickly respond? >> yes. >> very quickly. actually, the overwhelming majority of the banks that did receive funding our small banks and midsized banks. >> i'm talking up her city twice. >> thank you.

>> ms. clark. >> thank you very much, manager, ranking members, and takes each of the witnesses on the panel for being here today. this topic is clearly a very crucial topic and crucial to a solid and healthy economic recovery. and i appreciate the spirit of cooperation between the administradministration and the congress and finding solutions to this lending freeze. i look forward to working with each of you as well as my colleagues in congress to pursue policies that will improve the funding environment of american small businesses. my first question is, of course, to administrator mills. i want to thank you for being here. in your testimony you expressed your principles related to improving access to capital. you said that we should, one, build on what works. two, maximized the tax dollars, and three, make targeted changes as quickly as possible. we have discussed previously i'm a great proponent of cdfi street

and the cdfi fund which was established in 1994 has been instrumental in supporting institutions that operate in underserved areas. and i would argue that it's been working well despite limited funding. it is maximizing limited taxpayer dollars by leveraging 15 tonight teams for each dollar of taxpayer capital. and there's also picked up demand for cdfi fund assistance that and more resources could quickly be deployed to where it is sorely needed. so i'm saying all of this to ask, we have spoken about this before, has the sba begun the process of exploring partnerships with cdfi for its many programs in teaming with the cdfi fund at treasury to explore ways that we can work together better to serve small businesses in underserved areas? >> the sba is actively engaged right now with about 30 percent

of the cdfi's. we find the relationships very beneficial and we're looking to expand. we are currently in discussions with cdfi's in treasury, about how to increase the overlap. we believe, well, one of our missions is to serve underserved communities. our network and to underserved communities is in part to the cdfi's, and we think they are very strong and potentially good partners to increase. >> and then this question is for, you know, whomever on the panel. i am just wondering, going forward how we can better serve the cdfi fund together. what can congress do to increase more lending to minority and women-owned businesses and underserved areas through cdfi's? and would is being done in the administrations to better serve and cdfi's and promote lending in underserved areas?

>> let me address your question, congresswoman. the treasury of course has worked very closely with the cdfi fund. we have recently established a facility exclusively through cdfi to provide them with capital at very low rates. in fact, the demand rate is only 2%. the response of the cdfi community has been tremendous. across the country. we are anticipating very high participation, and i think this will go a long way to assuring that the cdfi's better industry difficult time are able to survive, and serve their communities. >> if i could, the focus of the federal reserve is on a very wide basis and so we brought together the researchers better in the fed as well as our community affairs people that have the relationships with the cdfi's. industries of these that we are doing are actually going to very

specific communities to find out what very specific needs on underserved areas, working with cdfi's, working with bombers, working with lenders and trying to get pictures of all the different ways, and then blue sky that into whatever thoughts we can come up with on ways to solve it. >> well, i want to thank all of you for your efforts in this regard. this is music to my ears. i serve the district where these institutions have been really just sort of life saver so many of our small mom and pop businesses, many of whom are actually poised for growth. if they can access the type of capital that cdfi's afford them. so thank you all very much. madam chair, i yield back the bouts of my time. >> mr. barr but? >> thank you. several years ago before his retirement, i was talking with my friend, president of a small committee bank who have been in

that business for half a century. and he was lamenting what he saw as a stifling presence of the bank examiners and the regulars. and he told me about banking and bygone days when he would meet joe on the street corner in frederick, maryland. joe would say i need some more money and this is how much and this is what it's for. and he would say joe, i will put that money in your checking account. when you have a chance come by the bank and sign the papers. he could do that because he knew joe and he knew chose business and the new joe's father who had started to business. business. and dean is that it showed drop dead of a heart attack that joe's wife would come by the bank and sign the papers. i think that kind of a personal knowledge and judgment may be more meaningful and decide who is a good credit risk today than you regulatory checklist. and i guess my question is, it's would not much of a role for that kind of knowledge and judgment in today's world, is

there? you don't need to answer the question because i think the answer is very obvious to so let me give the rest of my time to my good friend, don monsoonal. >> thank you, roscoe. we had three different panels representing three different interests. the guys that need the money, testified they're gone. somewhere back there. you're the ones that do the regulations. he will testify and you will be gone. and the guys with the community banks will come in and testify. and the problem is that the three groups need to get together. let me give you an example. yours to guidance the interagency statement. it says banks are becoming overly cautious with respect to small business lending. financial institutions that engage in puts small business

lending perform a comprehensive review that barbers, financial condition would not be subject to criticisms for loans made on that basis. and the next panel, the community bankers, will testify. washington policymakers and sort community banks to lend to businesses and consumers, making regulars particularly field exams place restrictions on banks well beyond what is required to protect a bank safety and soundness. the banking agencies have moved the registry pendulum too far and the direction of over regulation at the expense of the lending. then you have the little guys out there, steve who testified. he says i can create 25 green jobs right now. and 25 percent of those will be for people with disabilities, et cetera, et cetera but nobody will linda to be. you know, this is not a situation where you have good guys and bad guys.

you have three groups of totally honest people who are working very diligently, who returned calls of members of congress very diligently to get everybody has agreed to desire to get involved. but here's the problem. the choke point for recovery in this nation is this. the institute for supply management now says, is above 50 and climbed for the seventh month in a row. this is the natural recovery of manufacturing. and i know of firms back home, food processing, there's a company back home that makes the world's only portable vacuum he processing machine. if you want it high-end, if you want a lower income it is a sign for less than 250,000. people are itching.

people are itching to get their hands on the. the guys, go to the manufacturers go to the banks, and the banks say, you, let me tell you what one bank told a constituent of mine who asked about eight to one of equity to debt. he said we can't lend to you because your sub s. is not showing a profit. now why don't you think about how stupid that statement is. but the bank had been with his family for 30 years said the regulator told them that the sub s. is not showing a profit, therefore they will classify the loan. sub s. banks are not -- companies are not supposed to show a profit. they are all past. and the two brothers that ran the business said, congressman, what could happen happen to our family business? i would like to see this panel, and i know you been here a long

time, when the guys come up, i would like to see you sit behind them and listen to what's going on. as you sat and listened to the first crew. and now here we are, we are at the brink of recovery. we are right at the edge of recovery. orders for manufacturing are coming in. i've got probably 2000 manufactured in addition. property only member of congress and the going to wear how school to learn supply chain management. we are right there. we are at the recovery. we don't need more government programs to create jobs. these guys want to go back to work. something has got to be done. and i don't know what is going today, and john, you called me back. she's a bar called me back. and chairman bernanke here this week said we will meet with your people, but you got to have some plan. and i don't hear it, and it's not because of lack of bad

faith. it's just not getting done. >> thank you. >> i thank the gentleman from illinois was big for very number large number of congress. but not pony figures, expressing the anguish people feel. let me say i do appreciate, we structured this very precisely so that regulars would be your at the same time. i apologize for prior commitments that i had to leave shortly. at 2:00 the bank can will coming. so members or another members who are listening, we will have time to have that additional panel. we will finish up for more questions here. but i thank the gentleman from illinois has done a pretty good summary of what the prevailing segment that i hear on the congress. >> thank you, mr. chairman. i would like to associate myself with the comments on the gentleman from illinois as well. i had similar circumstances, and i fully understand. quickly, if we assume that the question is, which is best

suited to use this $30 billion to increase lending to small businesses, banks or the sba, i want to get some clarity to make sure we all understand where we are. mr. allison, would you say banks are sba? >> i'd like to turn to my colleague, administrator for her answer. i would be happy to see his i'm going, because time is of essence, i'm going to have to as for an answer, please. >> i believe we program for this gale, a can best be administered through this -- >> sir, i hate to pressure but i have many questions. banks are sba? that's what the public wants to know. banks are sba? >> for a program of the skill i can banks are best -- >> banks. >> quickly. >> i understand the rationale is great. i just need to know what you're saying banks are sba. i take it you're saying banks. ms. mills? >> both banks and sba loan

guarantee programs are needed. there's two reasons for this. >> because we need some clarity from you as to where you are. are you saying banks are sba for the $30 billion? >> thirty -- there's two problems with trying to solve. >> i understand the problems. can you give me -- what i want is your position where the banks -- this is what we're trying to come to some conclusion of that. banks are sba. if you give me nebulous notions when you live, i want to know exactly where you are. so we kindly tell me banks are sba? >> we support $30 billion from treasury to banks -- >> i cannot get a direct answer. let's move on. >> i believe that the biggest problem is the credit make the banks are going to take and therefore -- >> sba? >> that's fine. you are an sba person. >> mr. dorgan? >> sba. >> thank you, sir.

>> mr. gruenberg? >> i don't think i'm in a position to make a judgment. >> banks and thrift. >> oh, my. thank you very much. let me come back to you, ms. mills, for something else that i'm not badgering you. i have learned that if i don't ask questions they give me a yes or no answer, i sometimes assume people mean just when they have actually been trying to communicate know. in a very nice way. so now, with the centcom you mention a 90% loan guarantee. is it important you think to indicate and let the public know that this is not a 90% guarantee of the loan, but rather 90 percent of the loss. because if there are assets to cover losses, that may make the loan totally covered with the assets the losses, then the government doesn't lose any money, the taxpayers don't lose any money, is that correct?

>> it's 90 percent of the loan. >> not of the law? >> correct. >> so is the loan defaults and the borrower has assets that are going to be used to satisfy some portion of the loss, don't use of trackback from the loss of self? >> it is for the whole loan so we take 90% and the bank take 10. >> won't the assets that are available be taxed as well as a part of the lost? >> yes. >> as an offset? >> as an offset for 90% going to the sba guarantee, 10 percent to the bank's. so what i am trying to communicate is there are assets that would be used to offset some of these losses as well. >> correct. >> that's important because it can come across as though we are talking about 100 percent of the 90% being used and that there

will be no offsets with the assets. that's what i'm trying to get into the record. thank you very much. mr. allison, you mentioned tier one cap it would be used, some of the 30 billion could be used as tier one capital. is it true that tier one capital is not capital that children but rather capital that you maintain to be fully capitalized? >> tier one capital refers to the amount, the base of -- >> do you linda tier one capital? >> you can lend tier one capital, but tier one capital can be leveraged -- >> i understand. when we capitalized the big banks, they took that money and they did not use it for lending. they use it to become fully capitalized to help prevent runs on backs. is this to? >> in some cases yes. >> okay. is this money that the $30 billion, with the bank be able to lend it or will they be able, or will they use it to

become fully capitalized or will they use it for both? >> we have talked to many of the banks. we're confident if they receive this capital, given the incentives in this program, where the dividend rate drops dramatically if they use the money for lending, we are confident that they're going to use this money and help to lend to small businesses. we expect a significant increase in their lending because this amount of capital can increase their total capital by 30 to 50%. >> thank you. my time is up. i don't want to coach. thank you, mr. chair. and madam chair. >> who is next? mr. manzullo? >> thank you. the national association of manufacturers commission the institute to do report on the impact of manufacturing in the

recovery. there's nothing less than staggering. we can buy our way out of this recession. we have to manufacture our way out of it. we have to restart the supply chain. we have to get people back to work. to the jobs they had before. in many cases. i know a situation where manufacturers belong to banks, without order from a manufacturer. offering to let the bank factor, pay for the raw materials, to pay the subcontractors, and then to receive the check from the final manufacturer and make

distribution, taken out of course the proceeds of the loan. and even then the examiners balk. i just -- i guess you have to visit, and i know many of you have, the factory floors that i have to see the total frustration of people who been in manufacturing for years, see orders coming in and listen to this very clearly, because they can't get operating capital, those orders are going to china. and jobs are being lost as a reduction of our manufacturing and defense base, because the capital simply cannot come. and i know in the guidance, it says examiners will not classify loans solely due to the bars association with a particular

industry or geographical location that is expecting financial difficulties. this is the last sentence in the november 12 guidance, but that's not what's taking place out on the field. i mean, you could bring it all the people you want from around the country for a week of training in washington, but unless they understand, you will not be able to get these manufactured going. the question is, is the fact, that the examiners can ask the question that decisions are being made that a bank may have too many commercial real estate loans, too many manufactured loans, too many agricultural loans. and then the examiners will say, well, you have to balance this because we know that manufacturing is sliding and those jobs are going, and this alone may not perform.

would that be correct? does somebody want to touch that? >> i mean, it's fair to say that if a bank is concentrated in a single line of lending, concentrations in a particular category, can pose a risk. >> but at what point are manufactured loans a risk? is a 25%? is a 50%? >> i think the concentration would require the examiner to review the book of loans and make a judgment. >> but see, that's the problem. the problem is this. you read manufactures on the demise. because people don't understand, they don't know. and probably neither do the examiners. they can't read trends. they can't, they can't take a look at in order from somebody like ford motor company, for

example, that pays its bills and do you have a supplier begging, just begging to get the money offering to factor it in the examiners are saying no. i mean, that can't continue. >> i will make this point, congressman, and in regard to the guidance that one of the things the guidance points out, you know, 90 percent of the reduction in lending in the fourth quarter of last year was from institutions with assets over $100 billion. many of those large institutions utilize in fact models to make judgments about how they provide credit to certain communities. rather than examining the actual credit worthiness of the borrowers, you have models making judgments about credit availability. and one of the things that

guidance specifically addresses is that, as you pointed it out, that should not be the basis on which lending decisions are made. >> time has expired. thank you. >> thank you, madam chairwoman. i will try to make a complicated issue as i'm comforted as i can, and i doubt if that's possible. first of all, i'd like to just make an observation, mr. dugan and mr. gruenberg, at one point during our panel, i saw you folding your arms. now i know that you're not sending any body language issues or anything. you are probably just making yourself comfortable, right? i wanted to be a story of somebody, in my district, the nicest man in the world, a banker. he was there within examiner sitting there just folded his arms because he was comfortable. the examiner sitting there across from him demanded that he stubbing on the defensive and unfold his arms. now come on.

they just demanded that he unfold his arms. well, that's not something i think is their job to say. and that's just kind of what's happening. i also heard during this that you have absolutely no discretion that you are pretty much, your hands are tied. but yet i'm also hearing that there is, everything that you're examiners and regulators are doing is also just a. it's not objective. everybody wants to blame somebody else, and we're here because we've got to stop blaming other people. because we want to come out of this. the stories i hear as i cover my eight counties in my district are all the same. i don't care if it's the world, the urban or the exurban. bankers -- or the bankers want to help our small businesses. the small businesses have never missed a payment. they are doing everything they can. they are good people in their communities, but their lines of credit are being pulled, and they're having to go find credit

somewhere else. and they can't pick these are people who want to invest in their companies. most of them have made a profit. and now they're going to have to shut their doors because they can't even find a way to completely pay their bills or their employees. so we are sending these double messages that we want our companies to invest. we want our local banks to lend, and no, we're not doing anything. so that we want to talk about the fact that we're helping our sba small business administration loan more. welcome our banks to want to work with the small business administration because of the people were. so we say that we are fixing the paperwork. but then my bankers say that takes four, five, six much to get a loan, and who wants to wait that long for a loan? now it doesn't matter if any of this stuff is true. if it is perception, it becomes reality. so what i'm looking for here is flexibility. again, i hear there is no

flexibility. everybody's hands are tied. so okay, you don't have flexibility. tell us, what can we do. this is ridiculous. if we are american and we want to invest in our companies, we want to recover, we are right there, tell us, help us how we can recover, how we can provide our banks, our small businesses, with some flexibility that is not tied up in all this bureaucracy. i may be new. i'm in my first term, but i more commonsense. i just want to do it. i want to tell my small businesses, you can invest that we're going to help you with your loans. and i want to tell my bankers, you weren't the problem. you didn't cause this problem. and i want to tell all of you, please help us through this. because we are the ones that are on the ballot. we're the ones that are after listing to our constituents morning noon and night. but yet, we are having to do

with this bureaucracy everywhere we go. so the only thing i want to do is that maybe, i don't know if it is ms. duke, mr. gruenberg, but who can help us? where can we find the flexibility, and where can do three of you groups work together so that we can make this all work. otherwise you're going to put businesses out of business. there will be more people out there looking for healthcare because they're not going to have a job. and they're going to be strapped to the roles of government. so we've got to do something, and please, if there's anybody there that can help you with a little of this common sense that we need. >> i don't know who wants to start. >> may i, please? >> yes, please. >> let's assume that businesses want to borrow, the banks want to lynn and the regulars want to make sure that the banks are lending responsibly. and have adequate capital to support their lending. we can solve all three if congress will approve an

increase, this new capital fund so that we can provide this capital to banks so that they can increase their capital base dramatically. i think without being presumptive of my colleagues for the regulars at this table, that should make regulars more comfortable about the strength of the banks. and they will be able to lend more. i think we have to act quickly. and i think that it's important that leaders in you can and the governor's offices and the mayors make the point to the banks that they should look carefully at taking this capital and fulfilling their responsibilities to their communities by lending. >> time has expired. but let me take this opportunity to also remind mr. allison that back in 2008 there was an interagency memo that mr. manzullo made reference to. and apparently, the banks and

examiners didn't get the memo because here we are, in like three weeks ago, another memo interagency memo was sent. and that is my concern. if we're going to put all the eggs in one basket, and give all this money to the banks without any strings attached to it, that will require for the banks, if you take the money, that is supposed to be two used for lending for small businesses, it's got to go for that. but we are providing what you're doing is giving a blank check, again. mr. paulson? >> thank you, madam chairman. you and your agents probably to a greater degree than that of the banks themselves are determined how many more survive and how many more fail. following up on the comments of my colleague previously, most of

the bankers that i've talked to, and we've had numerous financial roundtables in the counties i represent and surrounding counties, would actually prefer a little dose of common sense to the infusion of more money, believe it or not. they mostly swear to me that if they are allowed to work through some issues without some monolithic bureaucrat beating them over the dog own head, they can work out of this think that they are very confident about it. and they're very confident that there's going to be massive failures if they are not allowed to do that. and let me add, that you're getting quite a few mixed signals here today. you are all against forebears but you are in favor of using commonsense. and i don't know where you draw the lines there. i mean, i really don't. at every roundtables they've also mentioned, and it's just about been unanimous, they have heard a rumor that the fed want to dramatically reduce the

number of small banks in this country so there would be a more manageable number, easier to regular and probably manipulate. and so i would ask each one of you that have heard anything like that to measure hand right now. and let the record show that none of you have heard that, none of you raised your hands. just to make sure that i got this on record perfectly. if you have not heard that, please raise your hand. everyone to, to of your absolute stoned and death. you have not heard and you have entered. i think mr. green was get into a while ago. is very unfortunate. in your agency statement you said, you've all said for most small business loans primary source of repayment is often the casual of business. let me drop down to examination reviews. examiners will not discourage by financial institutions nor will they criticize institutions for working in a prudent and constructconstructive than with small business borrowers.

. . >> so i want to know what your plans are specifically, not generally we're going to be helpful, what are your specific plans for helping institutions

or not forcing them to be purchased by larger institutions which have been many times given t.a.r.p. funds on the acquires assets of those transactions. i want to know what policies you have in time to take into account for the short term and long-term impact on the business and communities and ultimately to the taxpayer of this great country. how do you make sure the policies are being effectively implemented as well? anybody can jump in there. i see you are anxious. but. >> first of all that i'd like to say we go to the have a plan to reduce the number of banks in the country. we are working not only with the guidance but also at looking at gathering data within the institutions to find out what troubled debt restructuring are working, looking for statistical ways to measure the impact of

guidance. and to look for and calling for change that is we can do. most important thing is to improve the economy. >> how are you doing that? are there bureaucrats out there that the task is the next couple of years to figure it out? what's an action item? how do they get rolling? how does the real world tell you what you need? for example, they tell me almost every banker, they've got a loan. it's never not been current. but if the father-in-law makes a payment or another companied owned by the same principals makes a payment, it's off the books. that's collateral. they can't make money on it. they have to make up higher interest or money that can't go into the community and help another business. it's a cycle that perpetuates the downfall of our economy. how would you suggest we address

an issue like that? >> again, by making our expectations clear, by talking to bankers, borrowers, examiners, by gathering information on what things are working and looking at the overall impact. the idea is not to get the business to look forward to. p >> thank you. i'll look forward to the the written responses of all of them. >> thank you. >> i was very hopeful that the stress test would be seen as creditable, would be seen as a rigorous test of their soundness. and when some of those institutions were told they had to raise more capital after the stress test, i thought good luck with than p i was very surprised at how easily and quickly they did raise the additional capital. we've heard that regulators are telling a lot of the smaller

banks, regional and community to raise more capital. and it appears not to be happening. what's the difference? are they trying? are there questions about what's really on their books? chamber nan key said yesterday part of it is their commercial realize. but the 19 big institutions obviously had some problems with their assets too. why are they not raising capital? how important is that to dealing with the supply side problem with credit? anyone who wants to answer that. >> i think first of all, the smaller the bank, the less access they have to capital markets. there's another piece where there's concern about putting capital a into the banks and the banks fail and the capital get lost. or in the cases where banks are trying to really just sell themselves, there's a concern that perhaps if they wait long enough, depending on the stress of the bank, that they may be able to buy the bank cheaper

after failure. >> is that because they are small enough to fail? is that one difference? they were too big to fail? >> i'm not certain that all of the 19 were too big to fail. they were large enough to have access to a wider spectrum of investors to put capital into them. >> okay. commissioner, do you think i should note for the record that despite your unfortunate name, you were the graduate from the university of north carolina? [laughter] >> the 19 banks. the biggest banks that were subject to the stress test, they represent something like 80% of the banking system's assets. and they appear not to be -- they say they are lending. they say it's on the demand side, not the supply side. that seems to be a questionable claim. what's the problem there? why are they not lending? some of them took the t.a.r.p.

funds and use it for paying cash bonuses, even buying back their own stock, which is going 180 degrees in the wrong direction. why are they not lending? are they lending? >> it's not clear with the larger banks how much is due to the fact that their customers also have access to the net market and have in some cases issue debt and paid down on the loans that they have with the banks. we don't have good data on the break out between loans to smaller businesses and loans to larger businesses. we only have data on small loans, not necessarily loans to small businesses and historically we only had that once a year. we're not putting in to place the process to get it on a quarterly basis. >> mr. dugan? >> yes, if i could add to that. that's right. as you said, they have the biggest chunk of the assets in the banking system, also had the

biggest chunk of the decline. disproportionally, there is larger institutions than smaller. what the larger institutions tell us is what you said, number one that demand is significantly weakened. number two, they have tightened their underwriting standards because they believe in this climate of recession -- >> they want to get paid back. i want them to get paid back. >> what don't tend to hear the regulatory component. just generally speaking. >> center anything we can do to help the smaller banks atrack more capital? not just the $30 billion in the treasury's proposal but attract private capital. i have heard from the investors that there is money out there. they don't feel the confidence to invest it in community and regional banks. >> one thing that the regulators have looked at, this is a

controversial area, that they relax the rules to let private equity come in and purchase institutions. and so there are issues associated with that both the holding company level, whether it's the federal reserve or the ots or from the -- if it's an assisted transaction from the fdic. but there have been absolutely an exploration in trying to widen the circle of potential capital investors with some success so far. >> no one else? >> time. >> i will yield back. >> thyme has exploreed. >> i have no questions. i wish to associate myself with the comments of mr. manzullo and chairman frank, i think governor duke, you have hit the nail on the head in the testimony on page five. you state and i quote some banks

may be overly conservative in the small business because of the subject to criticism from their examiner. pew dredge is warranted in an -- prudence is warranted in the economy. the concerns may have been lost particularly on the part of small banks. individual examiners have criticized small bank loans in an overrerly reflexive fashion. this is true of my district and true of almost every member of this committee. i have had in my office in new jersey, small businessmen and women who are on the verge of tears because they can't receive appropriate amount of loans. i commend all of you for your fine work. we have to work together, out of the crisis, particularly for the small business community which i believe is the engine in a

creation of jobs in a revitalized america. i yield to balance my time. >> thank you. with that, it concludes this panel. i want to thank all of you for your insightful and great exchange that has been able to have today. and with that, we excuse the witnesses and we will ask the third panel witnesses to please come forward. >> i promise i won't fold my arms again, mr. chairman. [laughter] [inaudible conversations]

[inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations]

[inaudible conversations] [inaudible conversations] >> gentleman, please take your seats. the committee is still in session. we appreciate all of you for being here and apologize for the congressional schedule deferring your appearance. we appreciate you staying here. we will begin our testimony of this the third panel with mr. andrews. >> thank you very much for the opportunity to come here today.

i'm steve andrews, president and ceo of bank of alemeda, it's a bank in san francisco bay area oakland. we operate in california roughly $200 million assets. i'm pleased to be here to address the panels as well as the committee with the respect of state of small business and local lending markets. i'm very pleased to represent the bank communities. bank of alameda, we special in realize and relationship lending. community banks across the nation, some 8,000 community banks staying ready and prepared to lend into their communities to support those businesses that require stimulus and recovery. my bank faces serious challenges. we just heard from a series of regulators up here about their work trying to mitigate some of

those challenges. but the facts remain that community banks are operating in the toughest economic climate and the most severe regulatory climate we've seen in over two decades. we've heard about the pendulum. from the community bank perspective. that pendulum has moved too far into the category of over regulation at the expense of lending. we see the results of that with with many of your constituents come into your offices worrying about the allocation of credit. the regulators are questioning real estate values, they are making subjective calls on the street and in community banks. that is creating an atmosphere where many banks are failing to make small business, commercial loans. some of those borrowers out there are having trouble financing and making their payment, regulatory burden has added another category and

stress to the situation. we also have fairly healthy economies existing in the united states. even in those areas community banks are suffering because regulatory constraints are asking them to reduce over exposure in the cre area. the regulatory environment is tough. some of our best clients in the bay area come into us and site not only that, but we are concerned to invest today. so yes, there is an element of our borrowers that are concerned to invest and take out additional credit. because they are not sure as all of us here today will the recovery will take effect. i want to chance trait my balance mostly with the regulatory environment. i do see, and believe me, i represent 130 bankers in california, representing the cib, california independent community bankers, and banking

regular regulators are making tough decisions in the field. i am seeing the regulator do have their feet on bankers throat in some cases as we heard from the first panel. in my specific example, regulators came into the bank. they raised our leverage from the 5% statutory to 10%. in that case, what happens is you have to adhere to those agreements and inhibits our ability to lend. our bank has to to reduce it's balance sheet, loans outstanding at the end of 2007 or roughly $248 million today they say that $200 million. that's not a way to make the economy recover. although my bank meets the higher 10% thresholds, it does come at a heavy toll. field examiners are hearing

mixed messaging. hearing from congress to lend, i think sometimes they are hearing that they mood to remain tough and make sure they have tough regulatory environment to get through the rough patch. it's not an easy patch, and i felt a little sorry at some point in the regulators in the room, but the reality is they are making it tough for community banks to lend. especially when we have the high capital imposed on us. also when we are asked to bring our loan reserves to high thresholds. that impairs our ability to allocate capital into lending. in closing, i'd like to say the independent community of bankers fully endorsing the $30 million fund we've chide about. we think that's a prudent idea. at the same time, we also want to make sure that some of the stigmas attached to the t.a.r.p. is not placed with this. i think herb alice, when he

spoke, there is hesitant to jump into that. bankers do not want to see a change like that. thank you for your time. >> thank you, mr. andrews. mr. bridgeman. >> ranking member bachus, ranking members and members, it is a pleasure to be here today. i'm a sever of t.a.r.p. funds. i'm a rarity of community banking. ladies and gentlemen, i have never been to wall street, but i have lived and i work on main street. i've never made a subprime loan, i can barely say derivatives, let alone put it on my books. we do not compete with loans at the local level with our too big to fail banks, we do not. they do not come into our

communities and ask for loans, but they do come into the communities and ask for deposits. currently, communitybacks make -- community banks make up 11% of the total network, we at community banks, make 8% of the small business loans. the small business loans and the small businesses that's 60% of the new jobs together for this country. you've asked the question as to why we are not lending to small businesses are two primary factors. first, small businesses have taken up pounding in the last two years. their financial statements are in chaos, and they do have a tough time qualifying for credit under prudent policies and practices. additionally, the businesses that do qualify are very concerned about their future and whether they should be lending or whether they should be going out and seeking credit or not. small businesses are concerned about the economy, what's happening with health care and

taxes. the other side of the problem is the regulatory burden as been mentioned here today several times. regulators are taking a view of every bank that they look at. when they look at a bank, they are looking at an independent institution without regards to what's going on in the larger picture of the country and the economy. i would point out that the letter written by congressman frank, chairman of this committee, and also crankman munnic spells out what they are. every banker that read the letter stood up. because it's dead on to what the problems are from the regulatory point of view. there are two primary hindrances that are effecting what wangs can do in lend being of one is

the higher capital ratios. they have raised the capital ratios in the country to 8% and 10% minimum used to be is now 12%. with these ratios we are not able to lend. it hampered the ability of us to loan. second, they decided reserves need to be raised to excessive levels, ratios that are taking capital out of the ability to lend. they are also asking us to write off credit. they are making us take imperments that are obsessive. i have had to shrink my bank, even though i am well capitalized, on the loan side. and we are working diligently to get our capital ratios which are well capitalized by all regulatory standards, we are well reserved by all standards,

and we are taking those up. some comments that i've had are t.a.r.p. funds are used for the purposes of increasing capital and increasing loan loss reserve. that is not the reason that t.a.r.p. funds were ever created. they were there for lending. we did loan, we created almost $20 million in new credit. we were credit sized by the regulators for growing our institutions. we were criticized for having a concentration of owner occupied commercial credit. we were credit -- criticized for that. loans, tdr, are how we're helping our customers continue to operate and keep operate employeed. some of the concerns that i have is that lending as ceased and that no jobs are going to be

created right now. our economy is struggling, and i will tell you that my community is struggling as well. my concerns is also that if we continue running into the commercial real estate problems, we are going to have a second dip in the economy. i will tell you that the regulators have a lot of control at this point at determining where the economy will go. in conclusion, i am a community contract. i build communities. that helps build our country. >> thank you very much, mr. bartlett. do you want to introduce the next witness? >> it's my honor and privilege to introduce our third witness. william b. grant is from garrett county, maryland. it would be the biggest county i have the honor in representing and it has the smallest population. you know it's a rural county, and mr. grant really understands community banks. we're glad you made it here, sir. your county has had 20 feet of

snow. the snow in his yard is above his waist, and he's pretty tall. they are in the midst of another 2 foot small -- snowstorm. we're glad you made it out. thank you for coming. >> thank you. it's a pleasure to be here. ranking members and members of the committee, as congressman bartlett noted, i'm bill grant, i'm chairman and ceo of the first united bank and trust. my bank is 109-year-old bank. this recession is one of the worst that we have ever faced. while the statisticians will say the recession has ended. the impact of the downturn is being felt by all businesses, banks included.

accumulative impact of eight straight quarters of job losses over 8 million jobs nationwide since the recession began is placing an enormous financial stress on many individuals and businesses. this has caused business confidence to drop and loan demand to fall. many businesses either do not want to take on additional debt or are not in a position to do so given the fall off of customer business. there, however, some positive science. we have heard from bankers that small businesses are now returning to test the market for loans. it will, of course, take time, for this interest to be translated into new loans. in the previous recessions, it takes generally 13 months for credit to return to prerecession levels. banks have many pressures to face in the mean time. the commercial real estate market will pose a particularly difficult problem for the banking industry this year. the cre market has suffered

after the collapse of the secondary market for commercial, mortgageback security and the economic slowdown that has caused retail vacancy to rise. this has made cre banking scare and with loan that is are stressed. regulators will continue to be nervous about the trends and will continue to be highly critical of bank cre portfolios. we've heard anecdotes from our members about examiner who take approaches in the analysis and who are consistently requiring downgrades of loans whenever there is any doubt about the loans condition. this is especially true of cre loans. examiners need to understand that not all concentrations in cre loans are equal and that setting arbitrary limits on cre continues traditions has the effect of cutting off credit to

credit worthy borrowers exactly at time that this congress is trying to open up more credit. the american bankers association appreciates the initiative of president obama which he outlined in his state of the union address which would provide additional capital to small banks who volunteer to use it to increase small business lending. a few factor is removing it from the rules and regulations of the t.a.r.p. stigma that we've talked about. as this program is developed, we record that congress and the administration create criteria that will allow all viable community banks to participate. further, we propose that treasury offer assistance to the bank that did not qualify for the capital purchase, but to demonstrate the ability to operate safely, soundly, and survive if given a chance with the necessary capital.

the focus should be on whether the bank is viable in a post investment basis. otherwise, congress will miss the community to help the customers and communities of many banks across this country. we also appreciate the work this congress has done to increase the guarantee of the sba's 7a loan program. subsequently, sba expanded eligibility by applying the broader standards used currently. these very positive changes mean that additional 70,000 businesses will be eligible to participate in the 7a program. the success of small businesses and local economies depends in large part on the success of community banks. we must work together to get through the difficult times. i'd be happy to answer any question that is you might have. thank you very much. >> thank you very much, mr.

grant. mr. covey? >> mr. chairman, thank you. i'm testifying on behalf of cuna. it was the first credit union established in the united states. we are very, very proud of our heritage. for just over a century, we've been helping with a full range of affordable financial services. the idea bewith hind is very simple. people pool their savings in order to help each other achieve a better standard of living. that's why we help out small business owners. our credit dates back to the first days of our movement. it's in the credit union dna. st. mary has a track record of granting listens that dates back to the early years. we provide business loans for

working capital, equipment loans, seasonal loans, commercial real estate loans, and energy loans. we're an approved sba lender and active in all of the programs. we also use several state programs. the average business loan size is under $200,000. we have 960 business loans totally $75 million and 2200 members. our potential is much, much greater. this loan does exist, but credit union is subject to cap. our cap is $85 million. currently we have a business pipeline and a new business loan request of about $15 million. that if approved, we with exceed by $5 million. let me emphasis that, i do not see a scarcity of credit-worthy. i have the funds to lend and nearly $5 million loan request that may go unfilled because of

a cap enacted without any safety, soundness, and rational. given the demand, we do not see why we should not be able to put more money back into the community by hard-working business owners to employ more people and create more opportunities. there are several hundred letters who i've have to receive loans from credit unions many after being rejected by banks. big banks and community banks. these members have experienced first hand the values of providing the business loan. this is a great service to businesses everywhere in stymes job growth. it could increase the risk of the national credit union share insurance funds. however, the facts are otherwise. our loss rate is just 1/5 of that and lower still than our

own losses. second, business cap gives the credit unions a way to further diversity, ultimately lowering the overall risk. third, the ncua has full authority to supervise credit union business lending as the chairman recently emphasissed to the letter in the treasury secretary. from my own experience, the ncua thoroughly review my portfolio annually. for us, increased business lending would be a very, very low risk. the president has proposed giving community bank access to $30 million t.a.r.p. funds. credit union have not sought, because the small business credit is not the lack of capital. the impediment is a cap on lending. there's no economic or safety and soundness rational for the

cap when it was enacted and none that exist today. small businesses need credit union today. banks that have been serving them in some cases for years are pulling back access to credit. this is leaveing many credit worthy business owners high and dry, unable to get funds they need to operate and expand. representatives jan and royce have opened up legislation with the cap, this would add $100 million business to my credit union. nationally, we estimate they could lend an initial $10 billion in helping them create over 100,000 new jobs. hr3380 is a small -- smart bill that will help. i encourage you to enact it as soon as possible. mr. chairman, i thank you for being here. i look forward to the question.

>> thank you, mr. covey. mr. wieczorek. >> thank you members. my name is rick wieczorek, i serve as the president and ceo of the mid atlantic credit union. we appreciate the opportunity to participate in this discussion regarding the condition of small businesses and commercial real estate lending and local markets. at mid atlantic we are proud of our track record of helping our members and their small businesses. we have been a member and just last year became a express lender. mid atlantic has just over $28 million in member business with loans putting us at very near the credit union member business lending cap. we believe that the success of

our member business running program is because of the expertise we have on staff at our credit union. our top business lending personnel have over 85 years of combined business and commercial loan experience, including receiving awards from the sba. credit union believe we can play an important role. we have faired well in the current economic environment and as a result many have capital available. a number of small businesses who have lost lines of credit are turning to credit unions from the capital that they need. with this in mind, they support the package and promoting lending to the small businesses act of 2009. this bill would raise the member of businesses to 25% while also allows credit unions to supply the much needed capital to underserved areas. the legislation would also choose the definition of member business to 50,000 to $250,000. this is a significant step for

as the panel knows one of the biggest declines has been for loans under $250,000. credit unions have been making loans for decades, however, the credit union access act established a cap for the first time in 1998. the same bill directed a department to study the need. the treasury department released the study that the the credit union has no effect on the property of other institutions. we have a strong track record for overseeing lending. just two days ago, nco chairman wrote secretary geithner to ensure that the arbitrary cap was modified they would pass a regulation to make sure it would not result in unintended safety and soundness concerns. finally when he tried to point

it to the credit union, there's no correlation. we also support the continuation of 90% guarantee on waiver on the sba loans through at least the end of 2010. while some have proposed raising the 7a loan from $2 million to $5 million, we do not believe this is a good idea. maintaining the $2 million allows to guarantee greater number of loans. therefore, helping more lends, businesses, and communities. as this panel is aware were earlier this month, the president proposed creating new fund with money remains from t.a.r.p. to make capital a infusions to encourage loans. most credit unions would be ineligible to participate in this due to the how capital is defined in a federal credit union act. we applaud the administration for it's focus on increases job growth and small business

lending. we believe the administration should find ways with the efforts. increasing the lending cap would make it easier for small business to have access to loans. furthermore, it could be done without costing the american taxpayers a dime. many credit unions, such as mine, are approaches the cap but have funds available. in conclusion, it's having an impact on american credit union. we can continue to provide products and services to their members. credit unions stand ready to help us recover. legislation before congress, such as hr3380 and proposals to extend the fee and 90% sba loan guarantee would aid credit unions in their efforts to help our nation. additionally as new programs are proposed we hope they are designed to include credit unis. we welcome any questions, thank you for allowing us to be here

today. >> thank you. ms. nash? >> thank you. my name is cathy nash. we have $12 billion institution headquartered in michigan and serving the upper midwest. in 2009 we approved $2.9 billion of loans and we're very proud to have two years in a row been named the number one sba lender in michigan. i'm also a member of the board of directors and consumers bankers association and in the sorbs for more than 90 years have been recognized voice, including small business lending. our members hold 2/3 of the industries total assets. i'm pleased to have the opportunity to appear before you today to discuss the issue surrounding small business and commercial real estate lending. as we seek to continue to move our economy, and indeed our country back on the path of stability and growth, it's important to seek input with debate and focus on those who are most able to influence that path. in my positions are citizens

republican, as well as with the cba, i see the challenges we face in serving our clients, protecting our depositories and navigating through the climate. those problems have been magnified. as a bank, we ask, how much capital is enough? some would say the bank could never have too much capital. regulators must focus protecting the depositors. the best way to do that is to hold more capital. every dollar of capital is a dollar that cannot be lent to a business owners. it's a dollar that cannot help a community recover and grow jobs. it's exactly the holding of more capital that adds to the length and severity, but holding capital and making fewer loans or shrinking to preserve more capital. businesses cannot grow and hire because their capital access has

been restricted. it is clear that the some of the practices of the last decade must be curtailed. in those businesses seeking to borrow today, in the past they competed for new loan clients. while most bank have strong criteria and policies. in today's environment we haven't losened or tightened our standards. we are holding every loan against the standards. this may feel if the bank is getting more restrictive when we are finishing long, established policies. in the market we saw some bank close the lines. we've seen competitors exit industry segments and geographies. for business clients, we look at it discreetly. we have tried to see the line of credit. for example, a long standing client with a $2 million that

they've never used, we might work to reduce to more reasonable level based on forecast. to some clients it feels like it's a reduction. we need the clients needs and manage the requirements. commercial real estate lending is driven by lower rents paid by tenants or on the building side, slower sales that result in slower prices. these drive the appraiser of the property to lend to what we originally thought we could. we have a client that wants to build an office $10 million project. presales did not come true, and those that did, were at lower rates. the client believes the market will come back. but we are unable to put the value because of the policy. this is typical example for us. we should have a positive

impact. we support on the express loans, 504 program and the la lane -- 7a loans because we believe it would help our industry. it essentially ask bankers to certify the borrowers is in hardship at same time they want them to pay debt. in your invitation, you asked how banks can best fulfill their fundamental role in the immediateys consistent with prudent lending standards and strong capital requirements in a period of extreme financial and economic social success. good borrowers will always find a loan. those borrowers with weaker financials will have a harder time. the fundamental capacity and

willingness to repay must be established as the hallmark of lending activity. this will happen at one at a time by bankers that know and understand them. we thank you for your continued success, look for ways to improve the small business with and real estate lending and cba is dedicated to working with both communities to meet that goal. >> thank you very much. mr. hoyt. >> thank you. i'm david hoyt with wells fargo. thank you for allowing me to be here today. wells fargo is number one small business, middle market, and commercial real estate lending in america. serving more than 200 million small businesses and 15,000 middle market businesses nationwide. we bank one out of ten small businesses and one out of every

three middle market businesses in this country. in many cases, we have had banking relationships with customer that is have spanned cycles. we work with borrowers in experiencing dick -- difficulties and encourage them to talk with us as soon as problem. many businesses are hurting. we are doing our part to put businesses back on their feet. we extended $40 million of credit to the new business borrowers. we continue to hear directly from the customer who's are concerned about being able to obtain the credit they need. we also see the demand for business credit has remained soft through the fourth quarter of 2009. in our opinion, the reality of weaker loan demand, as well as the perception of the lack of availability of credit is rooted in several factors. first, the economy has taken the toll on the credit and financial capacity of many businesses

reducing their cash flow and the capacity to repay bet debt. second, asset values have declined from many higher levels that existed at the top of the economic cycle, businesses that relied on the value of these assets to borrow, can't borrow as much against them today. third, given the uncertainty of the economic environment we with see our borrowers being more conservatives. making few capital investments which reduces the need to borrow. finally, loan structures and terms are more conservative now than at the peak of the economic cycle, we and believe rightfully so. the increasingly aggressive extensions of business credit was responsible for the financial crisis. borrowers that access credit on those terms find the terms of credit extended today to be more restrictive. terning to commercial real estate market, asset values have decided significantly, leaveing many borrowers and lenders where

loans exceed the value of properties surrendering them. reaching an all time high in 2007. as a result, evaluation increased. as the economy slowed, they returned to normal levels. adding to the problem, tenant failures are resulting in declined in cash flow generated by individual properties. the combination of these issues have resulted in cleaning property values, in many cases 40 to 45%. our recent experience that there's e quitty available to deal with the issues on a macrolevel. although the resolutions are painful to individual owners and lenders. in our opinion, this is not a short-term problem and our expectations is it will take some time for the problem of the commercial real estate to work it's way through the system. we want to be part of the solution. we're hiring bankers, providing educational tools to customers,

doing out reach to women and diverse business owners and extending sba loans. when lending to small businesses. we're taking the time to reevaluate the loans. we take a second look at declined loans because we want to make every good loan that we can. there are some positive signs in the market. while loan demand is soft, it has improved over the last several months. businesses for credit is stronger, loan opportunity has increased and liquidities in the market have improved. as we travel along the road to economic recovery, we maintain our commitment to help business loaners succeed financially. madame chair, mr. chair, and members of the committee, thank you. and i would be happy to answer any questions. >> thank you, mr. hoyt, we'll now here from mccusker.

>> thank you on the behalf of patriot capital. patriot call tap holds three licenses. nonbank lenders are sbic are important and often over law school looked part of the small business equation. patriot capital has provided long-term investment capital to 64 businesses, small businesses and portfolio companies employ over 17 states. 6,000 of the 10,000 people we employ, jobs were created as a direct result of our investments. sbic are very small, highly regulated funds that invest exclusively in long-term capital

investments. under the program, funds are raised from individual investors and upon licensure from sba, can multiply the amount of capital. the program is getting capital to the market. when the treasury and the small business administration held a summit on small business financing in november, the only small business participate who said he had adequate access was the small business backed company. we have a recycling company in the midwest that has struggled, but survived and met any expectations and yet the bank continues to reduce the amount of credit able. while debt capital would be able if they were larger, small businesses are having problem. patriot capital provided capital when the bank would not. sbic can and do fill the capital void in the marketplace. the relationship with the banks, banks are not competitors, but

major investors in our fund. sbic fill an important and unique role. sbic generally provide long-term investment capital. a range in which banks are comfortable in lending with smaller community banks. sbic invest in small businesses which despite being companies have collateral too small to be worthy of credit. sbic has made over 20% of their unvestments in low and moderate income areas. over 90% were in smaller serieses. furthermore, related to banks, banks are often more comfortable with lending to lenders have long-term investors. patriot have multiple and very few are affected by the smaller

marketplace. a trucking company to a women-owned to t telecom manufacturers would have been put out of business and liquid liquidateed by their bank if not for us. the companies have we can loan represent 600 american jobs. these may not seem like large numbers, they are huge to the employees and small towns. if you consider 4% of the portfolio and patriot capital is only 2% of you have to multiply by 1,000. 600,000 jobs affected. stories like this can be told by every one of the sbic. it's easier to save and create than to create them from scratch. recent actions by and proposed actions are cutting off capital

to sbics and small businesses. the day after the president proposed volcker rule, even before graham-leach-bailey, they were allowed to invest. a clear message needs to be sent to banks that they are not only allowed but encouraged to invest. also, banking regulators particularly the occ has cut off new investments in sbic by removing certainly that banks will receive the credits for small business investment companies. there's been no legal or regulatory. cra credit for investments need tour memorized. on the incentive side. just 3% of that were allocated to community banks to invest directly in sbic, that capital can be leveraged by the sba and invested in companies providing

long-term investment capital. >> the gentleman's time has expired. >> thank you for the opportunity to testify today. >> i apologize for characterizing in secondary. ms. robertson. >> good afternoon, my name is sally robertson. i'm a board member of the national association of development companies. additionally, i'm the president of the business finance group. it's a virginia-based nonprofit provider of the 504 loans. 504 is partnership that leveraged 40% of loan guarantees to provide 50% financing for long-term commercial and real estate project. they are job creators and done at no cost to the federal government. and the need to improve access to capital for small businesses. independent studies by deutsch

bank, credit sweeps, and congressional oversight panel we view that $1.4 trillion will mature. of this $700 billion, 300% of the main cap tap end reserves. that has forced smaller banks to lower capital. the loss of the market for the sale of cre loans has added to the liquidity issues for those banks. if steps are not taken soon, the rate of failures is predicted to increase. without capital, even success businesses cannot grow. without new sources of long-term capital, businesses that cannot refinance their commercial homes will risk shutting their doors, adding their employees to the ranks of the unemployed. one of the larger loans we've done is for a second generation commercial laundry facility. the project financed the equipment while the borrowers

financed the building as the equipment loan maxed out their sba availability. the equipment loan will mature, the business may fail since the equipment cannot be readily moved causing the loss of 131 jobs. through two rounds of stimulus, congress and the administration have worked hard to put more working capital into the hands of small businesses. 50% increase in 504 volume through january 31st of this fiscal year over last fiscal year speaks to the success. but the current stimulus package in ending. an extension of the stimulus is critical for the access to capital by small businesses. but we must all do more to expand capital sources and induce community banks to get back in the lending business. we believe that many small businesses either need access to larger guarantees amounts or have already used up the

allocateed maximum under current law. the credit we study indicated that the majority of cmbf loans are coming due. demonstrating a disproportional impact on small business. and the current loan size limits are too low to assist many success small businesses that can expand and create the most new jobs. we recognize the business community for passing hr3854, and sba program reauthorization bill with numerous beneficial changes. foremost is the propro sal to increase the 504 loan size to half million to $1 million. however, the expanding cre financial crisis has increased the demands for capital. as president obama has advocated, a lending association has endorsed, we support the urgent need to provide even

greater levels of capital access to healthy growing small businesses. as stated in hr4302 we urge support for regular 504 projects and public policy projects and $5.5 million limit. our industry also strongly recommends that the committee support hr4302 for the proposed temporary restriction for the financing division. there are three distinction needs each of which affects the jobs outlook. small businesses, each those who can make their payments may be unable to renew their loans which can load to foreclosure. losing 504 to attract a commercial lending could save those jobs. high cost debt, many small businesses have older loans done when rates were high by refinancing the loans at smaller interest rate. the savings on debt cost can be used to expand on investors and

higher more workers. inspite of the decline, many small firms have significant equity. refinancing those existing mortgages while providing them with more operating cash will enable them to reinvest, expand, and recreate jobs. thank you for the opportunity. and i look forward to your questions. >> thank you, mrs. robertson. and to all of you on the panel for your thoughtful comments. the favor we have done all of you by asking you to come late friday afternoon is that our questions will be mercifully brief. i'd like to start by asking and turning to the chair of the committee over to the ranking member. :

>> but there is some clarity in their, spirit of that, but the implication still lacks a little bit.

>> congressman baucus, i would say that having recently expressed an examination in the month of december, that i would tell you there's a disconnect between what is being put out from washington in the form of the guidances and what is actually being delivered to the community bankers at the grassroots level. there is clearly some subjectivity that seems to be going to the excessive overzealous side. >> all right. mr. grant. >> i would just like to echo what they said, and there still is that message out in the field that hasn't gotten through yet. we heard comments from the examiners today that certain things that just generally applied in practice once you get out in the field so i would echo what's been said. >> mr. hoyt? >> yeah, we would view that as being guidance as being

reiteration of some long-standing guidance that docc has had. and i would take a bit of a different view. i think our examinations have been consistent with the guidance that have been provided. >> you know, there does seem to be sort of a disconnect between, you know, wells, what y'all's experience is, the lending needs of small businesses are being met, is that what i heard you say? >> well, i can't speak for the needs of all small businesses but i can tell you it's something that we're trying very hard to meet. we are hiring more bankers. we're making more loans, and we are clear in the fact that we want to do every good loan possible we can. >> do you think there is an unmet need among creditworthy small business, small businesses for loans or for refinancing, or among developers, say, for

refinancing? or do you think -- i mean, you've heard what some of your fellow panelists have said. >> we have seen i was a increased competition for lending, particularly over the last few months. and in most cases, we are seeing competition between multiple financial services providers competing for individual loan opportunities. >> as opposed, the loans are available or are they just had a higher rate than small businesses want to pay? >> yeah, i would say the loan availability issue comes back to a number of issues that i mentioned in my testimony, which relates to the fact that i think small businesses are under more stress. i think that in many cases borrowers or most cases borrowers aren't able to access credit on the same terms that they're able to access credit. in 2006-2007, creating the

perception of the change. so i believe that credit is available. again, we're trying very hard to find all the opportunities and want to do more in the small business area, but there clearly is an availability issue relating i believe to the credit worthiness in some cases, and rates of terms available to small business owners. many small business owners are under a lot of economic stress. >> let me ask you this, and i'm particularly interested in, say, a bank the size of wales. and this is anecdotal goal -- anecdotal evidence. but from time to time we do here small businesses, and when i say small, i'm talking about maybe employing 100 employees. saying that some of the banks, the larger national banks are not that interested in making small loans.

would maybe any of the panelists like to comment on the? but mr. hoyt, is that -- >> i don't think anything could be further from the truth for our institution. as i mentioned, we now think about one out of every 10 small businesses in the u.s. last year we hired an additional 1500 bankers to find small business loans, and we intend to hire at least another 700 this year. as i mentioned before we made $40 billion in new loans to our business customers last year. >> small businesses? >> small businesses. >> thank you, mr. hoyt. the gentleman's time has expired. call on chairwoman velazquez for five minutes. >> thank you, mr. chairman. i would like to ask mr. andrews, mr. bridgeman, mr. grant, the

following question. and i just questions and i would like a yes or no answer. if the treasuries proposed $30 million small business lending fund were enacted today, would you apply for funding? >> yes. >> yes. >> yes. >> i would like to ask you whether you will commit to using the money you received solely for the purpose of small business lending? mr. andrews? >> yes. >> yes. >> yes, we will. >> would you also be supportive of these or other penalties for banks who take the money and do not use it to make small business loans? mr. andrews? >> i would be supportive of how he outlined in his testimony. i would be supportive of how herb allison outlined his

testimony with the incentive. >> is that a no? >> could you rephrase the question for me? >> mr. bridgeman? >> that would be a no. >> know. >> thank you. mr. wieczorek, there currently some -- let me ask you, you want to do more small business lending. both of you, mr. covey and mr. wieczorek, bright? >> that's correct. >> what would be your answer if you are allowed to receive money from the $30 billion, will you take its? >> can i go ahead? okay, we can't -- >> i know, i know. but let's say that you can. >> yes. >> some of these or sort of theoretical questions. >> yes. >> know, we would not.

>> okay. so mr. wieczorek, there currently some who are proposing that we increased the maximum size on 7a loans as much as two and one half times the current size. to 5 million. have you seen any real demand for loans this large from small businesses? or if this is something that is more likely to benefit large banks? >> i have not seen that demand, and i agree that it would be more in tune with larger institutions. >> mr. mccusker, equity capital can be a vitally important part of the small business capital structure. do you think the administration has missed an important part of this solution by focusing only on lending program? >> thank you for the question. i believe that both equity capital and long-term investment

capital weather in the form of equity or long-term debt is a vital solution to the growth of the american economy. absolutely. >> let me ask you, mr. mccusker, have you seen a demand for loans, size, small just $5 million? >> we invest in the areas of 500 to 500,000, 500,000 to $5 million. we see demand for a lot of those every. mostly in longer-term investment capital still, even equity or unsecured debt. not so much in terms of short-term capital. >> do you think the proposal to increase the 7a loans to $5 million is duplicate of what the already to? >> i'm not exactly an expert on what the spl program is but i do know it takes the same amount of

time and effort to do a fight on donald as does a 50,000 our own. so i'm afraid the result may be more money but less loans to last a small businesses. as i understand i am not have supportive of it. >> okay. thank you. >> mr. barton at? >> thank you. increasingly small businesses will be coming to the traditional lenders, the community banks and credit unions. if this recession is like past recessions, the companies that will lead us out of the recession will be small companies. i think they said more than 90 percent of all the new jobs were created in companies of 124 employees, those are really small companies. they will be coming to the

community banks and credit unions. community banks and credit unions as far as i know have made fewer or no subprime loans. they are financially sound. you are different than the banks that have made this plethora of subprime loans that are in financial difficulty. and yet, you are burdened by what may be excessive response to this crisis with the regulatory changes. you are different. why shouldn't you be treated different? if you aren't, i'm afraid that this recovery is going to be stifled. because you will not be able to make a loans that you know would be good loans to the people you know could repay them, that would create jobs that will bring us out of this recession. if you are different, why shouldn't you be treated different? >> i think we should be treated

differently. i think that there should be a two-tier system of sorts that favors community banks. i think in unity banks do not create the problems of wall street, and we would be in favor of relief and we would be in favor of a change in the ad as far as capital ratios are concerned, too. earlier in the panel we are a situation would have been community banks can't attract capital. because the 19th largest banks in the world or backstop by the u.s. government and there is a disparity of too big to fail out there. and so you create a level playing field and i think that needs to be addressed. >> i'd like to respond also come and say, i think in our economy we need banks of all size. and in reality, an awful lot of the misery that was caused by the recession were really from non-related financial institutions, and to a great extent regulated financial institutions regardless of their

size really did not contribute significantly to the downturn. having said that, we certainly applaud a program financial regulation. i don't think that the current regulated institutions, be they large banks, small banks, credit unions, in my opinion there is more than adequate regulatory supervision of those institutions. we would apply some sort of regulatory scheme that is placed on a non-break is a financial institutions that really brought about this problem. >> i would say that the number one thing i would like to see is consistency in the regulations because with the current environment, right now we're getting mixed signals on capital ratios, reserves, they're inconsistent. there's differences and cap pressures even between states, what are being considered the new thresholds, so to speak, even though their unofficial. so there needs to be a consistency. and also needs to be an

understanding that a lot of the examining body at this point has never been through this kind of a downturn, and out of the bank examiners are very young. as a matter of fact, i've been a banker in many cases longer than some of the bank examiners have been a lie. when you take that into consideration their needs to be some common sense applied, some reason. and i'm not saying we have to be regulated differently, just barely. >> congressman, the credit union are being treated differently now because we have an artificial cap on how many loans we can do as a percentage of our assets. as we approach that cap we have capital and resources, but the cap is preventing us from doing more business lending. >> i agree that i think we should, you know, we are being treated differently. and one of the things i wanted to clarify about if we would get into a hypothetical question about -- [inaudible] >> excuse me rex.

>> it is, i feel it is benefiting the borrower. we are out there lending, and -- >> i thought you said there were capture up against from prohibiting making you loans. >> that is correct. okay. let me just say one thing real click here about a hypothetical though. question about the t.a.r.p. funds. and i just want to make sure that my intention there was that because we can't raise capital, it would be nice if we could get that capital injection. and i think that's how we are getting treated. that's also preventing us from growing. and going out and doing what we need to be doing. >> the gentleman's time has expired. >> thank you, mr. chairman. >> mr. droegemeiei think all the left which is disappointed me

from the standpoint that all if you set to their testimony i think would be important for them to listen to you. reminds me of headline i saw in the "washington times" today with regard to the healthcare summit. so i paraphrase. they were listing but they only listen to themselves. so along that line i just kind of curious, the bank folks i know that you have been hammered with fdic insurance premium, and how impact the house that into your ability to lend? >> well, i will take that anytime you lose our earnings, you lose the potential to lend. my fdic insurance premium from 2006 to 2009, at the same level of reading and we had went up 1205%. it went from $36,000 annually, to $444,000 annually. and that is a significant

impact. it impacted me and my ability to lend to my community. so that's how it affects us. >> yeah, from our point of view we've had to cut expenses to pay that fdic premium. it hasn't really impacted our lending ability or our willingness to lend. we simply had to cut expenses to pay the premiums. >> it's had no impact on our lending. >> you're big enough to absorb it. okay. >> it was painful to absorb that, but at the same time the industry stands behind the insurance fund and it was probably necessary. >> mr. grant? >> i would echo similar remark. i think the fdic took pains to make sure the impact was spread over a number of years and again emphasize what mr. andrew said that the fdic fund is always been funded by bankers but it has not cost the taxpayers any money at all. and so just the same as property and casually when there are losses go up, your premiums are going up.

it's early was a tough nut for us. and like ms. nash we've had to cut expenses. we just had a 10 million-dollar check off to the fdic at the end of last year. that hurts you in earnings a bit but you carried on from there. >> just a little? okay. mr. andrews, in reading through your testimony i noticed that you have a couple of ideas there about that operating loss carry back and income tax cap at 35%. would like to elaborate on that a bit on how important you think it is to the viability of community banks and how that impacts lending? >> i think if, so earlier in panel one we actually had a question regarding accounting. and our net loss operating carry bags i think if we were to extend that would be very beneficial. another thing that is come up to bite banks has been deferred tax assets we have a difference between a cruel accounting plus her tax returns, a lot of those

tax-deferred assets have been built up over the years are being wiped out and that's a direct hit to capital. but in my written statement, yes, we are in favor of extinct a net loss carry back so i think that would be very beneficial. >> can you explain the income tax rate cap? >> on so best? sure. on sundays i think that there are a lot of small community banks that are out there that will organize themselves as so best. and obviously of tax cut issues with the corporations that you are earlier were you at a borrower that was in a loss position. so we think we're we were to provide we for the small businesses to form the form sub s accountant and tax breaks, that would help stimulate and make those franchises more typo and also laid into the community. so we are in favor of some relief in the tax society. >> okay. the examiners that were here

made comments to the effect that they were concerned about, or the discussion was okay with regard to the way that they were being advised to do things. and i think one of you, number of you maybe comment about about the disconnect that i was curious, with regards to the examiners that you are experienced with, or have expenses with, are they looking when ever they review your lord untranslatable photo are they looking at what's going on now and going to guess what's happening in the future? with a look at your portfolio now and how you and how you need to be looking at that and try to exceed in that environment? >> i think it is a combination of both. speculative crystal ball? >> they utilize where they want you to stress occur in situations. as i think wasn't indicated earlier. you have a situation where things may be okay now, but as you go through various stress

test, then all of a sudden they deteriorate and then they make the position, because of that prospect of deterioration, want you to go ahead and classified asset and possibly take charges or allow its for it. >> thank you, mr. grant. the gentleman's time has expired. >> thank you, mr. chairman. >> i would like to ask the community bankers here a question and i will start with mr. andrews. we had testimony in the first panel from at least two of your customers collected customers, that the inability of their lenders to make loans was not just a function of lack of demand, but was very importantly influenced by a combination of procyclical regulation by the regulators, wanting more than minimum capital requirements, and basing -- reducing their

lending based on experience that many cases they have caused, combined with a liquid portfolios, asset portfolios, combined with inadequate capital that was caused importantly by appraisals based on distressed sale bags that had caused loans to be classified and reserves to be created that were not necessary based upon any intelligent evaluation of the assets used as collateral. i would like to ask you, to what extent are those three factors influencing your and your members ability to function in this difficult environment? >> including my written and oral testimony, i've touched on those areas. i do think that we're in a tough regulatory and vibrant as i mentioned. you are saying loan loss reserves in increase at dramatic rates. many of my peers will consider them to be excessive levels.

you also are seeing capital ratios being raised by the examiners in the field. in my oral testimony heard where the ratio went from 5 percent to 10%. that limits our ability to lend. it forces us to look at our balance sheet and possibly shrink that. you heard in my oral testimony we have loans of 248 million, which shrunk to 200 million. >> and is that typical to what happened to all of the member? >> i think it is difficult to what happened in various regions of the country, the west coast, oregon, washington, florida. certainly there are states suffering more than others. all my peers that shortly happened with that are crying the blues. it's difficult. >> i would mirror mr. andrews and a lot of his comments that i would say that the regulatory environment is significantly impacting our ability to lend. and i think that some of the

write-downs that are being policed on banks, because of the appraisals dropping, the real estate market is going down significantly. and because of that we are taking more money into reserves. we have a very, very strong reserves. and along with very good capital ratios. but to keep those and maintain those and work through the problem credits it is going to impact the ability for us to borrow. , to lend, to qualified borrowers. >> so if the bank examiners were to value assets at something, approximate fully functioning market values, and we're not doing to insist on excess capital over and above statue, the regulatory requirements, you would be making more low? >> i would be able to make more loans, yes or. >> and the same question to mr. grant smack yes, i would respond in total agreement and had a few other things. the illiquidity, we have circumstances we could come in

as a here are these classified loans that are entering their ability to lend. but yet there is really no avenue for off placing those loans that you have to work through them. and i think the entire day has been added of work you with a small customers. the other thing i would add is the concentration levels, the regulators to require a significant amount of slicing and dicing, if you will, of the loan portfolio. and will suggest that you must not lend any more of this type of loan or that type of loan. is sometimes based on the markets, that certainly could impede it. some of the criteria that they use with the levels of capital, the indicated guidelines, but the time it comes into the field are pretty much requirements. >> ms. nash? i've could only another 40 seconds. >> i will be quick. we have a little bit of a different experience to our regulars have been quite contradictory in terms of building our loan loss reserves and the way we take and analyze

our risk. i think what we do see them is we understand we are imaging, which is expected to be the worst part of the recession of any state in the country. i will get maybe a little bit to california on the and of the table there. but the fact is what we see is there is a future uncertainty risk, and i think mr. grant mentioned that in his comments as well, that we do seek more emphasis on that. we have quite frankly a lot of support about our credit analytics and out credit today. >> my time has expired, but those of you have responded in writing if you wish. i would ask mr mr. baucus. >> one of the things were talked about was the gap in many of the banks did not engage in subprime lending. one thing that we were, i won't say misled by, but we did talk to several large banks and they said we're not doing subprime

lending that but they are unrated athletes were. so i think it's one of the things important about any bank reform is that we do close those gaps in regulation. and if a regulated institution is going to have an unregulated affiliate which can engage in all sorts of risky behavior, and i don't mind risky behavior and leisure going to bail folks out. but you know, that obviously is problematic here so i think -- and i think had we passed in 2005, which some of us proposed, that would license and register all mortgage brokers, we would have at least stop some of the later problems that we see because there were a lot of fraud. my second comment, mr. hoyt, i

want to convey my appreciation to wells fargo for your purchase of wachovia, which included southtrust bank in birmingham and alabama, one of the largest banks. you did so at three times the purchase price that the federal regulators had engineered and agreed to by city. and he did so without any federal loan guarantees. that's something that's never really been looked into, would be an interesting hearing for this committee that the federal, the federal regulators actually came to an agreement to sell a bank for basically a third as they were liquidated, a third of it of what wells came in and offered. and then you did so without any federal guarantees, and that,

that, i commend you. but boy, that's really troubling, that whole deal. and then i think wells was threatened with a lawsuit. for, quote, interfering with federally insured purchase. so i do appreciate that. a lot of people in alabama in did up with three times as much money in their pockets as they would have. they still took a tremendous loss with that. i thank you for that. and i thank all the members of the panel for their attendance today, and we are obviously the country is in a difficult economic atmosphere. and one thing we hadn't mentioned, but as we move forward i do think that in many cases, attempts by this congress and even the regulators to micromanage the economy and

institutions has been counterproductive. because banks are going to make decisions that they think are best for themselves and their customers. and are only going to loan money when they think there is a promise to be repaid, which is good for the banks and delivers. i think we will see some unintended consequences of some of these, not only have we seen it from the target things where we put all sorts of restrictions on it and made it ready unbearable, but we are seeing it maybe from the credit card legislation, and the pending on what we pass, what the senate sends back to the house and was passed on financial regulation, i think you're going to see that the congress may do more harm than good, which is often the case. but i do appreciate your attendance, and i wish you well because viability and the strength of the financial

industry is essential for properly function economy. thank you. >> i would like to thank and at go the ranking member's comments, and to thank all of you for being here. we are sorry we did have a folder panel. maybe you aren't, people here asking you questions, but very much appreciate you being here. your thoughtful comments, and i would ask unanimous consent that all members have 30 legislative days to submit stements, and other extraneous material for the record. with that, thank you all again. the hearing is adjourned. [inaudible conversations] [inaudible conversations]

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>> federal reserve chair ben bernanke on the semiannual monetary policy report. held yesterday by the senate banking committee, this hearing is just under two hours and 45 minutes. >> the committee will come to order. let me welcome all who were here this morning for the committee hearing. hearing on the semiannual report to congress by the chairman.

we welcome you wan once again te banking committee, and i will make a brief opening statement and turn to senator shelby. for any comments you may make, and then we will turn right to you, for your opening comments and get to some questions. we thank you once again for joining us here this morning. today as you testify before us, mr. chairman, take a moment to recognize that our economy is showing signs of returning from this recession. during the last two quarters gdp has shown positive growth as the gross private domestic assets growth private domestic investment. financial markets have stabilized enough to allow the fed to wind down to all the liquidity facilities and established in response to this crisis. that doesn't mean that our economy is out of the woods as we all know. more important it doesn't mean that the situation of working families has improved dramatically either. households and small businesses dependent on banks are financing continue to have trouble getting the loans that they need.

commercial real estate losses continue to mount. and combined with losses on home mortgages, they are making credit crunch even worse. outside of securities guaranteed by the federal government the residential and commercial markets for mortgage-backed securities are practically nonexistent. foreclosures continue to plague our communities, at greater and greater rates and a large inventory of foreclosed homes continued to suppress the housing market and discouraging new construction. worst of all, mr. chairman, the job market continued to suffer from the losses incurred during the recession. we've lost 8.4 million jobs since december of 2007. the unemployment rate stands at 9.7%, although many of us would argue that number is that has in excess of that in many areas of the country. and it is widely expected that it will remain high for several years to come. an astonishing 6.3 million american workers have been out of a job for over a half of you

are more. that is a record in our nation. the state of our economy as a whole may be improving, but if we're talking about the situation of ordinary american families, i think i can sum up this recovery in three words. not good enough. i think most would agree that the longer we go without resolving these problems, the worse off we will all be. unemployed americans will continue to lose their health insurance and their homes. skills will begin to deteriorate, leaving us less competitive in the global economy. those who do have jobs will see their wages stagnate that our country will suffer as a result. this congress has able to play in putting people back to work. would have responsibly to put protections in place to make sure that the crisis like this never threatens our financial system again. our committee is made important progress. and my hope is that we'll have a financial reform bill ready in the coming days. mr. chairman, to also have a role to play in august as you know. i have been impressed by your leadership keeping the american economy from falling into the of this. you deserve a great deal of credit for having contributed so significantly to that resulted

it's now time for you to show the same kind of leadership in helping us and the american families along with those of us on this side of to achieve the same thing, to come out of this abyss and come back out on her feet again. i look for to working with you in the coming days. i know all of my colleagues will. as many of my colleagues know, having filled in this seat for ted kennedy as chairman of the health and education in the committee, i have another place to be this morning, the white house. sit there and resolve healthcare. which i'm confident we will do here this 40. i didn't see any smiles around the table here on that prediction. so i'm going to be leaving shortly, but i want to take, i'm going to abuse my chairmanship for a minute that i will ask a question because i will get a chance in the normal process. but in light of what's happening in greece, i wanted to raise an issue because matters have risen. i raises and you can either respond quickly to arrival go to

senator shelby. i haven't done this before, but given with my promises or more has to be. the debt crisis, mr. chairman, increases shedding light on the role of derivatives and the financial markets. according to news reports this morning and over the last several days banks and hedge funds are using credit default swaps to bet that greece will default on its debt. the rise in price of these contracts contributes to an amateur of crisis make it even more difficult for the greek government in my opinion to borrow. since there's no requirement that purchasers of credit default swaps own any of the underlying debt, we have a situation which major financial institutions are ever fight a public crisis for private gain. i want to ask you whether or not there ought to be limits on the use of credit default swaps to prevent the intentional creation of runs against governments. do you have any quick comment on that? >> yes, senator cummings wants a first of all we're looking into

a number of questions related to goldman sachs and other companies and their derivative arrangements with greece. and this issue as well. credit default swaps are properly used as hedging instruments. >> i agree. >> the sec of coors has been interested in this issue obviously. using these instruments and a wave that is counterproductive. and i'm sure the sec will be looking into that. we will shortly be evaluating what we can learn from the activities of the holding compass that we supervise here in the u.s. >> let me make the request of you here. i'm sure i'll of us on this committee would like to very quickly what the response is going to be if any from you our recommendations he would make it was from the sec. i will make that former request this morning. it's a critical issue for all of us. senator shelby? >> thank you, thank you chairman don. thank you to the committee, mr. bernanke, again. as our financial markets begin

to show signs of improvement, many of the fed's temporary many facilities have been allowed to expire and monetary policy has begun to normalize. and while use of the temporary lending facilities wayne expanded purchases by the fed a federal agency debt mortgage-backed securities and the longer-term treasuries of security staff kept the size other than to balance sheet unusually large. as of last week, it's my understanding that the banks had over 1.2 trillion in reserve balances and federal reserve banks. that is more than 100 times the average level of such balances in 2006. this morning i am interested in hearing, mr. chairman, plans for reducing the size of the fed's balance sheet, with run a story liquidity support from the banking system, and continuing the normalization of monetary policy. in addition, i believe, mr. chairman, you should tell us how the fed plans to use interest on

reserves as a monetary policy and how you intend to use repurchase agreements to address reserves in the banking system. finally, the committee i believe should gain a better understanding of how the fed and the treasury department intend to manage the fed's balance sheet. i think this is especially well of and given tuesday's announcement by the treasury that it anticipates selling security and injecting around $200 billion into the department's supplemental financing account at the fed over the next two months. mr. chairman, while there are signs of improvement in the economy, conditions remain weak, especially in labor markets. too many americans are unemployed, underemployed. because a credible plan for fiscal balance and monetary policy are essential for economic recovery, we need to have transparency and clarity about the federal reserve's plants. i hope this morning, mr.

chairman, that you will provide that clarity. thank you. >> mr. chairman, the floor is yours. >> thank you. chairman dodd, ranking never shelby and other members of the committee, i am pleased to present a report to congress that i'll begin today with some comments and the outlook for the economy, for monetary policy, and in touch with on several important issues. although the recession officially began more than two years ago, u.s. economic activity contracted particularly sharply following the intensification at the global financial crisis in the fall of 2008. concerted efforts by the federal reserve, the treasury department and other u.s. authorities to stabilize the financial system together with highly stimulative monetary and fiscal policies helped to arrest the decline and are supporting and nation's economic recovery. indeed the u.s. economy expanded at about a 4% annual rate during the second half of last year. a significant portion of that growth can be attributed to the progress that firms made in

working get unwanted inventories of unsold goods which lets them more willing to increase production. as the impetus provided by the inventory cycle is temporary, and fiscal support for economic growth likely will diminish later this year, a sustained recovery will depend on continued growth in private sector final demand for goods and services. private final demand does seem to be growing at a moderate pace. more in part by general bolden of financial conditions. in particular consumer spending has recently picked up reflecting gains in disposal income and household wealth and tentative signs of stabilization in the labor market. business investment in equipment and software has risen significantly. international trade supported by our recovery in the economies of many of our trading partners is rebounding from its deep contraction of a year ago. however, single family homes which rose knows with his last spring have recently been roughly flat. commercial construction is

declining sharply, reflectinreflecting poor fundamentals and continual difficulty in obtaining financing. the job market has been especially hard hit by the recession. as employers we acted too sharp declines by deeply cutting their workforce in late 2008 an end to thousand nine. some recent indicators suggest a deterioration in the labor market is a baiting. job losses have slowed considerably and the number of full-time jobs and manufacturing rose modestly in january. initial claims for unemployment insurance have continued to trend lower, at the tip resources industry often considered a bellwether for the employment outlook has been expanding steadily since october. notwithstanding these positive signs the job market remains quite week with the unemployment rate near 10% and job openings scarce. a particular concern because of its long-term implications for workers at skills and wages, is the increasing incidence of long-term unemployment. indeed, more than 40 percent of

the unemployed have been out of work for six months or more. nearly double the share of a year ago. increases in energy prices resulted in a pickup in consumer price inflation in the second half of last year. but no prices have flattened out over recent months and most indicators suggest that inflation will likely remain subdued for some time. slack in labor product markets has reduced wage and price pressures in most markets, and sharp increase of productivity have further reduced producers unit labor costs. the cost of shelter which receives a heavy weight and consumer price indexes is rising very slowly with a king high vacancy rates. in addition, according to most measures, longer-term inflation expectations have remained relatively stable. the improvement of financial markets had that began last and continues. conditions in short-term funding markets have returned to near pre-crisis levels. many most of our difference have been able to issue corporate bonds or new equity and do not

seem to be hampered by lack of credit. in contrast bank lending continues to contract, reflecting both tightened lending standards and we demand for credit a bit uncertain economic prospects. in conjunction with the january meeting of the, boardmember sandbank presents prepared projections for economic growth, unemployment and inflation for the years 2010 through 2012 and over the longer run. the contours of the forecast are broadly similar to those i reported to the congress last july. the participants continue to participate a moderate pace of economic recovery with economic growth of roughly three to 3.5 percent in 2010, and 3.5 to 4.5 in 2011. consistent with moderate economic growth participants expect the unemployment rate to decline only slowly. to a range of roughly 6.5 six-point five to 7.5 percent by the end of 2012. still well above their as that of the long been sustainable

rate of about 5%. installation is expected to remain subdued. in the longer-term inflation is expected to be between one and three quarters and 2%. the range that most participants judged to be consistent with the federal reserves still mandate of price stability and maximum employment. over the past year the federal reserve has employed a wide array of tools to promote economic recovery and reserve price stability. the target for the federal funds rate has maintained at historically low range of zero to 1% since zero untrendy simmer 2008. they continue to participate economic conditions including low rates and resource utilization some good inflation trends and stable inflation expectations are likely to work exactly low levels of the federal funds raised for an extended period. to provide support to mortgage lynn and housing markets and to

improve overall conditions and private credit markets, the federal reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. we have been gradually slow in the pace of these purchases in order to promote a smooth transition and markets and anticipatanticipate that the transaction will be complete by the end of march. the fomc will continue to if i would its purchases of securities in light of the evolving economic outlook and conditions in financial markets. in response to the substantial improvement in the functioning of most financial markets, the federal reserve is winding down a special liquidity facilities it created during the crisis. on february 1 a number of these facilities including credit facility for primary dealers, lending programs intended to help stabilize money market major funds and paper market, and temporary liquidity swap lines with foreign central banks, were all allowed to expire.

the only remaining flinty program for multiple borrowers created under the federal reserves emergency authorities is the term asset-backed facility, or talf, and is scheduled to close on march 31 for loans back but all types of collateral except for newly issued commercial mortgage-backed securities and it will close on june 34 loans backed by newly issued cmbs. >> in addition to closing its special facilities the federal reserve is normalizing its lending to commercial banks to the discount window. the final auction a discount window funds to depositories to the term auction facility which is great in the early stages of the crisis to improve the liquidity of the banking system will occur on march 8. last week we announced the maximum term of discount window loans which was increased to as much as 90 days during the crisis would be returned to overnight for most banks as it was before the crisis erupted in august 2007. to discourage banks are relying on the discount window rather than private funding markets for

short-term credit, last week we also increases the discount rate by 25 basis points, raising the spread between the discount rate and the top of the target range for the federal funds rate to 50 basis points. these changes like the closure of most of the special many facilities artist this month, are in response to the improve function of financial market which is reduce the need for extraordinary assistance from the federal reserve. these adjustments are not expected to lead to dire financial conditions for households and businesses and should not be interpreted as signaling any change in the outlook for monetary policy. which remains about the same as it was at the time the january meeting of the fomc. >> although the federal funds rate is likely to remain exceptionally low for an extended period, as expansion matures, the federal reserve what's important to begin to tighten monetary conditions to prevent the department of inflationary pressures. notwithstanding the substantial increase in the size of its balance sheet associate with its purchases and treasure and

agency securities, we are confident that we have the tools we need to firm at the appropriate time. most importantly in october 2008 the congress gave statutory authority to the federal reserve to pay interest on banks holding and reserve balances at federal reserve banks. by increasing the interest rate on reserves, the federal reserve will be able to put significant upward pressure on all short-term interest rates. actual and prospective increase in short-term interest it will be reflected in turn in longer-term interest rates and a financial conditions more generally. the federal reserve has also been developing a number of additional tools to reduce the large clergy of reserves held by the banking system. which will improve the federal reserve schedule a financial conditions by leading to a tighter relationship to the interest rate paid on reserves and other short-term interest rates. notably, our operational capacity for conducting reverse repurchase agreements, a tool that the federal reserve has historically just absorb reserves and banking system, is

being expanded so that such transactions can be used to absorb large quantities of reserves. the federal reserve is also currently refining plans for a deposit is that i can convert it portion of the holdings in reserve balances into deposits that are less liquid and cannot be used to make reserve requirements. in addition the fomc has an option of reading or selling securities as a means of applying monetary restraint. of course, the sequencing of steps and accommodation of tools that the federal reserve uses as it exits from its current very accommodative policy stance will depend on economic and financial developments. i provided more discussion of these options and possible secrecy in recent testimony. the federal reserve is committed to ensuring that the congress and the public have all the information needed to understand our decisions and to be assured of the integrity of our operations. indeed, on matters related to the continent of monetary policy the federal reserve is already

one of the most transparent central banks in the world. providing detailed records and explanations of its decisions. over the past year the federal reserve also took a number of steps to enhance the transparency of its special credit and liquidity facilities, including the provision of regular extensive reports to the congress and the public. and we have worked closely with the gao, sigtarp, the congress, and private-sector auditors and a range of matters related to these facilities. by the emergency credit and liquidity facility for important tools for implement monetary policy during the crisis, we understand the unusual nature of those facilities creates a special obligation to assure the congress and public of the integrity of their operation. accordingly, we would welcome our review by a gao another reserves management of all facilities created under emergency authorities. in particular we support legislation authorizing the gao to audit the operational integrity, collateral policies, use a third party contractors,

accounting, financial reporting, and internal controls of these special liquidity and facilities. the federal reserve will of course cooperate fully and actively in all reviews. we are also prepared to support legislation that will require the release of the entities of the firms that participate in each special facility after an appropriate delay. it is important that the release of car after a lag that is sufficiently long that investors will not get institutions use it with these facilities as a possible indication of ongoing financial problems. thereby undermining market confidence in the institution or discouraging use of any future facility that might become necessary to break the u.s. economy. and appropriately would also allow for adequate time to inform investors through annual reports and other public documents of their use of federal reserve facilities. looking ahead we will continue to work with the congress in identifying approaches for enhancing the federal reserve transparency that are consistent with our statutory objectives of fostering maximum employment and

price stability. in particular it is vital that the conduct continue to be insulated from short-term political pressures so that the fomc can make policy decisions and the longer-term economic interests of the american people. moreover, the company shall be a discount with a link to individual depository institutions must be maintained so that the federal reserve continues to have effective ways to provide liquidity to depository institutions under circumstances were other sources of funding are not available. the federal reserve's ability to inject liquidity into the financial system is critical for preserving financial stability and for support depositories key role in meeting the ongoing credit needs of firms and households. strengthening our financial regulatory system is a center for the long-term economic stability of the nation. among the lessons of the crisis are the crucial importance of macro potential regulation. that is, regulation and supervision and at addressing risks to the financial system as

a whole. and in the four infected consolidated supervision of every financial institution that is so larger interconnected that its failure could threaten the function of the entire financial system. the federal reserve strongly supports the congress' ongoing efforts to achieve comprehensive financial reform. in the meantime, to strengthen the federal reserve's oversight of banking organizations we've been conducting an intensive self-examination of our regulatory and supervisory responsibilities and have been actively into many improvements. for example, the federal reserve has been played a key role in international efforts to toughen capital and liquidity required for financial institutions. particularly systemically critical firms and women taking the lead in ensuring that the compensation structures at banking organizations provide appropriate incentives without encouraging excessive risk-taking. the federal reserve is also making fundamental changes and a supervision of large complex bank holding companies both improve the effectiveness and

supervision and to incorporate a macroprudential oversight to that goes beyond the traditional focus on safety and soundness of individual institutions. we are overhauling our supervisory framework and procedures to improve coordination with an old supervisory staff and with other supervisory agencies and to facilitate more integrated assessment of risks within each holding up and across groups of companies. last spring the federal reserve led the successful supervisory capital assessment program, but operate known as the bank stress test. an important lesson of the program combining on site bank examination with a suite of quantitative and analytical tools and great improve comparability of the results and better identify potential risks. in that spirit the federal reserve is also in the process of developing an enhanced quantitative surveys program for large bank holding companies. supervisor information will be combined with firm level market-based indicators and aggregate data to provide a more complete picture of the risks

facing these institution and the broader financial system. making use of the federal reserve's unparalleled breadth of expertise, this program will plot a multidisciplinary approach that involves the economist, specialist in particular financial markets, and other professionals as well as bank supervisors. the recent crisis is also underscored the extent which direct involvement in the oversight of banks and bank holding companies contribute to the federal reserve's effectiveness in carrying out its we thought about it at the central bank that including the monetary policy and management of the discount window. but most important is the price is once again demonstrate, the ability to identify and address the threats to financial stability depends critically on the information, expertise and powers that it has by virtue of being both a bank supervisor and a central bank. the federal reserve continues to demonstrate its commitment to strengthening consumer protection in the financial services arena.

since the time of the previous monetary policy report in july the federal reserve is propose a comprehensive overhaul of the regulations governing consumer mortgage transactions. and we are collaborate the department of housing and urban development to assess how we might further increase transparency in the mortgage process. we have issued rules intimate enhance consumer protections for credit card accounts and private student loans as well as new rules to ensure that consumers have meaningful opportunity to avoid overdraft fees. in addition, the federal reserve has ever been an expanded supervision program for non-bank subsidiaries of a bank holding congress and foreign banking organizations. more generally the federal reserve is committed to doing all that can be done to assure that our economy is never again devastated by a financial collapse. we look forward to working with the congress to develop effective and comprehensive reform of the financial records were framework. thank you. >> thank you, mr. chairman.

is there an agreement that the five minutes will be enough on the clock? if so, i don't want to be outwardly rigid, but so be it. jeremy bernanke, the weather has been unusually harsh across the country the past month. . .

>> we will have to be particularly careful about interpreting the data we receive for january. as congress grapples with the need for job creation and the need to reduce deficits and national debt, can you talk about the impact of unemployment and the budget imbalance could have on inflation? >> well, currently, senator, inflation looks to be subdued. we are not expecting inflation to rise in the near or medium-term. on the one hand the unemployment and the low use, the low rate of

utilization of labor has been, of course, keeping wage gains very low, which of course, from a worker's perspective is a problem. from the perspective of employers they're seeing both very slow wage growth and because of all the cuts and cost-cutting measures they are also seeing very strong increases in productivity, which is quite remarkable. the combination of slow wage growth and high productivity gains means that the labor costs, the cost of production is, if anything, falling. so that together with the very weak demand means that firms have very the ability or incentive to raise prices, which would, of course, tends to moderate inflation. on the deficit, the impact on inflation in the near term, i think, is limited, of course. it is important that congress, the administration find a solution to our longer-term debt

problems. otherwise it is conceivable, and i'm not anticipating anything in the near term, but it is conceivable it could lead to a loss of confidence in the u.s. economy, interest rates, the value of the dollar, and those things could directly or indirectly affect the state of the economy, recovery, and the rate of inflation. >> as the federal reserve begins to wind down mortgage-backed securities what steps, if any, are needed to ensure stability in the housing market transition? >> well, as you know, senator, we are at this point planning to end our purchases at the end of this first quarter. a question is what extent will mortgage rates be affected by the end of our purchases. of course, even though we have stopped purchases we are still maintaining our balance sheet of one and 1/4 trillion dollars of

mortgage-backed securities. we believe the holding of the securities of the market in itself will tend to keep mortgage rates down. we don't know for sure how much mortgage rates will respond to our leaving the market. so far there is little evidence. obviously we will have to keep monitoring that. if there is a response that seems to threaten the broader economic recovery we certainly would be there to review that decision. again, at the moment it doesn't seem to be a large change in the mortgage rates or in the the effect on housing. >> january 26, 27, 2010, open market committee meeting indicates that as core measure soon have been stable, they also indicate the headline inflation

to the core index to jump down by unusually sharp house prices. do you think that potentially higher future indicating housing costs pose an inflationary threat to in the medium run? >> we believe that the underlying trend of inflation given the stable expectations and the very weak economy looks to be subdued. of course we monitor energy and commodity prices very closely and they can vary substantially depending on, for example, the strength of local recovery. recently energy prices have been roughly stable. futures prices don't indicate that expectation of sharp increases in the near term. again, we will continue to

monitor prices, but currently, at least, they are not presenting a major inflationary threat. the very high vacancy rates in properties are keeping rents down, as well as vacancies in homes as well. our anticipation is that costs are going to remain quite subdued for some time. >> chairman bernanke, this committee continues, as you well know, to wrestle with financial reform and the role of the fed has been a significant part of that debate, as you are well aware. chairman dodd has previously proposed stripping the bed of its regulatory authority allowing you and your colleagues to focus on the monetary policy, lender of last resort and payment system functions and so forth. on the other hand some on the committee have argued in favor of allowing the fed to retain some type of regulatory

authority over the largest institutions, perhaps some of the others. what do you see, how do you see such an approach as a net positive or net native here? what would you do as chairman of the board of governors of the fed if you were, if the will of congress was to give the fed another opportunity to be a regulator what would you changed considering all the problems that we have had in the last seven years in the process? >> thank you, senator. as you know i think that stripping the federal reserve of supervisory authorities in light of the recent crisis would be a great mistake for several reasons. first, we have learned from the crisis large complex financial firms that pose a threat to the stability of the financial system needed strawn,

consolidated supervision. they need to be seen and overseen as a complete company reflecting the developments not only in their bank, but also the securities, and all the various aspects of their operations. a bank supervisor which focuses on looking at credit files is not prepared to look at the wide range of activities of a complex international financial firm. the federal reserve, in contrast, by virtue of its efforts to monitor policy has financial markets, payment systems, economics, and a wide range of areas other than just bank supervision. in our stress test we generated that we can use the full range of malta disciplinary skills to do a better job of consolidated oversight. the same token we need to look at systemic risks. systemic risks span across companies and into various markets. there again you need an institution that has a breadth of skills. it is hard for me to understand

why in the face of a crisis that was so complex you would want to take out of the regulatory system the one institution that has the full breadth and range of those skills to address those issues. let me mention your second point. a think your point is very well taken. as i discussed in my testimony we have taken very, very seriously both changes in our performance, changes in the way we go about these provisions, and changer in the structure of supervision. we have made very substantial changes in order to increase the quality of our supervision, our ability to look for systemic risk, and to use a multi disciplinary cross expertise platform to look at these different issues. we are very committed, and i would be happy to discuss with you through a letter or individually in more detail. if i might just have one more

second, the federal reserve made errors and mistakes in the the supervisory function, but we were hardly alone in that respect. >> what have you learned, i guess that is the question. what have you learned? >> we have learned several things. we have learned, first, that regulation needs to be tougher. we have led the effort to strengthen capital requirement, liquidity requirement, to put more controls in to these companies. we have learned that we need to have a more risk and systemic oriented approach. we have gone at this very extensively. >> mr. chairman, i want to briefly did in to the size. the administration recently proposed, as you well know, that limitations being imposed on bank and bank holding companies with respect to trading activities including proprietary

trading, the administration also proposed placing limitations on what was referred to as the shares of larger financial firms. what are your views on the proposal for limited excessive growth for firms with liabilities the power as some people have suggested? would you need legislature? >> center, i think we would all agree that we at we don't want companies taking excessive risks when they are protected by the government. that is very important. there are multiple ways to address those risks. capital requirements. as well as, for example, restrictions on executive compensation which affect the willingness to take risk.

if you go about imposing the voelker rule, i think it would be difficult to do on a purely legislative basis because of the potential for unintended consequences. so while on the one hand you may want to restrict purely proprietary trading, appropriate hedging behavior. you have to be careful of the unintended consequences. hedging, market making, customer activities can involved ownership of securities for at a time. i do think if you want to go in that direction you should at least allows some role for the supervisors to make determinations about individual activities. i think it would not be inappropriate if a supervisor determines a company does not have the managerial or risk capacity to appropriately manage

an activity for the supervisor to be able to restrict that activity. that would argue we have that ability to some extent now. if congress wants to reinforce that, it could not hurt. >> thank you, mr. chairman. >> senator reid. >> thank you very much, mr. chairman. the follow-up, how would you implement if you were to do it through your regulatory process? >> we would do it as part of our overall risk management assessment. we would look at the range of activities that the company engages in. there might be some activities that would be specifically prohibited by legislation, perhaps owning a hedge fund, for example. there are other activities, such as purchasing credits desalt swaps. i think it would be appropriate for the supervisor to, first of

all, ascertain that the use of credit default swaps is primarily intended to hedge other positions and therefore is overall a net reduction in risk for the company as opposed to an increase. secondly, even if the purposes of the program are in some sense legitimate there is still the question of whether the company has adequate managerial risk management resources to properly manage those risks. what we saw in the previous crisis, this is one of the things we really learned. many large and complex companies did not understand the full range of risk they were facing. as a result they found themselves exposed in ways they did not anticipate. if the company did not have strong risk management controls and a strong culture of all of system enterprise wide risk management it would be the

supervisor requesting either substantial strengthening in those controls or eliminating those activities. >> those controls are much more rigorous today. they tend to erode over time. particularly as these crises. and also the capacity of the regulatory to make very nuanced judgments about management. there is really a question of capacity as well as managerial capacity. simply sort of letting you do what you can do now. >> certainly congress can provide guidance about what they would like to see shutdown or make specific statutory recommendations or laws.

another -- i'm sorry, i lost my train of thought. oh, yes. i think another part of the reform package that is very important is the revolutionary authority in measures taken to address the too-big-to-fail problem. you can address the too-big-to-fail problem and get market discipline affecting firms so that investors will have an incentive to try to evaluate the risk taking of those firms, that will be an additional factor helping the regulators and the firm itself make the decision. >> underlying this discussion of the vocal rules is a more general principle, i think. that is what risk should taxpayers support. i think as a consensus that traditional commercial banking, everything has a risk. it has historically been supported, and should be supported. the ability to access your

credit facilities and your authority under 133 by large financial institutions whose primary activity is not commercial banking but proprietary trading and inherently riskier. the rich question of whether they should have that access. that's at the heart of the rule. your point about too-big-to-fail, the size has not been indicative of the capacity to fail. again, there is real questions that we have to wrestle with as a policy that you will implement whether we are going to with taxpayers' money support very probable risk-taking activities and catastrophic activities. >> well, senator, as an example basically killed by interest-rate risk.

today they would need to be able to securitized the loans that they made, or they would be able to hedge that interest-rate risk. i think we all agree we don't want excessive risk-taking, particularly on a tails i win, heads you lose basis. there are some legitimate purposes for using securities. we just want to make sure. >> i recognize the difficulty of sorting out a proprietary debate. you don't have the staff, frankly, to do that, to keep up with every trading platform. that is why i think there has to be a simpler approach. these organizations are so large in terms of their trading diversity and commercial banks that they may not qualify for the same type of support. >> thank you, mr. chairman. thank you for being here. on the discount rate increase how much landing is currently

outstanding at the discount window? i don't want to know the people, i just want to know the amount. >> i believe it is on the order of 17-$20 billion. >> if that is the case says there is so little discount window borrowing going on the increase in the discount rate seems to be more for show than for substance. on top of that you and the fed have gone out of your way to downplay the importance of that. why should anyone take that move as a sign that you are serious about taking away the punch bowl at this time? >> well, senator, what we have been trying to do is to eliminate the extraordinary support that we have provided financial markets. we had a wide range of programs that try to address the dysfunction in the commercial paper market, money market mutual funds coming interbank markets, and a variety of others.

as i mentioned on my testimony we shut down most of those programs. by june and we will have no morf these 133 programs. >> except what senator shelby brought up. on tuesday the treasury announced that they were starting up a supplemental financing program again under $200 billion. under that program treasury issues debts and deposits the cash with the fed. that is an effective same thing as the fed issuing its own debt, which you know is not legal. let me finish with the question and you can answer. what are the legal grounds that the fed and treasury use to justify that program? did anyone in the fed or treasury object when the program

was created? >> well, legally we are the fiscal agent of the treasury, and we hold treasury balances for all kinds of purposes. >> but they are not allowed to issue debt, the treasury. >> the treasury is allowed to issue debt. >> on its own? >> the issue bills and other kinds of debt all the time. >> yes. the treasury notes, treasury bills, treasury two years, five years, ten years. but you are buying, you buying their debt. >> we are paying them interest on their deposits in our balance sheet. >> okay. that isn't the answer i wanted. given what you learned during the aig crisis and the bailout do you think congress should be doing something to address insurance regulation or the

commercial paper markets? >> well, senator, i think aig is the poster child for first consolidated supervision. it did not have a strong consolidated supervisor that was paying attention to its activities. that is very important to do. secondly -- >> were those ones in england? >> no, those were the ones, the credit default swaps, the financial products division. >> weren't they located in london? >> well, they were in any case accessible to u.s. regulators. >> i didn't ask that question. i said didn't aig have an office in london that did those things? >> it had some foreign offices. i believe the financial products division is headquartered in connecticut. >> okay. go right ahead. >> so, again, to address aig

issues you need a strong consolidated supervisor that can identify those kinds of risks, and you also need some methodology. i think you would agree that you don't want to have too-big-to-fail firms. we don't want the fed involved in these bailouts. we need an alternative structure. i know this committee is all considering alternatives that would allow the governments, including the fed, to wind down a firm like this in a crisis in a way that would not bring down the overall financial system. i think that is a very important direction. >> does any other fed governor have their own staff? >> the staff of the the federal reserve works for all of the governors. >> that is not my question. >> not dedicated. >> do you think they should? >> we work collectively.

>> do the fed governors have access to the board's staff recommendations or do they only get to see the recommendations you approve? >> they see the staff recommendations. >> they do? >> yes. >> have you ever tried to change or influence staff recommendations before they were presented to the board? >> not final recommendations, no. >> your e-mails tell us differently. >> you are referring to an e-mail where a preliminary draft by a couple of autonomous -- >> it was the fed staff, it was bad staff. it was, indeed, fed's staff recommendations because it was a graph done by several people in the division not by the leadership of the staff. was in any case the recommendation that was outdated by changes in circumstances.

>> that was your opinion. >> yes, sir. >> i have more. i passed my time. >> senator. >> thank you very much. i want to welcome chairman bernanke back to the committee and also to congratulate and welcome him, wish him well in his continued tenure as the chairman of the board of government of federal reserve. we both share a commitment to improving the lives of working families by better educating, protecting, and empowering consumers. chairman bernanke, chairman dodd, and other members of this committee helped develope and enact meaningful reform

legislation. i am proud that law includes provisions for my credit card minimum payment warning which will provide consumers with detailed personalized intimation of their billing and it make access to a reputable credit counseling services. consumers will learn the true cost of making the minimum payments and how long it will take for them to pay off their balance if they only make minimum payments. consumers also provided with the amount that they need to pay to eliminate their outstanding balance within 36 months which is the typical length of debt management plan. this is information that was recently started occurring on statements. my question to you is, how will

the personalized credit card minimum payment information influence the behavior of consumers, and also what additional personalized disclosures pertaining to other financial service products would enable consumers to make better informed choices? >> senator, i congratulate you on those contributions. as you know, the federal reserve developed extensive disclosures for credit cards as well as some rules which were very extensively incorporated in the congressional bill that passed and was signed by the president. obviously as you point out the more information you can provide consumers the better decisions they can make and the kinds of information about minimum balances, time to pay off, the

cost of the card, the penalties they might face, those are the kinds of things people need to shop. if they can shop the market becomes more competitive and you get a market that better serves consumers. we have been very focused on the disclosures of information. we have, in our disclosure reform that we did earlier -- i don't see senator schumer here today, but there is the so-called schumer box which has a list of the key features of the account. we have spent a lot of work on that to make it easier to read and more understandable for consumers. one of the innovations is the use of consumer testing. we have gone out. instead of having lawyers figure out what we should be putting in the disclosures we have gone out to shopping malls and had people look at disclosures and tested

them to see how much they understand and maintained. we are improving the ability of folks to understand what they're buying and encouraging them to shop around to get a better deal. again, i congratulate you on your contributions to this and on your longstanding support for financial literacy and for clearer disclosures. >> mr. chairman, unfortunately investment banks, credit card issuers, and predatory lenders through there excessive bonuses and treatment of consumers are giving the term bank an even greater negative connotation. i am afraid that abused consumers may continue to underutilized main street financial institutions. after having grown up in a non-bank home i personally know the challenges. many community banks and credit

unions provide vital financial services to working families by providing opportunities by saving, borrowing, and low-cost commitments. the question is why is the attempts to encourage under bank to utilize main street financial restitutions more? >> well, senator, as you well know for various reasons lack of information, cultural reasons and so on, many minority or immigrant communities don't make much use of the regular banking system. the cost of that is they maybe find themselves paying much more for check cashing or short-term borrowing or other services that they need. in most cases there would be better off in a mainstream

financial restitution. .. >> so i think it's very important that mainstream financial institutions continue to reach out to people in their communities, including minorities and immigrants, to

attract them to use of mainstream financial services. >> thank you. thank you, mr. chairman. >> senator dual hasn't. >> mr. chairman, good to see you again. mr. chairman, let me start out and say that i think we've done some good work as we've tried to move through regulatory reform. i think everybody, quite honestly, has learned from the mistakes of the last years, no doubt about that. but i must admit i have a concern about something that i think is shared by probably everybody here, maybe a little sensitive, but i want to ask about it. and that's fannie and freddie. we have spent a lot of time talking about too big to the

fail and looking at private companies and how gigantic they had gotten and how that really put us in a box. and in the end the taxpayers got put on the hook for that. isn't fannie and freddie the government version of that too big to fail, and how do you get out of that box? >> well, senator, first as i'm sure you know, the federal reserve has a long record of warning about the dangers of the structure of fannie and freddie. there are numerous dangers including conflicts of private and public interest, and most notably, insufficient capital to support the very large portfolios that they held. and, in fact, it turned out they didn't have enough capital, and now the u.s. government, the taxpayer is subject to substantial cost.

right now we're kind of in no man's land. fannie and freddie are in conservatorship is. they are being, they are part of the government's efforts to maintain the housing market because there really is no other source of mortgages at this point, or mortgage securitization. but certainly this is not a sustainable situation, and i think it is very important that we move towards clarifying the longer-term status. there are numerous ways to go. i've talked about some in a speech, but to give two examples, one would be a privatization approach which might allow the privatized firms that securitize mortgages to purchase insurance from the government for the mortgages that they package and sell. another possibility would be just to acknowledge that these are government utilities and incorporate them with fha and

other government agencies. those are two very different approaches, but both of them have the advantage of eliminating this platte pus kind of, you know, neither fish nor fowl status those firms have now. >> neither approach would eliminate the exposure that the taxpayer faces, would you gee with me there? >> well, for example, if you had a situation where privatized firms were not allowed to hold large portfolios which is a major source of the risk, first, and secondly, that they paid actuarially-fair premiums to the government as opposed to the implicit support they had before, there would still be risks to the taxpayer, but at least there would be some compensation, some premiums being collected. >> in effect, it sounds to me like a government liquidation, and i don't know that i'd want to personally buy into that, but i guess as a taxpayer we would all end up buying into that. but it's a huge number, isn't

it? it's probably a trillion dollar plus of exposure. >> well, depends how you count exposure. of course, the mortgage-backed securities outstanding are in the trillionses. >> yeah. >> the, the government's commitment at this point is a couple hundred billion into those institutions. >> yeah. let me, also, draw your attention to something, and i'm running out of time here, but i was just catching up on some things, and i noticed today that first-time unemployment filings are, they've increased. that was not expected. durable goods orders have fallen the most since august, that is not a good sign, and that excludes, i think, transportation. the market has responded by dropping at least at this point by 160, and i appreciate the market can have up days and down

days. i'm starting to read more and more articles about the national debt interfering with economic recovery. and yet i don't see an effort to slow that down here. in fact, if we were just to stand down and say, okay, we'll adopt the president's plan, there's trillion dollar deficits over the next decade. can't imagine how that turns out for, you know, i'll be 70 years old the next decade. i'm not going to live long enough to pay that off. that means -- or pay that off. my children and grandchildren are going to have to deal with that. i'm beginning to wonder, mr. chairman, and i, i don't want this to sound overly pessimistic, but i'm beginning to wonder whether low interest rates really have any possibility of spurring this economy. and i'll tell you what i'm thinking about, and you may not even have enough time to respond.

unless there is demand, unless we can get consumers back into it, it just seems very unlikely to me that you're going to see much growth. i talk to people who handle the freight, the railroads, the trucking companies, they're not seeing much improvement. all these signs point to a situation where, quite honestly, this economy is still enormously flat. and i'm not sure that offering somebody an interest rate at 2% versus 4% is going to be, is going to get us on the other side of this, and i'd just like your thought on that. >> well, first of all i agree that the economy is still very weak. and very disappointing in that respect. i think low interest rates do tend to help, and i'll give you a couple examples. one, you mentioned the durable goods.

notwithstanding, i haven't had a chance to get into those numbers in detail this morning, but investment, actually equipment investment, equipment and software investment has been something of a bright spot and has been growing, and part of the reason for that is larger firms, at least, have pretty good access to credit at reasonable rates in the corporate bond market, for example, and that has supported the investment rebound which is a big part of what we're seeing in the recovery. another example is that the fed's actions and interest rate actions in our purchases of mortgage-backed securities have helped bring down mortgage rates. that has helped stabilize demand for housing and helped, as you may know, house prices seem to have flattened out and begin to rise a bit which is very important for consumers in terms of their wealth, in terms of the risk of foreclosure. and in terms of, you know, restarting activity in the residential construction sector. so those are two examples where

we see growth. we did have 4% growth in the second half of 2009. i think the issue we face is that will the growth be fast enough to materially reduce the unemployment rate at a pace that we would like to see? and that's a big uncertainty right now. but we are getting some output growth at this point. >> mr. chairman, thank you. >> senator brown. >> thank you, mr. chairman. mr. chairman, nice to see you. we all know from most of our nation's history -- i'm going to go in a bit different direction. for most of our nation's history manufacturing, agriculture and transportation drove our economy whether it's steel in youngstown or agriculture in places like lexington, ohio, or the port of cleveland shipping raw materials and finished goods all over the u.s. as an expert in the economic historian and an expert in the great depression you're aware, obviously, of the role of manufacturing, especially an

historic role in pulling our nation out of recession. as many ohio yangs can tell you, can painfully tell you manufacturing steadily declined over the last three decades. at the same time, we know that the financial industry has rapidly expanded. as recently as the 1980s, manufacturing made up 25% of gdp, financial services made up less than half of that, in the vicinity of 11 or 12%. those numbers crossed in the 1990s, now it's almost a direct flip, manufacturing 12%, financial services 20 or 21%. wall street's output, put another way, was equal to all the farm belt states and the industrial belt states combined in 2004. # 4% of all corporate profits in the u.s. came from the financial sector compared with 10% of manufacturing, and i say that as a preface to my question for this reason, kevin phillips, the writer, has noted sort of the history of great nations in the

last h -- 400 years. habsburg, spain, imperial england saw their economies go from manufacturing, shipping, agriculture depending on which of the three, and energy into more and more emphasis on financial services. and the financialization in that sense is what probably cost those empires their empire. they were not, they were countries that never really recovered in the wealth creation. i mean, it really is the fact that the banking, banking isn't an independent source of wealth, it doesn't cause our prosperity, the success of banking is created by our success and our ability to create wealth. and then i hear, i hear people when i talk about manufacturing policy, i hear your predecessor say this, i hear advisers in the white house regardless of party say we can't have a manufacturing policy, we can't

pick winners and losers. well, it's pretty clear in the 1980s that this country, that this government, that your predecessors and the treasury department picked winners and losers. they decided that financialization, financial service sector should be the winner as we got rid of usury laws, as we changed rules and deregulated and all those things. so we put ourselves in a position where as kevin phillips said, finance is the chosen sector of the u.s. economy. so my question is this, as your role, your statutory role a mandated target of 4% up employment it's at least twice, maybe three times that right now, when i look at a building on this overland college campus 20 miles from my house fully powered by solar energy, the largest solar-powered building on any campus in america, about eight years ago the panels were built in canada that stimulated demand and supply and have built

alternative energy, built clean energy jobs way better than we have. you read the articles in the paper about what china is about to, is about to way outcompete us on alternative energy, solar and wind with turbines, we know all that, we still sit with no manufacturing policy. so my question is this, as the economic historian that you are, are you troubled by the fact that the financial sector is now twice the size of the manufacturing sector? and i put parentheses around the next part of that, that no country that i can see in economic history has done well when that happened? are you troubled by that? and if you are troubled by that fact that the financial industry's twice the size of manufacturing flipping what it was or what should we do about it, and what are you doing about it? >> well, financial services, obviously, has a place to play in modern economy, and it is a productive industry in the sense that it helps allocate capital more effectively and share risk

and do important things like that. i think we would all agree over the past decade or so that financial services, residential construction and some other sectors may have become too big relative to other sectors, and we're now seeing the painful unwinding of that process. so i'm not -- i think the right way to address the size of financial services is to make sure that it's being productive and constructive, and that means having a good regulatory regime that directs, you know, that provides a context in which financial services would do productive, constructive things for the economy. so good financial regulatory reform should lead the financial services industry to adjust to an appropriate size that is right for the economy. on, on manufacturing, it's really a mixed picture in the united states. we still are probably the biggest or one of the biggest manufacturers in the world, we are most productive.

we've had extraordinary increases in productivity in manufacturing recently, and that fact is part of the reason why the employment share of manufacturing keeps going down is that we need fewer workers to produce a car or an airplane than we used to. >> [inaudible] true, mr. chairman, but look at the profits of the financial service. the chasm is, the chasm's big in terms of the percentage of gdp. it's even larger in terms of profits in the last five years. >> so in terms of the financial industry, you know, i think markets should be allowed to work, but they should be allowed to work on, in an environment where regulation is appropriate and where there's an appropriate, level playing field. so you would, i suppose, agree that financial services were not appropriately regulated or appropriately supervised. if we strengthen that regulation and allow appropriate changes to take place, that ought to bring down the size of the financial

services industry to a size which is more appropriate for our economy. manufacturing is another issue. i think there are lots of things that mostly congress -- i don't think the federal reserve has a lot of direct influence on any particular sector -- but there are a lot of things that congress can do. there's tax policy, there's immigration policy, trade policy. there is the issue of picking winners and losers. i think that is difficult to do, but if you, you gave the example of solar panels. solar panels are a viable industry with government support if, if the congress terms that, for example, for global warming purposes that carbon-reducing technologies or capital is socially desirable and, therefore, supports that activity, then that will, the private sector will, therefore, come out and produce that. so that's a determination of

congress whether it needs the public subsidy. i don't think that many of those alternative energy sources would, would survive by themselves in a marketplace because whatever value they have in reducing carbon with, for example, is not captured in their price in the market. so i guess what i'm saying is that we need, first of all, better regulation of finance to bring finance down to an appropriate size and appropriate set of functions, and there are a set of things that congress can do to try to improve our trade balance, for example. to improve tax policy. i think, frankly, this is a topic that i never can get much traction the on. i think that our immigration policy which restricts severely the number of highly-trained, skilled immigrants is a problem because bringing those sorts of folks in helps our high-tech industries develop more

competitive, become more pet i have. competitive. so there are things, i think, you can do to strengthen manufacturing. i would also just note that while it's been a very severe recession in the manufacturing sector, manufacturing is, in fact, leading this recovery as you pointed out. industrial production has been very strong, and we are seeing, in fact, growth in manufacturing employment. so it has been important in that respect. >> one real quick closing statement. if manufacturing were even close to the same percentage of gdp as it was, think how much stronger, how much quicker we would come out of this recession in terms of recovery just as a point of reference, perhaps. thank you, mr. chairman. >> senator witter. >> thank you, mr. chairman. thank you, mr. chairman, for being here and for your work. thank you for your monetary report. mr. chairman, when, when i go around my state, have town hall meetings and other things, obviously, folks are real concerned about jobs and the

recession. but i get just as many questions and expressions of concern about what they consider the next looming crisis caused by spending and debt. now, obviously, you gave us a monetary report focused on things you can control. federal spending and debt is not something you can directly control. what is your general projection and outlook once we're out of this current recession for the impact on the current levels of what are, in my view, unsustainable federal spending and debt and the impact on the economy? >> well, senator, as you point out, at the moment we're in a deep recession. revenues are down to 15% of gdp, we have a lot of costs arising from the recession, and so the deficit's extremely high. the really interesting question is what is the structural

medium-term deficit? if you look at the range of estimates provided by the omb and the cbo over different scenarios and so on, most of them suggest that the deficit after we come out of recession, say 2013 or so and the rest of that decade, should be somewhere between -- will be somewhere between 4-7% of gdp. that is not a sustainable number. a rule of thumb is that in order to keep the ratio of outstanding government debt to our gdp more or less constant, i mean, it'd be better even to reduce it, but just to keep it constant, you need to have deficits in the area more of 2 and a half to 3%. so i think it is important. so 4-7% is not sustainable. if it were to actually happen, we see increasing interest costs and eventually the markets would spirally lose confidence in our -- entirely lose confidence in our fiscal policy, and

interest rates would spike. even though we're now still in a very deep recession and a very weak economy, it is important for congress to try to clarify how we're going to exit from our fiscal position and try to provide a credible blueprint for how our federal deficit will be controlled over the next ten years and 0 years. >> just to follow up on that. >> yeah. >> if let's say in the future we reach a point that we're truly out of this recession in the a meaningful way and there is deficits where there are projected, 4-7% versus 2 and a half, how quickly would that become a major problem in terms of the economy? >> well, it could become a problem tomorrow if bond markets are not persuaded that congress is serious about, about bringing down the deficit over time.

but in any case, certainly if you look at the cbo numbers, you know, by 2025, 2030 under existing policies we're going to be seeing the curve looking very sharply rising -- >> but surely way before that it would be an issue and a problem in terms of interest rates -- >> absolutely. >> et cetera. >> absolutely. we'll be seeing debt ratios rising, crowding out of investments and other problems, yes, absolutely. >> so is it fair to say, you know, we're perhaps not saying those immediate threats because we're in a serious recession? once we come out of that, those immediate threats, the chances of their having a real negative impact elevate enormously. >> that's right. and we're not completely sure we won't have negative effects even sooner than that -- >> before that. >> -- depending on how interest rates respond. >> right. on june 18th the treasury

secretary said before us, quote, fannie and freddie were a core part of what went wrong in our system, closed quote. i assume you agree with that. >> yes, sir. >> we're discussing regulatory reform in terms of the draft bills we're discussing, there's no title on fannie and freddie. when should we be addressing that, sooner rather than later, or when? >> well, i think for no other reason than just trying to reduce uncertainty in the market, the sooner that you can come to some clarity on the future of fannie and freddie, the better. of course, i understand that you're dealing with a lot of complex issues and financial reform and health care and other areas right now. but it would be, obviously, helpful to try to get some clarity on that. that doesn't mean necessarily that you can get to that new situation quickly. it's going to take some time to move from the current situation to a more stable, long-run situation, but certainly i hope

congress is looking at this issue now and thinking about where you want to go. >> okay. we're really not looking at the issue now, at least in a meaningful way. and the schedule, as i understand it particularly from treasury, is not until 2011. is there any good reason in your opinion to essentially put that off to 2011? >> well, i think their concern is just that the ageneral da is so full -- agenda is so full and is there time, you know, for everyone to focus on that. and that's not my judgment to make, but i think that's their concern. i think they would agree that an earlier resolution would be better certainly. >> okay. mr. chairman, i want to go to resolution authority and 13-3 type authority. and we've talked about this before, but t really important, so i want to have the discussion quickly again. if in our regulatory reform package we come up with a

reasonable, workable winddown mechanism to resolve large failed institutions in an orderly way, to take them down, to break them up in an orderly way, if we do that, would you support our, also, ending, taking away 13-3 and other similar authority from the fed and others to put taxpayer dollars in large quantities into individual firms? >> in short, yes, i would support that. 13-3 has been used two ways, it's been used in what you would call bailouts, and it's been used in developing these broad-based lending facilities to help individual markets like the ones we just closed down february 1st. i think the latter is a valuable thing to have in the case of a future crisis, but we'd be happy to give up any involvement in the winddown of failing systemically critical firms.

>> and just to make clear, i'm talking about the former, rather than the latter. >> same page. >> as i understand the treasury's position, they say they support a resolution authority, but they essentially also want to keep that other authority as, quote, foam on p the runway, as sort of a back-up plan, however you want to term it. do you think that is necessary or a good idea? >> it depends on the, on exactly how the resolution authority is structured. it might be that you want the fed to be available to provide liquidity as part of the resolution process, for example, but generally speaking i prefer that you develop a process that leaves the fed to do only standard discount window lending against collateral as it always has done without use of the emergency authority. >> so if we got the resolution authority right, you don't see any need for that other authority with regard to individual firms continuing to exist? >> would be very happy if the you could find a solution that

allows us to give up that authority. >> okay. >> could you gentlemen wrap it up? >> okay. i'll have one more, one more question which is about audits and transparency of the fed. i welcomed your recent written comments about that as, certainly, movement in the right direction from my point of view. one thing you us underscored was some delay in terms of disclosing certain action so as not to disrupt the markets in terms of an immediate disclosure of certain activity. what is your reaction to the idea of having the same disclose your with a lag -- disclosure with a lag for all loans and collateral used to secure loans made by the fed? in other words, the normal decision count window activity? >> including the names of the

borrowers? >> correct. >> that, that's a concern we have, and the problem is that if banks think they're going to be, that their names are going to be publicized, then they won't come even if they're under attack by the market, even if there is a panic or a run on the firm. so we are, it's a very delicate issue. i mean, we'll have further discussions, i'm sure, but we are quite nervous about essentially shutting down the viability of this critical tool which proved to be very valuable during the crisis. so that's something that we are concerned about even, you know, with the delay. >> so even with the delay. >> you know, i'm sure we'll have further discussions about this, but, you know, again, if a company is under attack by the, by people who don't believe that it's stable and they know that if they go to the window their name is going to be published even with some del,