Iowa banking superintendent to Congress: Widespread failures not expected

Iowa Superintendent of Banking Thomas Gronstal told the U.S. Senate Banking, Housing and Urban Affairs Committee today that the problems the banking industry currently faces primarily stem from the weakening of the housing market and the ensuing credit crunch.

Testifying at a hearing on the condition of the banking industry, Gronstal said the weakness of the housing finance market has resulted in reduced investor confidence in bond ratings, bond insurers and collateral valuation of asset-backed securities. The impact has spread to trust-preferred securities issued by banks, auction rate certificates issued by student loan secondary markets, and a general depreciation of asset-backed securities held in banks’ portfolios.

“A few lessons that state regulators would highlight from this experience are that good underwriting is consumer protection; consumer protection is investor protection; and transparency is in the interest of all parties,” he said in a press release. “We believe these lessons should be applied to policies ranging from the pre-emption of state consumer protection laws to Basel II,” Gronstal told the committee.

Basel II refers to new international guidelines for the amount of capital that global banks are required to maintain to mitigate the risk of failed investments. Those less-restrictive rules, which went into effect in Europe in late 2007, were to be phased in beginning next month in the United States, but that is now likely to be delayed due to the credit crisis, The Wall Street Journal reported today.

Representing the Conference of State Bank Supervisors on a panel that also included representatives of the Federal Reserve Board, Federal Deposit Insurance Corp., Office of Thrift Supervision, Office of the Comptroller of the Currency and the National Credit Union Administration, Gronstal said state regulators are prepared to handle a greater number of bank failures than in recent years, although he indicated that widespread failures are not expected based on current information and conditions.

“State regulators must remain active participants in mortgage supervision because of our knowledge of local economies and our ability to react quickly and decisively to protect consumers,” he said.

Gronstal’s testimony, along with that of other panel members, may be found at http://banking.senate.gov/index.cfm?Fuseaction=Hearings.Detail&HearingID=295