By Robert Brannum
If you believe in the old adage, “Desperate times call for desperate measures,” then you’ll likely find comfort in an unusual set of powers recently granted to New York State Banking Superintendent Richard Neiman by the state’s Banking Board. On September 25, 2008, after waiving its customary 30-day public comment period, the Board granted immediate authority to Superintendent Neiman to allow state-chartered banks and trusts to make emergency business loans that exceed statute-based lending thresholds for single borrowing entities.
Neiman’s action seems to indicate a concern about short-term liquidity problems in the NY economy. This authorization provides a message to NY banks to think creatively as they work with their commercial customers that may be having difficulty obtaining credit in the midst of the current liquidity crisis.
Worsening market conditions have severely limited access to credit, and many commercial customers of New York banks have found it challenging to get the capital they need to fund ongoing operations. Existing lending restrictions for firms in these situations would impact the amount of funds banks could make available to these firms already in jeopardy, potentially causing these firms to fail by going into bankruptcy.
The Board of the New York State Banking Department had been approached earlier by the Superintendent to grant him the ability, under the Board’s so-called “Wild Card Authority” to authorize banks to grant these loans in what the superintendent deems to be “emergency situations” to make these loans. It has been well documented that current market conditions are limiting access to credit by imposing restricted credit amounts and by requiring borrowers to accept unusually conservative loan terms. In a statement released the day after the Board decision, Superintendent Neiman stated, “These are serious times and we have a responsibility to be responsive to changing market conditions and to ensure that we have the ability to enable New York State-chartered banks to help ease the credit and liquidity crunch that the financial markets are experiencing.”
Mimicking the OCC’s Earlier Action
This action by the New York Banking Department, at the Superintendent’s request, essentially mimics the adoption of similar rules in March 2008 by the Office of the Comptroller of the Currency, which has jurisdiction over national banks. The NY resolution, which was passed unanimously by the Board, is filled with language that indicates that this request was made essentially for competitive purposes, in order to keep the state-chartered banks on a level competitive playing field with national banks.
Under national banking laws, a national bank is limited in the amount it may lend to a single borrower, and that limit is based on a formula that considers a bank’s unimpaired capital, among other criteria.
In March, the OCC adopted its own ruling that authorizes national banks to make loans, on a case-by-case basis, in excess of these normal loan limits, provided the borrower is facing an emergency situation and the bank has received the OCC’s written approval. The risk and liability for any loss still remains with the bank, despite the OCC’s authorization.
Significant Latitude for Interpretation by Superintendent
The NY emergency loans, which can be made by banks only with the approval of the Superintendent, are intended to only be temporary loans made in emergency situations for limited periods of time. It is at the Superintendent’s discretion whether he believes the loan meets the requirements of an emergency situation, will be of short duration, and has an acceptable term and risk profile. As with the OCC’s arrangement, the bank is still ultimately accountable – including any losses. “The lending decision is made by the bank,” said the Banking Department’s press office. “The role of the Superintendent is to ensure that the bank’s lending parameters are consistent with safe and sound banking practice. The supervision of the bank’s business, including the lending decision under the Wild Card power, is the responsibility of our bank examiners.”
The Superintendent is responsible for oversight and for compliance monitoring, and in fact, is responsible for the interpretation of both key elements of the threshold: “emergency situation,” and “limited period.” There is currently no expiration date for this authority – same as with the OCC’s national rule.
The “Wild Card” provision is part of state banking law, and enables the Board, in extraordinary circumstances, to grant to state banks the same operational abilities that federally chartered institutions have. This is not the first time the Department has invoked this authority since the Wild Card statute was passed in 1997: according to the NY Banking Department’s press office, prior to this most recent “emergency lending limits” rule, the Department used the Wild Card authority in February 2008 to grant state-chartered commercial banks the ability to repurchase their own stock, and again in June 2008 to permit The Bank of New York Mellon to administer its common trust funds on the same terms and conditions as permitted for national banks by the OCC.
Loans Have Been Made…But to Whom?
Waiving the Board’s customary 30-day public review period seems to indicate there was urgency to the Superintendent’s request. While the OCC adopted its measures in March, Mr. Neiman didn’t make his request for emergency powers until September, when he asked for, and received, immediate authority. In written comments to Banking New York, Mr. Neiman’s office responded, “Given the worsening credit crisis, the Superintendent determined that it would be a good time to have the same authority as the Comptroller of the Currency to authorize loans or credit exposure in excess of the statutory limits in exigent circumstances. The Superintendent requested that the authority be put in place immediately because of the seizing up of the credit markets.”
The Banking Department has confirmed to Banking New York that emergency loans have, in fact, been granted since the emergency lending resolution was passed in September. Citing confidential supervisory information rulings of the New York Banking Law section 36 (10), it would not disclose which institution – or institutions – was granted authority to make such loans, or for what purposes, or which borrowers in turn have received the loans, or even which industries they represent.
Is Lack of Public Scrutiny An Issue?
But what of the lack of public review and response to an extraordinary set of powers, that do not require public disclosure, have no limit, and whose appropriateness rest solely with the Superintendent? Mr. Neiman’s press office commented, “The Banking Board used its extraordinary power under section 14(1)(p) of the Banking Law, to vary the requirements of the Banking Law upon a finding of the existence of unusual and extraordinary circumstances to forego the time period for comment usually associated with wild card measures.”
Although the loan authorities went into effect immediately, the Board did allow retroactive public comment for a month after the authority was granted. “Although the Wild Card authority was approved by the Banking Board without a prior comment period,” said the press office, “the Banking Department “bulletinized” the wild card action on September 26, 2008 and advised the public that it would accept comments until October 27, 2008.”
Perhaps it was a sign that there is an acceptance among bank industry watchers in NY State that these are, indeed, extraordinary times. Or perhaps that so many of us are concerned with our own individual economic situations to question the powers granted to Mr. Neiman: the Banking Department didn’t receive any comments at all.
Robert Brannum is a freelance writer based in Boston with special expertise in the financial industry.