1. The prevailing examination approach seems to be to insist on write-downs and reclassifications of commercial real estate loans or other loans whenever there is a doubt about the condition of the loan. This is not always the right course of action. Examiners must give the benefit of the doubt to management when appropriate. Otherwise they risk hindering the ability of small banks to lend monies and remain competitive.
2. Small community banks should not be required to raise and maintain capital levels significantly above the minimum regulatory levels established for well-capitalized banks. The recent crisis was not caused by excessive leverage among community banks.
3. Regulators should allow, without penalty, small community banks to use certain types of non-core funding such as FHLB advances and CDARs reciprocal deposits. These are vital forms of funding for institutions that do not have the wherewithal to build expensive retail deposit gathering capabilities.
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