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FDIC Federal Register Citations

State Bank of Long Island

From: Nicols, Bob []
Sent: Wednesday, June 01, 2005 3:20 PM
To: Comments
Subject: Interagency Proposal on the Classification of Commercial Credit Exposures

Re: FIL-22-2005

Thank you for the opportunity to comment on the proposed "Classification of Commercial Credit Exposures."

Our institution is a community bank with a loan portfolio of approximately $800 million ($700 million Commercial). We are very much opposed to the adoption of this proposal for the following reasons:

 We believe the premise for the proposed change is factually incorrect. The proposal states that "the [current] system dictates that transactions with significantly different levels of expected loss receive the same rating." If this statement were accurate, every banker in the country would be lined up in protest at the doorsteps of their regulators. The experience of our institution over many years, demonstrates that examiners do in fact view collateral, guarantor strength and other factors in determining loan ratings. While we may have differed with an examiner over the factual valuation of a specific guarantor or piece of collateral, we have never seen an examiner apply the same rating to two facilities to the same, inherently weak borrower, where one is unsecured and the other well collateralized or protected by a strong guarantor. Never!

The proposal further states that "the current classification system focuses primarily on borrower weaknesses and the possibility of loss without specifying how factors that mitigate the loss, such as collateral and guarantees, should be considered in the rating assignment." However, the present definition of "Substandard" relates to an asset that "is inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged." Further, the definition of "Doubtful," references "the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable.
 Despite the comment in the proposal that "the agencies have sought to minimize complexity and supervisory burden", this proposal will only add to it with no benefit whatsoever. The several references in the proposal to "mapping" our current system to the one proposed, grossly oversimplifies the complexity of this task.
 We believe that this proposal would add another level of duplication (and potential conflict with GAAP), as we are already required under GAAP and SEC regulations to calculate loss reserve estimates for impaired loans under FAS 114. The proposal states that "facility ratings would be required only for those borrowers rated default (i.e. borrowers with a facility placed on nonaccrual or fully or partially charged off)". This definition, in effect, equates to impaired loans under FAS 114, and the required calculation of the applicable reserve is already far more specific than the 0% to >30% "loss severity estimate" range contained in this proposal.

The proposal states that "institutions may use their ALLL impairment analysis as a basis for their loss severity estimates. How can this be a choice since GAAP requires that the reserves for these loans must be calculated under FAS 114, and the resultant calculations are included in our SEC filings? Since this is not a choice, but a mandate, what does the proposal accomplish, except additional confusion and complexity?

 With FDICIA, Sarbanes Oxley and The Patriot Act, to name just a few, the banking industry has enough confusing and duplicative regulatory burdens to deal with and we don't need yet another.

In conclusion, we believe the current system works well and should be left intact. At most, a mere tweaking of the existing loan category definitions or a revision of the examiner handbooks might be appropriate.


Robert J. Nicols
Senior Vice President
State Bank of Long Island
Two Jericho Plaza
Jericho, New York 11753

Last Updated 06/02/2005

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