Bankers from the area devastated by Hurricane Katrina told Congress yesterday that they hold thousands of loans secured by buildings and businesses that no longer exist and urged lawmakers to help them out with regulatory flexibility, and possibly money.
Some of their customers are borrowers such as the owners of New Orleans parking lots, which may be shut down for as long as a year, said C.R. "Rusty" Cloutier, president of MidSouth Bancorp Inc. in Lafayette, La., speaking for the Independent Community Bankers of America. "How do they pay their note?"
Rep. Richard H. Baker (R-La.) hypothesized a bank may have lent $1 million to the owner of a grocery store, secured by the building and the store's receivables, and now the building is gone, the business is gone, and the man is gone. "How do you book that?" he asked.
Cloutier said, "It's going to take six to 12 months for us to get a hold on those questions in the banking industry," adding that his colleagues in New Orleans "are saying that 30 to 60 percent of their loans are in a great deal of question."
Some of the bankers who spoke at the Financial Services' financial institutions and consumer credit subcommittee hearing, chaired by Rep. Spencer Bachus (R-Ala.), urged lawmakers to consider establishing a national facility to spread the risk from natural catastrophes such as Katrina. That notion was seconded later in the day by some insurance companies speaking at a Capitol Hill briefing on Katrina's impact on their industry.
Neither group offered a particular model but instead suggested some kind of public-private partnership, such as the insurance pools some states have established for wind coverage in recent years or a federal reinsurance program similar to the one created by the Terrorism Risk Insurance Act. It is a federal backstop in the event of massive damage from a terrorist attack.
America's Community Bankers, a trade group representing smaller banks, "supports development by the federal government of a mechanism for spreading the risk of major natural catastrophes over a risk pool including all holders of improved real property," said Diane Casey-Landry, the group's president.
At an informal briefing by insurers for the Financial Services Committee in the afternoon, Michael J. McCabe, chief legal officer of Allstate Corp., said his company is "an ardent advocate of a national public-private partnership" that could "guarantee coverage for all Americans."
While insurers said they expected to meet all the obligations under their policies, bankers said the situation remains grim for them and their depositors and borrowers.
The breakdowns of communications and electricity have made many routine banking and credit card transactions impossible and reduced the area to a largely cash economy, they said. This has created overwhelming demand for greenbacks as banks have striven to meet demands not only of their own customers but of others who are stranded far from their own banks and trying to cash checks.
Bankers are cashing checks for people stranded without proper identification and are worried that regulators will later penalize them for failing to follow proper banking practices. Several also said customers without identification are running into trouble with the Bank Secrecy Act and the Patriot Act when they seek banking services or try to open new accounts at nearby banks because they cannot get to their usual institution.
Most worrisome, though, is the state of many banks' loan portfolios, especially smaller institutions whose business is concentrated in the storm area.
Many borrowers whose properties were outside the federally defined flood zone did not have flood insurance, and those who did may not have had enough, the bankers said. Without some sort of assistance, many may, as Casey-Landry said, "turn around and walk away" from their property.
The Independent Community Bankers of America recommended that Congress "create a special fund to allow the federal government to purchase impaired loans of borrowers affected by the disaster."
Complicating property owners' problems is the fact that federal flood insurance and ordinary property insurance do not work the same way, potentially leaving owners caught between two policies and possibly two insurance adjusters, said Markham R. McKnight, president of BancorpSouth Insurance Services Inc.
"There is no dispute resolution mechanism in place," and "we've got to get the customer out of the middle," he said, adding that lawmakers should "reevaluate the limits" of the National Flood Insurance Program.
J. David Daniel, speaking for the Independent Insurance Agents and Brokers of America, said his group "absolutely supports" the idea of a national public-private partnership to spread catastrophe risk.
The ideas received immediate support from Rep. Carolyn B. Maloney (D-N.Y.), who pointed to TRIA as the key to getting New York City going in the wake of the terrorist attacks of Sept. 11, 2001. "We are one country, and a disaster is a disaster," she said. Following Sept. 11, "we could not put up a popsicle stand" in New York until the federal program was established.
However, others in the insurance industry called such talk at best premature.
"We believe that right now the focus should be on this storm," said Julie Rochman of the American Insurance Association, a group of large property insurers. "Certainly there will be lessons to be learned, but we don't know what they are yet," and any action needs to be comprehensive and carefully considered, she said.
And in the meantime, Rochman said, insurers very much want Congress to push ahead with renewal of TRIA, which expires at the end of the year. "That's a very different risk," she said.