ABA shares concern over threat to dual banking

I have been concerned about preservation of the dual banking systems since the U.S. Treasury Department issued its Blueprint for Reform in March 2008. The change in administration has not alleviated my concern at all.

Apparently, I am not the only one who is concerned. Edward Yingling, president and CEO of the American Bankers Association, wrote a four-page letter to U.S. Treasury Secretary Timothy Geithner on May 28 outlining his association’s ideas for regulatory reform. Following is one paragraph from the letter:

Also, according to press reports, the Administration may be considering the creation of a single prudential regulatory agency for banks, in effect merging the OCC, OTS, and the bank regulatory functions of the FDIC and the Federal Reserve Board. The ABA is adamantly opposed to this concept because we believe it would, as a practical matter, be the end of a true dual banking system. Such a federal regulatory agency would undoubtedly have a strong bias toward federally regulated institutions. Therefore, state regulated banks would be at a disadvantage. The dual banking system has served our country well, particularly in terms of innovation of products and regulatory mechanisms. Furthermore, there has been no indication that the dual banking system contributed to the financial crisis; indeed, the diversity of our banking system has provided strength in overcoming the crisis. Finally, the model for this approach would appear to be the Financial Services Authority of the United Kingdom. As Chairman Barney Frank pointed out on CNBC this morning, this model did not work well in preventing the current crisis in that country.

On so many levels, states’ rights have disappeared in this country over the last several decades. Banking is the one place where states retain a meaningful regulatory role, and that is a good thing. Charter choice is the foundation of innovation in the industry. We are in an era when so much more power is being consolidated into the hands of a few agencies in Washington, D.C. The country grows more bland with every new industry that is effectively taken over by federal bureaucrats.

Although banking is working its way through a crisis at the moment, the U.S. banking system is actually the best system in the world. Other countries envy what we have here, in terms of financial safety and soundness, and equitable credit allocation. The dual banking system makes that possible. Let’s not mess this up!

Earnings info includes growing ‘problem list’

If you made more money in the first quarter than you did a year ago, you were among a minority of banks. The FDIC released first quarter earnings information yesterday; three out of five banks reported lower earnings in first quarter 2009 than in first quarter 2008. One in five banks, in fact, lost money in first quarter 2009. Read the press release here for details.

In the Midwest, 15.4 percent of 3,424 banks lost money in the first quarter. Michigan continues to have the largest number of banks in the region with negative earnings — 56 out of 149 for 37.5 percent. In Colorado, 20.6 percent of the banks lost money, in Illinois, 18.2 percent lost money, and in Missouri, 19.4 percent lost money. Nationally, 21.65 percent of banks were unprofitable in the first quarter.

Banking is a fishbowl industry where earnings are public, regardless of whether the bank is closely or widely held. I am not aware of any other business that is as transparent. Furthermore, banking is tougher on accounting standards than most industries. Banks set aside money for projected losses. That means they take hits to earnings well before they incur actual losses. In the first quarter, for example, the FDIC said banks added $60.9 billion to loan loss reserves.

Probably of greatest concern is the number of banks on the FDIC’s “problem list.” Bloomberg pick on this in their coverage.  At March 31, the number stood at 305; those banks represent institutions with $220 billion in assets. That compares to year-end 2008 when 252 banks with assets of $159 billion were on the list. The FDIC’s Deposit Insurance Fund has a balance of $13.0 billion, with a reserve for projected losses consisting of another $28 billion. The FDIC is counting on generating $5.6 billion from the special assessment it finalized on May 22.

One other interesting fact to come out of the FDIC’s Quarterly Banking Profile: during the 12 month period ending March 31, 2009, Federal Home Loan Bank advances as a percent of total bank assets declined to 5.1 percent form 6.3 percent. Total assets at the 8,246 banks across the country declined during the first quarter by 2.2 percent.

FDIC special assessment to be based on assets

FDIC voted 4 to 1 today to assess a fee of 5 cents per $100 in assets (excluding tier-one capital) to replenish the Deposit Insurance Fund. FDIC originally proposed an assessment of 20 cents per $100 in insured deposits but later signaled that it could lower the assessment if Congress voted to raise FDIC’s borrowing authority.

The decision to base the special assessment as on assets is being heralded as a break for smaller banks. Bloomberg quotes FDIC Chair Sheila Bair: “The failures have been mostly with smaller banks, but that’s because government programs have stabilized the larger banks…I do think we’re being fair.”

Most banks OK, but conditions are sliding

James D. LaPierre, Kansas City Regional Director for the FDIC, gave bankers meeting in Bloomington, Minn., for the spring seminar of the Bank Holding Company Association on May 5 an update on industry condition. He said the condition of the region’s 1,950 banks is generally satisfactory, but that “the condition of our banks has deteriorated as the number of problem institutions continues to increase.”

 

Median teir 1 leverage at year-end 2008 at all charters in the region was 9.29 percent; that is down from year-end 2007 when it was 9.46 percent.

 

Median passed due and non-accrual loans have increased from 1.84 percent at year-end 2007 to 2.42 percent at year-end 2008.

 

Median return on average assets was 0.86 percent at year-end 2008, compared to 1.01 percent for 2007.

 

Median brokered deposits to total assets was 3.83 percent at year-end 2008, a slight increase from 3.65 percent at year-end 2007. He said only 750 institutions in the region actually have brokered deposits.

 

At year-end 2008, eighty-eight percent of banks in the region were rated 1 and 2 on the CAMELS scale. “That means 12 percent rated 3, 4 or 5,” he commented. “The number of 3, 4 and 5 banks exactly doubled from year-end 2007 to year-end 2008.”

 

For perspective, nationally, 86 percent of institutions are rated 1 or 2. Fourteen percent are rated 3, 4 or 5. These numbers, he warned, do not include pending down-grades, which are imminent, he said.  

 

LePierre explained that 252 institutions nationwide are rated 4 or 5. “Those numbers are well below 1990, 1991, when we had about 1,400 on that list,” he said. “It is the largest number we have had since 2003. March 31 preliminary numbers are higher than 252.”

 

Look for a complete report of LaPierre’s comments in the June 1 print edition of NorthWestern Financial Review.

Full faith and credit in Bill Seidman

Bill Seidman is one of the most interesting people I have ever had the privilege of covering. He died yesterday at the age of 88. News reports said he suffered a brief illness before passing away in Albuquerque, N.M.

Seidman became chairman of the Federal Deposit Insurance Corporation in 1985, the same year I started covering banking. By then, he had considerable high-level political experience. A native of Grand Rapids, Mich., he came to Washington D.C. when Rep. Gerald Ford of Michigan was named vice president. When Ford quickly became president, Seidman found himself setting up shop in the White House. He worked with Alan Greenspan, who chaired President Ford’s Council of Economic Advisors.

At that time, one of the big issues Seidman worked on was lending to less developed countries. Seidman was part of the regime that encouraged it, a position he later said he regretted. In the 1993 book he authored, “Full Faith and Credit,” he writes the “recycling of petro-dollars” was viewed as prudent policy. In hindsight, he writes, they should simply have encouraged oil producing countries to make the loans directly, rather than through the American banking system.

Seidman left Washington during the Carter years and early Reagan years. When William Isaacs resigned as head of the FDIC in 1985, Seidman was asked to become the 14th leader of the agency that was relatively obscure at the time. As the ag, oil and real estate crisis would develop, the agency soon would gain prominence as it resolved more than 200 bank failures a year by the end of the decade.

In “Full Faith and Credit” (which, sadly, appears to be out of print), Seidman notes that one of his first issues as FDIC chairman was dealing with Citicorp’s decision to reserve for 30 percent of its loans to less developed countries, an action precipitated by the policy Seidman had helped to develop during the Ford years.

Seidman was in the thick of the banking crisis, which started in Texas and then moved to New England. At the same time, banks in the Midwest were suffering from the ag crisis. Meanwhile, things were falling apart in the savings and loan industry and when the Resolution Trust Corporation was set up to handle assets from failed S&Ls, Seidman was named head of that agency, too.

When one thinks back on the late 1980s, it becomes amazing to realize the extent to which the White House and its U.S. Treasury Department were not engaged in the financial stress of the day. It is a much different scenario today where Treasury and President Obama (for better or for worse) are in the thick of the issues. In the late 1980s, the head of the FDIC/RTC was the most powerful player in the financial services regulatory game.

Seidman had a sharp wit and spoke candidly with bankers and reporters. He named his dog “Proxmire” after the Wisconsin Senator who headed the Banking Committee in the late 1970s and again in the late 1980s. He got into a political fight with President Bush’s Chief of Staff when he ridiculed a John Sununu plan to pay for the S&L clean up with a fee for opening bank accounts. He called it the “Reverse Toaster Tax,” playing off the idea that banks used to give customers premiums for opening accounts. The label stuck in the press and Sununu’s plan was dead.

Bill Seidman was the right guy at the right time, in terms of bank regulation. He was an accountant by training, so he understood the numbers. He had been a bank director. He also had owned a television station, so he understood what it was to comply with federal regulations. And he had some political savvy. He was very accessible to the press. We ran a feature on him in December of 1987, including a cover picture of him on the balcony of his office, with the Washington Monument in the background.

After he left the FDIC, he spoke to banker groups many times, and made hundreds of appearances on television as an expert analyst on financial and banking issues. I reviewed “Full Faith and Credit” shortly after it came out. I mailed him a copy, which ran in our Oct. 16, 1993 edition, and he sent me back a flattering hand-written note.

A couple of conclusions Seidman draws are worth reviewing, and seem particularly timely despite having been published 16 years ago. Consider: “Do not try to achieve social goals such as community reinvestment, minority lending, publicly supported housing, etc., through private-sector financial institutions.”

And, at the conclusion of his book, he writes: “The accomplishments of the United States of America are unmatched. Our future is bright. We have the American advantage: We are the freest people in the world. There is more opportunity for our people to move up economically and educationally than in any other country in the world. We have the skill and abilities of a multiracial nation. Our innovation and flexibility make us the leader in the industries of the future. If we do not allow ourselves to be destroyed by voting more from the federal treasury than we are willing to provide in taxes, our success will continue.”

Stress test results are in

One Midwest giant fared reasonably well in the much anticipated stress tests. Another with strong Midwest connections will require additional capital.

Minneapolis-based U.S. Bancorp has enough capital to weather “a hypothetical two-year scenario that involve[s] economic conditions more adverse than actually expected.” The company’s estimated worst-case loss would be $15.7 billion, according to the Wall Street Journal.

Wells Fargo requires another $13.7 billion in capital under the stress-test criteria. The bank expects to be able to raise that much through earnings, a common equity offering and other “internally-generated sources.” Estimated worst-case losses would be $86.1 billion.

Regulatory guidance has addressed possible flu pandemic

There have been 403 cases of H1N1 flu reported, 82 of those in Illinois as I write this on Wednesday morning. Get the latest state-by-state breakdown of cases here.

Banks are more prepared to deal with an outbreak of the flu than almost any other business. The Federal Financial Institutions Examination Council issued an interagency advisory on influenza pandemic preparedness in March 2006; it issued an update in December 2007.

I remember first hearing about the potential impact of flu pandemic from Dr. Michael Osterholm, speaking at the ABA’s National Agricultural Conference in November 2005, held that year in Minneapolis. Dr. Osterholm painted a dark picture, referring to pandemics a century earlier that led to 50 million deaths worldwide. Dr. Osterholm was talking about the potential spread of avian flu; the current flu situation involves a milder strain of flu and, to date, there has been only one reported death associated with it.

One banker in Central Minnesota told me he was pleased regulators had required bankers to compile preparedness plans. He said his bank maintains a detailed, four-phase plan. He said he has reviewed it with staff, checked contact information in their calling tree, and verified responsibilities, including back-up duties. The bank also keep supplies, such as wipes and masks, in the vault.

Dr. Kevin Streff, director of the National Center for the Protection of the Financial Infrastructure at Dakota State University in Madison, S.D., said banks need to have plans that identify priorities. If staff is unavailable to offer all normal services, then which services will the bank provide in a limited-services environment? He said bankers also need to consider the preparedness of their key vendors. If a vendor reduces service, will the bank likely be one of those that continues to get service? If not, then what will you do? Dr. Streff encouraged bankers to review vendor contracts for information about service guarantees. He said bankers should have conversations with vendors to gauge their flu preparedness and to get a sense of how they may be treated in the event the vendor losses a substantial portion of its employees to illness. 

The advent of the internet and other technology means that many banking functions can be performed remotely or with no human contact. Ultimately, however, banking is a people business, where face to face contact is important. We have to hope that an outbreak of illness is limited and swiftly resolved.