Monthly Archives: April 2010

Bankers consider impact of financial reform, economy

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The mood at yesterday’s Day with the Superintendent in West Des Moines, Iowa, was subdued. There was a sense that financial reform is coming and there’s nothing in it for community banks. What I heard from one banker was: “The legislation won’t really do anything to hurt the big Wall Street banks, and it will do a lot to hurt us, and we had nothing to do with creating the problem.” That seemed to sum up the general mood of the meeting.

Someone else commented that the legislation will be another big step toward turning the banking industry into a utility, like the businesses that provide electricity or water.

Neil Milner, the long-time head of the Iowa Bankers Association who now heads the Conference of State Bank Supervisors, talked about some of the specifics in the reform legislation. He said his organization, which promotes the dual banking system, is lobbying to change Senate language which would strip the Federal Reserve of its responsibility to supervise some 800 community banks across the country. He also questioned the wisdom of putting the proposed new consumer financial protection agency in the Federal Reserve. He said Congress can avoid any budget impact by locating it in the Fed, where the independent agency would need to fund it. Milner noted that if the Fed has no authority over the agency, it is not likely to be very interested in funding it.

It appears the legislation will permit de novo branching across state lines for any bank. Milner said he would like to see the national 10 percent deposit cap applied to S&Ls; currently, thrifts are not included in the calculation.

The news on the economic front was subdued as well. Economist Bernie Goss told the 400 bankers that they should prepare for higher interest rates, higher taxes and inflation. He said there are signs the economy is improving but that the question is whether it will last.

Look for complete meeting coverage in the May 15 edition of NorthWestern Financial Review.

Legislation would doom card business at smaller banks

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The House Judiciary Committee is conducting a hearing today on the Credit Card Fair Fee Act (H.R. 2695), a bill the banking industry strongly opposes. While so much attention is focused on industry reform, this bill would have a far more significant impact on community banks than most of the provisions in the reg reform bills. H.R. 2695 would basically make it uneconomical for smaller banks to offer credit and debit card services to local merchants. If the bill passes, that business will completely migrate to the largest players, leaving smaller players and their communities out in the cold.

Here is how Kenneth Clayton, senior vice president and general counsel for the American Bankers Association, explained it in a statement issued earlier today:

“The Credit Card Fair Fee Act represents yet another attempt by the merchant community to try, at the behest of large retailers, to get Congress to lower their cost of doing business, all to the detriment of consumers and the broader economy.

“Banks of all sizes…take on significant risks and costs when they issue both debit and credit cards. These include extensive infrastructure costs, fraud costs and the real risk of non-payment. Interchange fees compensate banks for taking on these burdens and make it possible for banks to offer consumers better services, more competitive choices, and lower prices.

“The legislation under consideration today would take away these benefits and inappropriately shift the cost burdens onto consumers…”

I encourage you to learn more about this issue. The Electronic Payments Coalition has an excellent web site providing the details.

Senate vote keeps debate alive

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I can’t believe the headlines in this morning’s newspapers about the 57-41 vote last night in the Senate on financial reform. Sixty votes were needed for the legislation to advance.

The New York Times headlines says “GOP blocks debate on financial oversight bill,” and my local newspaper, picking up the same story, used this headline: “GOP blocks debade on financil overhaul.” What a bunch of bunk.

The truth is, now the debate can continue. Republicans and Democrats will continue to negotiate and real changes in the Senate bill are possible. Had the Democrats gotten 60 votes yesterday, the debate would be over. The bill would have moved to the Senate floor, but with 60 votes, what incentive would Democrats have to listen to Republicans? The answer is none, so if there is going to be debate it needs to happen now.

And we hear from Sen. Shelby, who spoke to hundreds of community bankers yesterday in Washington, D.C., for ICBA’s policy summit, that he is in negotiations with Sen. Dodd, and that compromises may be reached.

The Senate bill has a lot of problems. It won’t help most bankers. Fact it, both the House and Senate approaches to this problem simply rely more on the regulators who failed to avert a crisis in the first place. Regulators completely failed before so I am puzzled why lawmakers think it makes more sense to plow more resources and power into the regulatory apparatus to prevent a future crisis. To be fair, I don’t think more regulators will necessarily hurt, but I am highly skeptical that they will help.

I stated my solution back in the Feb. 1 edition of NorthWestern Financial Review. What we really need are capital requirements that increase with the level of risk a financial institution takes on, and rules which require lenders to retain some percentage of every loan they originate. Add rules for increasing transparency, and you will have what you need to prevent a future crisis.

Amcore and 6 other Illinois banks closed Friday

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A tough day in Illinois for bank closings last Friday. Regulators closed seven banks, including Amcore Bank of Rockford, which had $3.8 billion in assets and 52 branches in Illinois and Wisconsin, and Broadway Bank, the bank associated with U.S. Senate candidate Alexi Giannoulias. Broadway Bank, based in Chicago, had $1.15 billion in assets and four offices. The total hit to the FDIC fund for the resolution of all seven banks is estimated to be $973.9 million.

The failure of the Amcore Bank is particularly striking to us at NorthWestern Financial Review. For the last 10 years, we have been running short news items about the bank’s new branch openings and new hires. It was a growing bank. In 2001, the bank announced a branch expansion program that seemed to excite investors. One analyst noted that the bank had branches in the fastest growing markets in northern Illinois and southern Wisconsin.

Lately, the bank ran into capital trouble. On Jan. 5, it announced it was selling 12 branches to Midland States Bank of Effingham, Ill. (See the cover story on the April 15 NorthWestern Financial Review magazine.)

“The sale of these branches, when completed, demonstrate that our rebuilding efforts continue to move forward and remain on track,” commented Amcore Chairman and CEO William McManaman at the time. The sale of the branches was one of several moves the bank took to strengthen its position. On Jan. 5, it also announced it recently had sold $135 million in what it called “non-strategic, non-relationship loans,” and completed the sale of four rural Wisconsin branches. It also said recent tax legislation would result in a $25 million to $30 million tax refund for the company.

“As the result of those combined actions to improve capital, we would expect that the bank will no longer be deemed significantly undercapitalized for regulatory purposes at the end of 2009,” McManaman said in the Jan. 5 press release. “Assuming economic conditions in our markets stabilize, and that the transaction with Midland States Bank closes at the end of the first quarter  [it closed March 29] and its benefits are fully realized, we expect that the bank would be adequately capitalized and approaching well-capitalized.”

But on Friday, it all came to an end when the Comptroller of the Currency closed the bank and the FDIC facilitated a resolution with Harris National Association. Harris is the Chicago-based subsidiary of a Canadian company. About five years ago, Harris announced it wanted to double its American branches by 2010. At the time, it had about 200 branches. It had increased that total to 280, and now it will add the 52 from Amcore.

It is interesting how public this stuff is. Crains Chicago business ran this story the day before the banks were closed.

President makes case for reform

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President Obama pushed for financial reform with a speech in New York yesterday, and now a vote on reform legislation has been scheduled for Monday in the Senate.

Watch the president’s 25-minutes speech here, if you like.  He said these are the four highlights of the reform legislation:

1) It will put an end to tax-payer-funded bailouts of financial institutions;

2) It will bring new levels of transparency to the financial sector;

3) It will insure the strongest consumer protections ever on financial products; and

4) It will strengthen shareholder power, particularly regarding executive compensation.

The president said reforms will work for consumers and for the financial industry. He said there is no more dividing Wall Street and Main Street. “We will rise or fall together. Join me in passing these reforms because it is in the interest of your industry and of the citizens of the United States,” President Obama said.

The financial crisis was complicated and the president chose not to address many issues. For example, the president makes an issue of getting back all the TARP money. Fact is, he is getting back the money that went to the banking sector. The unanswered question has to do with the TARP money that went to AIG and the auto companies. He seems to expect banks to pay that money back too. It is not too difficult to understand why the banks might have a problem with this.

It will be interesting to watch the vote Monday afternoon; if it passes, the conference committee process will be interesting as well. It could take most of the summer, and even then there is no guarantee they will finalize anything before the break for fall elections. Rep. Barney Frank gets to run the conference committee, so it is reasonable to expect the House version of the legislation to carry a little more weight than the Senate version.

The President on reform

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President Obama will speak in New York today about his financial reform ideas. Here is a summary of the administration’s position. Most of his ideas are focused on preventing banks and non-bank financial companies from engaging in the same kinds of business deals that plunged the country into financial crisis. That’s fine, but reform legislation would be a lot more interesting if it contained provisions designed to help community banks offer their customers more.

The U.S. economy is unique around the globe because of its diverse and decentralized system for credit allocation — namely, its community bank sector, which consists of more than 7,000 banks. I blogged yesterday about the need for new rules regarding the write-down of lost value of commercial real estate. That’s the kind of thing that would help community banks do even more for their communities; the beauty of it is, it wouldn’t cost Uncle Sam anything.

The financial crisis did not originate in the community bank sector, but my concern is that many of the reforms aimed at the largest banks, like President Obama’s proposed “Responsibility Fee,” will eventually find their way to community banks. It’s like Sarbanes-Oxley, which was supposed to apply only to the largest banks, but best-practice guidance based on that law are now applied to banks of virtually all sizes.

My point is, the reform is mostly about sticks when I think what we really need are carrots.

CRE loan amortization proposal would help community bankers

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About a year ago, I wrote this editorial for NorthWestern Financial Review magazine explaining the need to give community bankers more time to write off losses in their commercial real estate loan portfolio. “Until real estate market activity returns to pre-recession levels, bank regulators should suspend the mark-to-market rules for real estate non-performing assets and allow banks to amortize the losses over a period of up to 10 years,” I wrote. This is not a new idea. Regulators did something similar in the 1980s when the banking industry was slogging its way through a crisis in agriculture.

Kevin Funnell, who runs Bank Lawyer’s Blog, recently has been writing about the idea. Check out this post, and this follow-up. Then, on Monday, he posted this about efforts by two U.S. Representatives from Colorado to put the idea into law. It is great to see this idea gaining momentum.

The mark-to-market purists who oppose the idea need to weigh the value of strict adherence to a particular valuation theory with the impact of real world consequences. Forcing banks to take big losses immediately on OREO property is an enormous drain on capital, which makes it much harder for these banks to lend, which further makes it harder for these banks to turn a profit. Give banks time to absorb losses and most of them will come through; force them to write off losses immediately, and in many cases you risk sinking the ship. And I ask, for what? Allegiance to a valuation theory that really isn’t appropriate for community banks anyway? This is ridiculous and lawmakers can easily solve the problem. 

This is an issue we will follow at this blog. The truth is, this idea will do more good to help community banks than anything currently in the regulatory reform bills passed by the House and under consideration in the Senate. The best thing that could happen would be for this concept to be folded into the financial reform bill.

What’s the trade-off for resolving TBTF?

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It’s crunch time in the Senate for financial industry regulatory reform. Sen. Dodd needs to get his bill passed by Memorial Day for a realistic shot at enactment into law this year.

For community bankers, it boils down to this question: Are the TBTF remedies in the legislation compelling enough for community bankers to accept additional regulatory compliance obligations?

Questions will always surround legislative efforts to resolve TBTF “once and for all.” There were a lot of people who thought we solved that problem in 1991 when FDICIA was passed, and clearly it is a bigger problem today than ever.

Resolution authority on TBTF needs to extend beyond the confines of the traditional banking industry so it can address situations like AIG. The House bill and the Dodd bill does, and that’s a good thing. But there will always be this question: Who exactly will qualify as systemically important? Is it just the 19 original TARP recipients? Is it the top 50 holding companies? Who are the non-bank companies that qualify? Who will pay into the pre-paid resolution fund proposed by the House legislation and the Dodd bill? What if a company that never paid into that fund needs special handling? What if the government decides a company that did pay into the fund shouldn’t be treated special?

And how strong will the resolution authority be if the legislation drops the pre-paid resolution fund concept, as apparently is being discussed in the Senate to win support from Republicans? 

Clearly, the largest banks in the country have a cost-of-funds advantage over community banks. But if the law does in fact end TBTF, will community banks make more money as a result of the new, level playing field?

From the perspective of sound public policy, we need to resolve TBTF, but if we do, I am not sure how much that will improve the lot of community bankers. The American taxpayer will benefit from the resolution of TBTF but only community bankers will pay any kind of a price (that is, additional reg burden). Some bankers will say it is worth that price, but I wouldn’t be surprised if some say it isn’t.