Monthly Archives: August 2011

‘Disparate impact’ gaining strength as factor in bank regulation

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Concern over the Justice Department’s ill treatment of banks is gaining visibility. We first blogged about the DoJ unfairly going after banks when Investors Business Daily wrote about the subject on July 11. Today’s Wall Street Journal includes this piece, in which essayist Mary Kissel essentially says DoJ has declared war on banks. Cam Fine of the Independent Community Bankers of America penned this August 29 letter to U.S. Attorney General Eric Holder expressing his concern about the Department’s tactics with respect to banks.

At the root of DoJ concern is the concept of “disparate impact.” This is the idea that even if someone has no intent to discriminate, and complies with every law and rule on the books, they can be guilty of illegal discrimination if the result of their lending decisions is that some racial groups get more loans than other racial groups. Disparate impact was all the talk in the early 1990s. The term lost its cachet during the Bush Administration, but now under President Obama, it is coming back.

I have always thought that if the government is going to prosecute based on disparate impact, it should go after its own school systems. In the Twin Cities, where I live, there is a significant “achievement gap” between Caucasian public high school students and African American public high school students, with much higher graduation rates among the Caucasians. Nobody is accusing the school system of racism, but if you applied the concept of disparate impact to education, you would have no choice but to charge school officials with violation of discrimination laws.

Fewer banks report losses

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The number of banks that are losing money in the 14-state coverage area of NorthWestern Financial Review magazine is declining — a welcome sign that industry conditions are improving, albeit slowly.

389 banks in the region reported negative net income for the second quarter, the FDIC reported yesterday. That compares with 412 banks that reported losses in the first quarter. That is a reduction to 12.3 percent of the banks in the region from 12.9 percent. The FDIC reports that across the country, 15.2 percent of all banks lost money in the second quarter, down from second quarter 2010 when 20.8 percent of the nation’s banks lost money.

Conditions appeared to improve the most in Nebraska, where 9.0 percent of the banks reported losses for the first quarter, but only 6.3 percent reported losses for the second quarter. Other states where conditions improved include: Colorado, Indiana, Kansas, Missouri, Montana, and North Dakota. The number of banks reporting losses increased in Illinois, Michigan, Minnesota, South Dakota, Wisconsin and Wyoming.

Subscribers to NorthWestern Financial Review can get second quarter data on our home page by clicking on “state pages” in the premium section.

FDIC notes industry progress in second quarter

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The FDIC made it official today: The Deposit Insurance Fund is now in the black. It had gone negative in 2009, but during the second quarter of this year the fund went from negative $1 billion to positive $3.9 billion. During the quarter, the pace of bank failures slowed, easing pressuring on the fund. Also, the FDIC moved $3.5 billion from the reserve for projected losses to the DIF.

The FDIC also reported this morning that the number of banks on the FDIC’s problem list declined for the first time since third quarter 2006. The FDIC now says there are 865 problem banks in the country, compared to 888 three months ago.

The FDIC said on an aggrigate basis, the nation’s banks made $28.8 billion in the second quarter, a $7.9 billion improvement over second quarter 2010 results. This is the eighth quarter in a row that the industry recorded a quarterly earnings increase on a year over year basis. A big part of the improvement is the result of lower provisioning than a year ago. Sixty percent of all banks in the country reported higher earnings in the second quarter 2011 than in the second quarter 2010.

Click here to read the details from the FDIC.

Here are comments from James Chessen, chief economist for the American Bankers Association:

While economic headwinds remain, higher capital levels, increased liquidity and lower losses mark a turning point as the banking industry continues to gain strength. Additional improvement can be seen in fewer troubled institutions and in the deposit insurance fund returning to positive territory.  These figures are clear indications that the worst has passed and the industry is returning to health.

Banks added $26.6 billion in equity capital during the second quarter and over $264 billion in capital since 2008 when the financial crisis took hold.  Total industry capital is now more than $1.5 trillion.  Banks also have set aside more than $207 billion in reserves to cover possible loan losses.  Capital plus reserves gives a total buffer protecting the industry of more than $1.76 trillion. In addition, the industry capital-to-assets ratio – a key measure of financial strength – continues to remain very strong and ended the quarter at 11.3 percent, the highest level since 1938.

The fact that lending saw modest growth – the first increase in three years – is a positive as the economy continues to seek a way forward. Business lending improved slightly for the fourth consecutive quarter, but businesses remain reluctant to invest in new equipment or hire new workers due to uncertainty about the pace of economic growth.  Loan demand remains weak due to the current soft patch in the economy and the lack of confidence is freezing current business expansion plans.  The housing market continues to face an oversupply of existing homes and buyers remain hesitant during a climate of uncertainty. 

Asset quality is improving, as noncurrent loans reported sizeable declines, the fifth consecutive quarter of improvement. In every loan category, the level of delinquent loans declined.  In fact, non-current loans were down by $22.2 billion (6.5 percent) compared to last quarter.  Banks are putting losses behind them and are building a portfolio of quality loans.

The number of banks on the FDIC’s list of troubled institutions has declined for the first time in more than four years, a turning point as the country continues to recover from the recession.  In addition, the pace of failures declined for the fourth consecutive quarter, allowing the deposit insurance fund to recover more rapidly.  The banking industry, which contributes about $14 billion a year in premiums, pays the full cost of the FDIC without any tax dollars.  Banks are committed to maintaining the strength of the deposit insurance fund.  Each depositor is fully insured up to $250,000, and there is full protection for non-interest bearing transaction accounts through the end of 2012.  In the 78-year history of the FDIC, no depositor has ever lost a penny of insured deposits.

With recent volatility in the financial markets, FDIC-insured deposits at banks are proving to be a prudent choice for those who want to guarantee principal and interest are protected.  More than $230 billion in new deposits flowed into banks in the second quarter and the third quarter will show strong deposit growth as well due to the stock market volatility. 

Today’s report shows banks are well positioned to deal with the many challenges ahead as the economy slows once more.  Banks have navigated these economic gyrations many times in the past.    Nearly 5,000 banks – or 64 percent – have been in business for more than 50 years, and one out of three banks has served its local community for more than a century.

Fed independence essential

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Over the years, there have been a number of people who have urged the politicization of the Federal Reserve. The Fed, of course, is independent and there are some people who have a big problem with that. There are those who would like to see the Fed subject to the President, or to Congress. But, wisely, Congress set up the Fed in 1913 as an independent agency; ever since then, however, there has been a tension between the Fed and those who would like more control of it.

The campaign season for the Republican nomination for president official launched with the Iowa Straw Poll on Saturday, and the guy who came in a close second, Ron Paul, has a long history of criticizing the Fed. He would certainly like elected officials to have more control of the Federal Reserve. Now, Texas Governor Rick Perry, who just announced his candidacy for the Republican nomination, is in the news for attacking the Fed. Here is how the Wall Street Journal covers it:

Mr. Perry brought the Fed directly into the campaign debate Monday night by saying it would be “almost … treasonous” for the central bank to play politics by expanding the money supply.

No one wants to see inflation; monetary policy is tricky business and getting the balance of rate setting and money supply is complicated. But I like the idea of that task being in the hands of an agency that is at least supposed to be independent. It would be highly imprudent to put such a task in the hands of politicians.

Why the Minneapolis Fed President dissented

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Federal Reserve Bank of Minneapolis President Narayana Kocherlakota has been drawing a lot of attention since Tuesday, when he dissented from the interest rate action announced by the Federal Open Market Committee. The FOMC announced it would keep rates low through mid 2013. Mr. Kocherlakota was one of three committee members to dissent. Here is how the Wall Street Journal characterized it.

He must have been getting a lot of questions about his dissent because Mr. Kocherlakota issued a statement this morning explaining his decision. He also says he won’t answer any more questions about it until his next public speech, which is scheduled to take place in Bismarck, N.D. on August 30.

Here is Mr. Kocherlakota’s statement:

One of my jobs as president of the Federal Reserve Bank of Minneapolis is to serve on the Federal Open Market Committee. At its last meeting on August 9, the Committee took what I viewed as a significant policy step. I dissented from its decision. I believe that transparency is an essential part of effective policy formation, and so I’m offering this brief explanation of my decision. These views are not necessarily those of others on the Federal Open Market Committee, including presidents Richard Fisher and Charles Plosser.

Entering the meeting, the FOMC was following an unprecedentedly accommodative monetary policy. There were three elements to this policy. First, the Federal Reserve owned over $2.5 trillion of long-term government and government-backed securities. The purchase of the final $600 billion of these assets was announced in November 2010 and completed by the end of June 2011. Second, as it had since December 2008, the Committee was maintaining the fed funds rate at between 0 and 25 basis points. Third, as it had since March 2009, the Committee statement included the forward guidance that it anticipated keeping the fed funds rate at this low level for “an extended period.” The “extended period” is generally interpreted as being between three and six months.

The Committee adopted this three-part policy stance in November 2010. I agreed with this decision and supported it publicly at that time and throughout this year.

In its August 9 meeting, the Committee changed this “extended period” language to say instead that it “currently anticipates economic conditions … are likely to warrant extraordinarily low levels of the federal funds rate through mid-2013.” This statement is designed to let the public know that the fed funds rate is likely to stay between 0 and 25 basis points over the next two years, not just over the next three to six months. Hence, the new language is intended to provide more monetary accommodation than before.

I dissented from this change in language because the evolution of macroeconomic data did not reflect a need to make monetary policy more accommodative than in November 2010. In particular, personal consumption expenditure (PCE) inflation rose notably in the first half of 2011, whether or not one includes food and energy. At the same time, while unemployment does remain disturbingly high, it has fallen since November.

I can summarize my reasoning as follows. I believe that in November, the Committee judiciously chose a level of accommodation that was well calibrated for the prevailing economic conditions. Since November, inflation has risen and unemployment has fallen. I do not believe that providing more accommodation-easing monetary policy-is the appropriate response to these changes in the economy.

Going forward, my votes on monetary policy will continue to be based on the evolution of the data on PCE inflation and its components, medium-term PCE inflation expectations, and unemployment.

It was the banks, not the taxpayers, who bailed out the S&Ls

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An astute reader of this blog telephoned the other day to give me an earful about this article, which we included in our free weekly electronic newsletter last Thursday. He was specifically complaining about this paragraph:

It’s also the highest number of problem institutions the agency has reported at one time since March 31, 1993, when there were 928 banks characterized as problems. That was back when the nation was dealing with what became known as the Savings & Loan crisis — a series of scandals and collapses that ended up closing down nearly a quarter of the nation’s 3,200 thrifts and costing taxpayers $153 billion.

And he has every right to complain. The author of this article is absolutely wrong about the cost of the bailout to taxpayers. Bankers know that taxpayers did not bail out the S&Ls, but the banking industry did.

When the old insurance fund for S&L’s went bust, it was the banking industry that was called upon to finance the solution. Money was borrowed through FICO bonds, which the banking industry has been paying off through the Federal Home Loan Banks. In fact, those bonds are just about paid off.

It might be easy to say taxpayers took a big hit, but that doesn’t square with the facts. I would argue the true story about the banking industry funding the bailout of a competing industry is far more interesting than perpetuating a fantasy about taxpayers rescuing the banking industry.

U.S. Rep. Cravaack explains vote to ICBM bankers

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U.S. Rep. Chip Cravaack, elected in 2010 to the U.S. House of Representatives to represent Minnesota’s eighth district, explained to bankers attending the ICBM convention in Duluth last Friday, why he voted against the House-Senate deal to raise the debt ceiling.

The numbers the country has compiled are not adding up. To be honest, they are down right frightening. [Editor's note: Thursday, August 4, the day before Rep. Cravaack spoke, the Dow dropped 518 points; yesterday, it dropped more than 600 points.] 

After all the debate in Congress, the only thing that has been settled is that the country will continue to grow. All the arguments you heard in the last few weeks was about the rate of government growth. When you heard about “cuts,” it pertained to the rate of government growth. The word “cut” means something quite different in Washington than it does to you and me.

In 2006, our current president, then a U.S. Senator, said in a floor speech in the Senate: The fact that we are hear today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. government can’t pay it’s own bills. It is now a sign that we depend on ongoing financial assistance from foreign countries to finance our government’s reckless fiscal policies. The president has come out and said he regrets those remarks. I wish he hadn’t regretted those comments because, quite frankly, he is 100 percent correct.

We will have a national debt approaching $22 trillion in ten years; the federal budget deficit will still exceed a trillion dollars for the next year and for years to come.

Our country’s financial condition has not improved and the numbers are going to get worse.  

As bankers, imagine a customer coming in seeking a $220,000 loan and he places in front of you his financial statements. It shows you are making $24,000 per year. Your expenses are $36,000 per year. You are spending 50 percent more than you are taking in. It shows you already owe other lenders $1.5 million. And you have promised to pay others $10 million in the coming decades in addition to what you already owe. 

If you multiply each of the figures used in this example by 10 million, that is the current financial situation of our country — $2.4 trillion in revenue, $3.6 trillion in expenditures, $15 trillion in debt and $100 trillion in unfunded liabilities, Social Security and Medicare.

This is why I voted “no” on the deal that was worked out between the Senate and the Congress. The bill simply did not address the problems. And it will be much more difficult to face these problems in the future. Washington has passed the buck to future generations.

ICBM convention report

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Congratulations to Nancy Skophammer of Farmers State Bank of Hartland, Minn., who was elevated to Chairman of the Independent Community Bankers of Minnesota at the organization’s 49th annual convention, conducted in Duluth, Minn., this past weekend. Steve Olson, MinnStart Bank, N.A., Lake Crystal, concluded his year leading the organization.

Also elected to ICBM leadership was Noah Wilcox, Grand Rapids State Bank, who becomes First Vice Chairman; and Dennis Martinson of Glenwood State Bank, who becomes Second Vice Chairman. Jim Kramer, Altura State Bank, is the association’s Treasurer fo 2011-12.

Mike Rothman, commissioner of the Minnesota Department of Commerce, told bankers that he is in the process of hiring five additional bank examiners. The Commerce Department, which oversees some 20 different industries, has a staff of 325 people. “We need a strong, professional staff,” he said. “We were down to bare bones already on our staff.”

In a very entertaining presentation, Mike Veeck offered nine tips for creating a successful organization. Veeck has been involved in promotions with professional baseball for years. He is currently a part owner of the Saint Paul Saints minor league team. His tips:

  1. Hire passionate people.
  2. Make it fun.
  3. Know your mission; communicate it often.
  4. Build a team “you can take home to mom.” Build partnerships among your people, including vendors and staff.
  5. Get comfortable with change. When there is a success, share it with everyone on your team; when there is a failure, take responsibility.
  6. Be creative.
  7. Work the media.
  8. Provide great customer service.
  9. Give back to the community.