There’s a story in Saturday’s Wall Street Journal about the timing of J.P. Morgan’s $2 billion trading loss and how it helps advocates of the Volcker Rule. A similar article appears in today’s American Banker.
Former Federal Reserve Bank of Kansas City President Tom Hoenig, now a director at the FDIC, not only approves of the Volcker Rule, which would curb proprietary trading at commercial banks, but would like to see the largest banks split up in order to separate investment banking from traditional banking. Hoenig has been talking along these lines for quite some time, including at a House subcommittee hearing on Friday. On April 26, he share similar views in Des Moines, telling some 270 bankers that the largest banks should be broken up along six distinct business lines.
“If you look at the largest institutions, there are six lines of business,” he said. “There is the traditional commercial bank. In addition, there is investment banking, there is managing and advising, there are certain kinds of proprietary trading, and broker/dealer activities, and managing investments in trust services.”
Hoenig said the law should segregate these lines of businesses into separate corporations, just as the Glass-Steagall Act separated investment and commercial banking before the Gramm-Leach-Bliley Act was passed in 1999.
Breaking up the largest banks, he said, is not a matter of “getting even,” but a matter of correcting perverse incentives. He said the federal safety net incents the largest institutions to grow and take risks that smaller institutions simply can’t take. Just about the same time Hoenig was making these comments, J.P. Morgan Chase was engaging in highly risky trades that cost $2 billion.
Be sure to read a full report on Hoenig’s April 26 comments in the May 15 edition of NorthWestern Financial Review
John Ryan, who heads the Conference of State Bank Supervisors really understands the dual banking system and the role that smaller banks play in our economy. Speaking in Des Moines recently, he emphasized the importance of relationship banking, saying that larger banks simply cannot replicate the level of service that smaller banks deliver day in and day out.
Ryan said there will always be a place for community banks because small business owners demand the kind of attention that only smaller banks can deliver. He expressed concern, however, that on-going industry consolidation has been concentrated among the industry’s smaller banks. “All the net decline in the number of banks has been among banks with $100 million in assets or fewer,” he said, citing a trend going back to 1992.
Individual judgment and the ability to tailor loans to specific situations is the hallmark of smaller banks, he said, but that mode of doing business is generally out of favor with regulators. Regulation is generally about standardization, he said, whereas smaller banks shine when delivering specialized services. “We have to figure out how to regulate to the institution, not to an arbitrary standard,” Ryan told 270 bankers participating in the annual Day with the Superintendent event on April 26.
Regulators need the flexibility to apply regulations where they are needed. It is a mistake to apply regulations equally across the board to all institutions, and he said dividing the industry into two groups — one with large banks and the other with small banks — still does not provide appropriate distinction for appropriate regulation among a myriad of institutions.
“We need to be smarter about regulation,” he concluded.
John Brown, the chairman and executive vice president of Bank Forward, has been named Executive Vice President of the Independent Community Banks of North Dakota. The ICBND board of directors made the announcement this morning; Brown’s first day on the job will be June 1.
Brown began a banking career 36 years ago at the bank owned by his family, Security State Bank in Hannaford, N.D.. Today, the bank is part of the Bank Forward organization, which has 17 offices throughout North Dakota and northern Minnesota. Brown was president of the ICBND in 1985. He also has served on the North Dakota State Banking Board and on the board of the Bank Holding Company Association.
The top leadership post of the association has been vacant since Don Forsberg left the association suddenly earlier this year after a decade of service. In addition to its membership and advocacy roles, ICBND operates a purchasing exchange and a credit card operation.
The Federal Reserve Board has released results from its first annual study of debit card fees.
It shows that the so-called Durbin amendment succeeded in reducing the fee debit card issues can charge merchants each time a customer uses the card. The data shows the average charge dropped to 24 cents from 43 cents. That information is useful as far as it goes. The real question is, where did the savings go?
Government price fixing is generally a bad idea; the only way advocates of the price cap on interchange fees succeeded was arguing that it would mean savings to consumers. So let’s see the savings. We know someone is savings 19 cents per transaction, but where is that money going? I don’t know any consumers who feel they are getting a better deal now.
I think we all know the merchants are getting that money, particularly the Walmarts and Home Depots of the world. I suspect additional research will prove this point.
The Durbin amendment was a bad idea from the start. Can anyone give me a good reason why government should fix prices so big box retailers can make more money? Down the line as the true impact of the Durbin amendment becomes obvious, I think the chances improve that the amendment will be rescinded.