Archive for the ‘systemically unimportant’ Category

It’s Time for Real Financial Reform

Tuesday, April 13th, 2010

Yesterday, the 111th Congress returned from its spring recess, undoubtedly rested and re-energized following the tumultuous and bruising year-long battle over health care reform.  With less than seven months remaining before the mid-term elections in November, the Democrat-led Congress is putting everything on the table, forging ahead with an aggressive agenda that includes financial regulatory reform, a third stimulus “jobs” bill, immigration reform and confirmation of a new Supreme Court justice.

The weeks and months ahead will be trying ones for those of us who care deeply about the banking industry.  Politicians and talking heads will cast aspersions about bankers, painting us all with the same brush and labeling us as “greedy fat cats.”  And yet, if the economic meltdown has proven anything, it’s that two classes of financial institutions exist in this nation; one, the community banks that sustain and encourage growth in Main Street America and, two, the “too big to fail” banks that pose a substantial risk to us all through unscrupulous and unsafe business practices.

With this disparity in mind, we must speak out against “one size fits all” efforts at financial regulatory reform and encourage members of Congress to enact real reform that addresses the sectors of the industry that pose the biggest threat to the American economy.   In order for real financial regulatory reform to be realized, there are four criteria that should be included in any bill sent to the President for signature:

1) End “Too Big to Fail” -  “Too big to fail” is a reality.  We believed, perhaps naively, that businesses succeeded or failed based on the merits of their business practices.  But not the so-called “systemically important” banks.

The bailout of financial institutions deemed “too big to fail” has created a competitive disparity in the marketplace, with the federal government ultimately choosing the winners and the losers.  Meanwhile, 197 smaller community banks have been allowed to fail since the fourth quarter of 2008.  It would take just more than $22 billion to bring all of the currently undercapitalized banks up to minimum capital standards as defined by regulators, contrasted with the $45 billion needed to bail out a single “systemically important” bank, Citibank. 

2) Rethinking how we deal with risk – When a bank fails, it costs millions, perhaps even billions of dollars to untangle that bank’s business dealings and to wind down the operations of that bank.  Under the current system, other banks pick up that cost through the Federal Deposit Insurance Corporation (FDIC).  At this time, community banks account for approximately 70% of the money that goes into the FDIC fund, while multi-billion banks account for just 30% because the assessments on banks are not based on actual systemic risk, just balance sheet objects.  This disparity must be addressed through real deposit insurance reform.  Future assessments should be assessed on assets, not deposits.  After all, it is the assets (loans) that go bad, not deposits!

Further, real reform would involve the creation of a systemic risk fund for the largest financial institutions with more than $50 billion in assets.  Just as you buy life insurance before you actually die, the systemic risk fund would be capitalized by fees charged to every bank over $50 billion, thus making those banks liable for their own systemic risk rather than transferring that risk to all other financial institutions.

3) Totally exempt banks with under $10 billion in assets from the oversight of the Consumer Financial Protection Agency (CFPA)
The CFPA is a classic overreaction by lawmakers who have little understanding of the way that financial regulation works in the first place.  The current economic collapse was not caused by sound business practices used by community banks, but rather by the employment of unscrupulous and unsafe practices in the interaction between large banks and the so-called “shadow banking” industry, which simply over-leveraged its debts to its assets until their house of cards came tumbling down.

The banks that should fall under the oversight of the CFPA are those that pose the biggest threat to consumers and the economy because of their large systemic risk.  These are the banks that did the harm in the first place and those that can most easily threaten the economy if left unchecked in the future.  Subjecting community banks to even greater levels of regulation will do nothing but stifle innovation in the marketplace and increase more red tape and costs to the consumers.

4) Preserve regulator choice
Under the current system, banks have the choice of whether they want to be regulated at the state or federal level.  This choice preserves health in the regulatory arena by providing a checks and balances system as state and federal regulators strive to be fair, equitable and, most importantly, consistent in their oversight of banks.

Despite the recent challenges in the economy, the United States continues to have the world’s strongest banking system, in large part because the system of regulator choice works so well.  Preserving a strong banking system is in the best interest of the consumer and the economy and any attempt to centralize authority of the banking system under the federal government should be recognized for the significant threat it poses to the strength of the industry.

The failures of the banking system cannot be allowed to be repeated.  However, there is a right way and a wrong way to go about creating strong system. The key to getting it right lies in recognizing the essential differences between financial institutions in the United States.

Congress has an opportunity to make it right.  The question is, will they do so, or allow themselves to become mired in partisan battles rather than solving the issues at hand?  They must ensure that the mistakes which led to the current financial crisis are never repeated.  Reform efforts must focus on the area of the industry that is sick, leaving community banks out of the reform rhetoric and allowing them to continue working for real citizens and small businesses in every community.

Posted in CFPA, Consumer Financial Protection Agency, FDIC, IBAT, Independent Bankers Association of Texas, bank regulators, community banks, financial regulatory reform, systemic regulator, systemic risk, systemically important, systemically unimportant, too big to fail | 2 Comments »

Preserving the Dual Banking System

Thursday, May 28th, 2009

Early this month I had the opportunity to hear Treasury Secretary Tim Geithner speak to the ICBA Washington Policy Summit. He was clear in his intent at that time that this administration was in the final planning stages in releasing their recommendations for reconstituting the bank regulatory system.

Yesterday’s Wall Street Journal article by Paletta writes “the new bank regulatory agency could prove controversial because it would consolidate the Office of the Comptroller of the Currency and the Office of Thrift Supervision and strip supervisory powers from the FDIC and the Federal Reserve.” The Federal Reserve would likely be deemed “the systemic regulator” and the FDIC would be relegated to receivership and insurance.

Another set of eyes?

Paletta goes on to report that the Administration has no intent to eliminate the dual banking system and stir controversy among the more than 5,000 state chartered banks. State charters and state regulators would be preserved but a single federal regulatory agency would have jurisdiction rights to examine the state banks and provide what the administration calls “another set of eyes. This approach would also prohibit “financial institutions from “shopping” for the best regulator.

Wait a minute. What would be the point of having a state charter and a state regulator if you also have to open your doors to the new OCC? Our dual banking system has served this country well for decades. One has to ask if this isn’t a back handed approach to create one super regulator for all banks who are systemically unimportant. Charter choice is not about “shopping” for the best regulator. It is about personal choice.

The Administration instead should be focusing on is preserving the existing regulatory structure as we know it and establishing a bifurcated regulatory system by establishing a community bank state or national charter and a commercial state or national charter along permissible banking power activities. Regulatory structure should be commensurate with risk depending on which charter choice you choose. Our current financial crisis was not caused by community financial institutions sticking to basic banking principles. It was caused by large commercial banks that expanded their reach into risky commercial enterprises.

A single federal regulator with jurisdiction over all systemically unimportant national and state banks would destroy, in this bloggers eyes, the dual banking system as we know it. It is not the current system that is broken, just the current one size fits all application of bank regulation.

Let’s all hope the Administration goes back to the drawing board, or in the event they advocate this new plan, Congress will see fit to ensure community banks are not further penalized for the sins of others.

Posted in FDIC, IBAT, ICBA, Independent Bankers Association of Texas, Texas Community Banking, Timothy Geithner, bank regulators, community banks, comptroller of the currency, federal reserve, office of thrift supervision, state bank charter, systemic regulator, systemically important, systemically unimportant, too big to fail, treasury | No Comments »

Breaking Up The Behemoths

Thursday, April 23rd, 2009

“And David  strikes Goliath in the head with a stone from his sling; the Philistine fell on his face to the ground. “

It was music to all community bankers ears this week to hear three respected economists, one a 2001 Nobel prize recipient, tell a Joint Economic committee of Congress to break up the too-big-to-fail institutions and disassemble the oligarchy they have created.  I say Amen, too.

Breaking up the behemoth banks would mean recalibrating the disproportionate influence they have had on public policy.  Translated for community bankers…a bifurcated banking regulatory system just might be within our reach.  Community bankers are tired, and rightfully so, for paying for the sins of Wall Street in the form of higher FDIC insurance costs, and their owned tarnished credibility in the eyes of the general public and lawmakers.

There are obvious immediate benefits that will accrue to all community banks if Congress has the guts to set about a systematic plan to break up the big banks.  Deposits will funnel back to local communities where they were extracted and rightfully belong into the hands of the more than 8,000 community banks to be put to work for the local folks.  More money will be available for small business and consumers.

But perhaps the most significant benefit that could result from this is a reduction of the many hidden costs of regulatory burden…a burden that has most community institutions drowning in cesspool of paperwork.

Last month I heard one of the more sensible solutions to reducing the regulatory burden on community banks.  It was sensible to me because it is precisely what my colleagues and I have been advocating for the past ten years.  And, it came from a bank regulator no less.  He advocated that two charter types should be created; one a commercial charter for those institutions that choose to venture out of traditional banking services into exotic and risky product lines, and  a community bank charter for those institutions that wish to operate more on traditional banking product and service lines.  Each would be subjected to different regulatory and examination specifications proportionate to risk.

We are a long way from realizing the dream that one day community bankers would be rescued from over regulation…regulation that has largely been created thanks to the greed and corruption of the mega banks.  The testimony of  the three economists this week however was a good start.  It is nice to see that someone is hurling the stones precisely where they need to be hurled.

You never know when one just might bring the mighty behemoths down.

Posted in FDIC, Independent Bankers Association of Texas, TARP, bank regulators, default category, federal reserve, systemically important, systemically unimportant, taxpayer, treasury, wall street, zombie bank | 1 Comment »

Systemically Unimportant?

Thursday, April 2nd, 2009

It’s like drinking from a fire hose.

Everyday there seems to be a new announcement from Treasury on the latest initiative to restore the financial system. Last week we learned that the Treasury and Administration would like to have visitation rights and new regulations imposed on “systemically” important non-bank institutions.

Soon, the Treasury will announce their plan for regulatory reform of the banking system. They are expected to announce that the Federal Reserve will be the regulator to oversee “systemically important” financial institutions.

I resent the constant reference to systemically important and systemically unimportant financial institutions. I recognize that the government has replaced too big to fail with too big to close or systemically risky to close.

In my way of thinking there is no such thing as a systemically unimportant financial institution, regardless of its size. Community banks after all are systemically important to their communities. Just see what happens to small business agriculture and consumer lending if the local banks goes down. It has a chilling affect on the economic well being of the community for years to come.  Community banks after all, are nothing more than a mirror image of the markets they serve.

Just ask any of the local folks who have seen their dreams realized thanks to their local community bank.

Posted in IBAT, Independent Bankers Association of Texas, Texas Community Banking, business agriculture, community banks, federal reserve, systemically important, systemically unimportant, too big to fail, treasury | 1 Comment »