|ABA Annual Meeting: Bankers assess the present and plan for the future (December 2009)|
Here’s a recap of what Sheila Bair, John Dugan, Ed Yingling, Newt Gingrich, and bankers had to say
In a year when you could have expected bankers to choose to “sit this one out,” attendance at ABA’s Annual Meeting Oct. 25-28 in Chicago, was down only slightly from last year’s meeting in San Francisco. Further, the tone of the meeting, while serious, was not doom and gloom. You could describe it as a mix of, “We’re mad as hell and not going to take it anymore” and “Hold on, we’re in for a wild ride!”
Vendors reported good traffic and interest in the exhibit hall, so attendees—virtually all community bankers—were not in “lockdown” mode in terms of getting things moving again, although the hotel where the event took place was, thanks to a large anti-bank demonstration during the meeting.
The protest only heightened the “mad as hell” feeling among the banks in attendance. It was targeted to the institutions that took bailout money and paid out big bonuses—which were Wall Street firms, and not traditional banks or even banks at all in many cases. (See accompanying story, “Protesters had the wrong crowd.”)
The theme of the event was “Rebuilding our future, community by community,” and one group of early-arriving bankers did literally that. They took part in the ninth annual Habitat for Humanity Build, in partnership with the ABA Housing Partners Foundation and held in conjunction with the Annual Meeting each year. Sessions and speeches were a mixture of dealing with the challenges of here and now and preparing for a return to better times. But the debate over bank regulatory policy and direction driven by the Administration’s massive reform proposal announced in early summer, and the more recent congressional action to implement it, was the overarching issue of the conference. Close behind were questions relating to credit quality, examinations, and the economy.
ABA President and CEO Edward Yingling, in his address to the bankers, described the regulatory reform proposal as the “most massive and complex legislation in 70 years. …I could talk about this bill for an hour, and still not cover all the issues it raises.” The association has publicly supported major reform, he said, and many of ABA’s recommendations are contained in the Administration’s proposal. “Yet this legislation will redesign the financial services industry and determine whether we can compete or not,” said Yingling, “and Congress could get it wrong.”
(The huge bill introduced by the chairman of the Senate Banking Committee, Chris Dodd, just before Thanksgiving was an example of Yingling’s concern. Thanks in part to an outpouring of more than 20,000 comments from ABA members, in addition to criticism from both Democrats and Republicans, Dodd has said he will rework the bill on a more bipartisan basis.)
Two of the top federal banking regulators addressed the conference. Here is a recap of their comments and their responses to banker questions.
Bankers hear FDIC’s Bair
In her remarks to the convention, FDIC Chairman Sheila Bair mentioned that a key priority for regulatory reform was the need for more market discipline to protect the FDIC fund. Two things were needed to accomplish that, she said: 1. “Too big to fail” must end, and 2. A resolution mechanism must be developed that applies to large financial institutions, just the way it applies to other banks when they become nonviable. She felt that there was a growing consensus on these points between regulators and Congress, and among Democrats and Republicans.
Bair addressed the subject of overdraft protection plans in her remarks. She said that banks “try to do a good thing for your customers,” but sometimes go astray with things like overdraft protection. “We need to put some constraints on that,” said Bair. “It’s been a terrible reputational problem for the industry.”
During the question-and-answer period, an Oklahoma banker told Bair that the “hit” that overdraft programs have taken has been in the press and among consumer groups, not among consumers. “Every one of my customers loves the program,” he said, “because we save them money.” He added that in his bank they give away something that would solve the overdraft debate—a calculator for keeping track of transactions and balances.
That got a round of applause from the audience. (See Pass the Aspirin, p. 14, for other banker views and ideas about overdraft protection.)
Bair responded that she hoped the bank was not “one of the ones we’ve seen that have customers spending several thousand dollars a year on overdraft protection—not just the doctors and lawyers who want the convenience and are happy to pay…, [but] people making $25,000 or $50,000 a year that probably can’t afford it.”
She continued, “More broadly, we all want the public to trust banks. We don’t want them to feel like anybody’s playing a gotcha game with them.”
On other points:
• Bair agreed that banks have suffered because everything financial is called a “bank.” One possible solution she offered was that only FDIC-insured institutions could be called banks.
• Bair was asked why the cost of resolutions is higher now than in the last period of bank closings in the early ’90s. She answered that the cost isn’t necessarily higher, depending on how you count the numbers. If you exclude Washington Mutual, then it may not be more expensive; or if you include savings and loans in the figures for the earlier period, then it was a lot more expensive then. She added that loss-sharing arrangements have saved the agency a lot of money, and that providing financing for purchasing assets is a prudent risk.
• A banker observed that the public criticisms of the exam process by the FDIC’s Inspector General’s Office seemed counterproductive and tended to make examiners act to avoid being criticized. Bair agreed that not making the reports public would reduce misunderstandings and reduce pressure on examiners, but making that change would require action by Congress.
OCC’s Dugan talks about credit quality
The overwhelming cause of failures among community banks in recent months is a concentration in commercial real estate credits often fueled by brokered deposits, observed John Dugan, Comptroller of the Currency, in his convention remarks. Bank failures are projected to continue well into 2010, he said, but the percentage of failed banks remains relatively small compared with the 1980s.
Dugan partitioned recent events into three phases: the liquidity crisis, now largely over; the credit loss phase, which the industry is squarely in the middle of; and the regulatory reform phase, now just beginning.
He spoke about credit conditions as OCC saw them in late October. Signs of consumer credit delinquencies appeared to be slowing in the third quarter, he said, based on early data (“we won’t fully believe it until we see the full data,” he added). Commercial credit delinquencies are just starting to climb, with delinquencies in large shared credits at a 25-year high. Residential commercial real estate, he continued, has already seen terrible effects from plunging asset values, whereas nonresidential CRE is just starting to show delinquencies. “It’s too soon to say” how bad that will get, said Dugan.
“We remain focused on recognizing losses,” Dugan emphasized. “Delaying only makes it worse. Later, in response to a question, Dugan took a hard line on deferrals. A banker had observed that 35% of foreclosures were due to unemployment, to which Dugan replied: “We encourage modifications; we don’t encourage deferral. Looking away from generally accepted accounting practice is not the way to go.
The Comptroller was more conciliatory on appraisals, however, saying, “We’re keenly aware of the need to take a balanced approach—for example, not unilaterally adopting collateral declines on appraisals without giving the bank the opportunity to adjust them.
Another banker offered his views on wholesale funding: “When we see a spike in interest rates it means significantly higher cost of funds,” the banker told Dugan, “which brings either narrower spreads or excessive risk. Community banks need a tool to match-fund term debt, and the solution is wholesale funding. I hope we can continue to look forward to using that.”
Dugan replied that it is not the view of the OCC that all wholesale funding is bad. There is a need for it. But it is also true that it caused some of the problems, “so we need a balance.”
On other points:
• Parts of the proposed Consumer Financial Protection Agency are good, said Dugan, particularly the part that would level the playing field between banks and nonbanks in terms of being regulated. There should have been no surprise, however, that the Comptroller has major concerns over the pre-emption of national banks envisioned in the CFPA legislation. “That just invites 50 different sets of rules,” he said, “which is not just an issue for big banks. The measure would invite states to add new regulations for all banks.” The legislative concessions offered to date on this point do not go far enough, in Dugan’s view.
• With everything else going on in Washington in terms of financial reforms, one thing that hasn’t gotten a lot of attention, said Dugan, is revising the basic standards for underwriting residential mortgages. These grew way out of hand—no down payment, no verification of income, etc. “We need to revisit setting some minimums,” said Dugan; “not as a matter of consumer protection, but safety and soundness.”
• Despite all the challenges banks face in Washington, overall, Dugan believes banks once again are in the driver’s seat. “The excesses of the shadow banking system have now been mostly eliminated. Banks can fill the void left by the exit of these unregulated players, and get customers back you lost through the building up of trust and relationships.”
Dugan did add one caution: We need to be sure we don’t return to lax underwriting practices.”
We need balance
In a session immediately following the two regulators’ speeches, ABA’s Senior Vice-President for Regulatory Policy, Mark Tenhundfeld, said he had heard from many bankers that examiners are squeezing them. That’s because the examiners are getting squeezed, he said. “They are feeling pressure from the Inspector General, as we heard earlier, to not let banks fail on their watch. In their mind they translate that into being more conservative right now.”
ABA Chief Operating Officer Diane Casey-Landry, who participated in the discussion with Tenhundfeld and James Ballentine, SVP, grassroots and political operations, said that ABA has been working hard to communicate bankers’ concerns to the agencies about the need for balance. [More on this topic in this month’s cover story, page 16.]
Bankers were polled during this segment of the program using wireless polling devices, and one of the questions was, “Have you contacted your member of Congress or Senator or their staff in the past year?” The answer was: “yes” 81%; “no” 19%. Said Ballentine, “That is fantastic. There have been a quarter of a million contacts through letters that bankers sent just this year, not including visits. That will have to continue because obviously there is a lot more work to do.”
Do your homework early
One well-attended breakout session at the meeting covered the subject of “Acquiring Troubled Banks.” Panelist Steven Butters, a partner with Deloitte, urged bankers to communicate their interest and strategy to the FDIC. “Begin doing your due diligence early,” he counseled, “either with public documents or even as an open bank. The timeline is extremely compressed once it begins. The timeframe for making a bid can be from one to two weeks or as little as 48 hours.”
Under FDIC’s loss-share agreements, the agency will reimburse 80% of loan losses up to a stated threshold, and 95% above that. The loss share cannot be transferred, said Butters. “There is a potential for a nice return [in a troubled bank deal], but it’s not always easy. We urge our clients to appoint a ‘P&A’ [purchase and assumption] manager, to monitor purchase agreements and loss sharing. It’s almost a full-time job.” BJ
Protesters had the wrong crowd
of the signs were hand lettered, some preprinted. One was not really a
sign at all, but a giant circle of fabric, held by about 20 people much
like a fireman’s net. On the top of this circle was printed: “Hold
Banks Accountable! Reclaim America”—meant to be read by people looking
out of windows, no doubt (not to mention TV news helicopters). They
were part of a group of about 2,000 demonstrators marching in Chicago
to send bankers a message. Every time the marchers paused, the group
with the fabric circle would begin rotating in place, chanting the
slogan on their “banner.” There was even a brass band to lend a little
pomp to the circumstance.
The electronic version of this article available at: http://www.nxtbook.com/nxtbooks/sb/ababj1209/index.php?startid=4
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