The following report originally appeared in ABA Banking Journal’s board newsletter, ABA Bank Directors Briefing. For a sample copy of the newsletter, with an order form, click here.
After a formal speech in which FDIC Chairman Sheila Bair took the banking industry to task for some of its attitudes and recent history, bankers rose during a Q&A session with her at ABA’s Government Relations Summit, March 14-16, and gave Bair a piece of their minds.
Hold on there!
Nearly 1,000 bankers in attendance had had several days of discussion and visits with regulators and trips to Capitol Hill. FDIC’s unpopular guidance on automated overdraft checking programs (Financial Institution Letter 81-2010) and the Dodd-Frank Act in general became lightning rods for a general level of frustration.
More about community banks and Dodd-Frank Act
• Community Bank Testimony: For a companion story about ABA’s testimony at hearings regarding the impact of the Dodd-Frank Act on the community banks, click here.
• Community Bankers Speak Out: For a roundtable discussion among community bankers about the impact of Dodd-Frank, click here.
• Vermont banker: “We are not writing the checks” that cause overdrafts, said one banker. “Our customers are making the decision to write the checks. This is systemic in our society. We are weak on responsibility for our actions.”
This same banker—having heard Bair speak of Dodd-Frank as almost a benefit to community banks because of its impact on very large institutions—continued to express frustration. No bank in his state took TARP money, he said, and foreclosures were quite low there.
“We don’t need more regulations,” the banker continued. “We try to do the right thing day in, day out. The only thing that new regulations are doing is increasing our costs.”
• Michigan banker: Having heard in another venue that Bair believes that banks’ automated overdraft programs cost consumers more than payday lenders—and Bair confirmed this belief to the audience, citing FDIC research—this banker grew angry with the chairman.
There’s no difference between the charge for covering a check with overdraft service and the charge for a bounced check returned for insufficient funds at his bank. Further, he said, a bank that covers the consumer’s check not only saves the consumer from the retailer’s bad-check fee, but also keeps them from winding up on the retailer’s “hot list.”
Bair indicated that she appreciated that point. But she added this: “It would be much lower cost if you set up a line of credit for them. But you [the industry] don’t want to do that.” Over the years bankers have indicated that many overdraft users wouldn’t qualify for lines of credit. Bair’s agency has pushed for banks to make small-dollar loans, as well.
This same banker accused FDIC of, effectively, legislating in its overdraft guidance, rather than solely regulating. While he said that the industry appreciates guidance, he added that “guidance” and “guidelines” generally come to be regarded by examiners as formal rules.
“I urge caution,” he insisted. “Don’t overstep the bounds and don’t legislate when you give guidance. Let the legislative process handle changes in law.”
• Another banker, with a sense of wry humor: This banker said he had taken FDIC advice to heart for some time, and that his bank attempts to counsel those who overdraw too frequently. He gave what he called a representative example, a woman who repeatedly overdrew her account. The bank talked to her and set up a $1,000 overdraft line. Now, the woman overdraws not only her account, but the line, too.
The banker said he was reminded of Larry the Cable Guy, and expressed this thought: “I’ve got a horse with a broken leg. I’m told I’m supposed to shoot it. Now it’s got a broken leg and a gunshot wound.”
“It sounds like you’ve done all you could,” said Bair. Her beef is with those who will not talk to habitual check bouncers.
At several points the possibility—quite remote in any total sense—of repealing Dodd-Frank came up. When Bair asked if the audience would like the law repealed, they made it clear they would. When much of the audience identified itself as community bankers, Bair expressed disbelief.
Much of Dodd-Frank was aimed at large banks, she insisted. “They’re really facing the brunt of this and community banks are not,” she said. “I don’t get that reasoning.”
The bankers’ collective disconnect to Bair’s reasoning was expressed as much in moans and groans during her talk as by the executives who stood to formally comment or question.
When at one point Bair suggested that the new Consumer Financial Protection Bureau would help community banks, loud grumbles of disbelief went through the crowded listeners.
In one of her final comments, Bair stated, “My tenure at FDIC has not shown me to be an enemy to community banks. It shows the opposite.” Bair is among those officials who have come out against the Dodd-Frank “Durbin Amendment,” which could hurt banks through loss of interchange income
Then she added: “I encourage you to think for yourselves and don’t be based on hypothetical things that could happen. Look at what’s really happening.”
Bair’s speech to summit
Bair’s formal remarks, frequently pointed, contained this statement early on:
“I would like to propose to you a radical-sounding notion. And it is that increasing the size and profitability of the financial services industry is not—and should not be—the main goal of our national economic policy.”
While banks play an essential role in economic growth, she said, the financial crisis was preceded by record earnings in banking in the first six year of the last decade. The recession that came next cost the economy 8.5 million jobs, she said, and has seen more than 9 million home mortgages enter foreclosure over four years.
Bair believes the only yardstick that really counts is the performance of the economy. Speaking both for banks and regulators, she said, “let’s be completely honest—in the period that led up to the financial crisis we did not get the job done.”
Bair pointed to construction and development real estate loans as an example of what went wrong. She stated that net charge-offs of such loans now exceeds 10% of the “C&D” loans that were on bank books at the end of 2007.
“I encourage you to think for yourselves and don’t be based on hypothetical things that could happen. Look at what’s really happening.”
Many bankers in the last two years have complained that examiners and real estate appraisers have played off each other, with falling appraisals driving writedowns forced by examiners who tell bankers to act immediately, rather than waiting for properties to make a comeback.
[You can read some of the tougher-worded excerpts from the speech in “Hard words from FDIC’s Sheila Bair.” And you can download Bair’s entire speech text.]
Faulting industry resistance
Bair indicated a belief that results might have been less severe had regulators reined in more of this lending when it was happening.
“But a review of comment letters sent to regulators by industry trade associations before the crisis shows a consistent pattern of opposition,” she said. It was pointed out, for instance, that “high levels of commercial real estate lending were necessary in order for small and midsized institutions to effectively compete against larger institutions.”
On the mortgage side, she said, ”when we issued proposed guidance on non-traditional mortgages, industry comments found the guidance too proscriptive.”
Bair’s diagnosis, overall:
“For our part, I think it is clear in hindsight that while our guidance was a step in the right direction, in the end it was too little, too late. To be sure, most—but not all—of the high-risk mortgage lending was originated outside of insured banking institutions. But many large banks funded non-bank originators without appropriate oversight or controls. And CRE lending did not cause the crisis, though poor management of CRE concentrations made far too many institutions vulnerable to the housing market correction some opportunities before the crisis to help protect well-run institutions from the high-fliers—both within and outside the banking industry—whose risky lending practices were paving the way for the real estate crisis.”
ABA letter tells Bair: Dodd-Frank is a “net negative” for community banks
In the wake of her speech, ABA Chairman Steve Wilson, a community banker himself, sent FDIC Chairman Sheila Bair a followup letter indicating in detail what community banks object to in the controversial legislation.
Wilson said that despite Dodd-Frank provisions that the association supported–including the creation of the Financial Stability Oversight Council; $250,000 deposit insurance; and the preservation of the thrift charter—Dodd-Frank is a net negative for community banks.
“[S]everal provisions of the final legislation were … harmful to the ability of all banks—and community banks in particular—to continue to provide the products and services that our customers want and that our communities need for robust and sustained economic growth and prosperity.”
Wilson said community banks are most concerned about:
• Debit card interchange
• Creation of the Consumer Financial Protection Bureau
• New capital standards
• New reporting requirements
• Risk retention on mortgages
Read ABA’s letter