For links to online extras included in this report, scroll to the green box in the latter part of this story.
In recent years, there have been folks in Washington who made bankers' blood boil. These people may have had misconceptions about the industry, or axes to grind. They may have been on the fringe of the debate, or they may have been its orchestrators.
Many such figures played a part in passage of the Dodd-Frank Act, which is generating a wave of regulation that many bankers believe their institutions cannot afford. But Mike Hunter says there's something else bankers cannot afford. And that is dislike, or worse, of policymakers they don't agree with.
"You may disagree with someone's ideas and opinions, but you can't let that devolve into something personal," says Hunter, ABA's chief operating officer.
Hunter believes this for practical reasons. Such an attitude interferes with the ability to secure the best results possible for the banking industry in Washington.
"You start disliking somebody and you discount everything they say," Hunter continues. There's much of this in Washington already. While ABA pursues, and will continue to pursue, industry priorities aggressively, Hunter considers it critical to strike the right tone. For him, that tone is for ABA to be seen as provider of "the best information, the most credible information, the most factual information, and, hopefully, the information that works toward the public-policy goals of this industry."
A case in point-but hardly an isolated one-is Senator Elizabeth Warren (D-Mass.). To many bankers, she is the creator of the Consumer Financial Protection Bureau (CFPB), and not a person they wanted to see get sent to the Senate-and especially to her post on the Senate Banking Committee.
Ignoring Warren is the last thing ABA would consider, says Hunter.
"Elizabeth Warren is a very smart person," Hunter explains. "Experiences that she's had caused her to be skeptical of the industry. It's going to be up to organizations like ABA to tell her, in a factual, credible way, the rest of the story. And I think she's fair-minded. I think she'll be somebody we can work with."
Ditto for any other new member of Congress, whether backed in the elections by banking or otherwise, Hunter says.
"Here in Washington, you don't get to pick and choose which members you get to work with," explains James Ballentine, executive vice-president, congressional relations and political affairs. "We work with whomever the people send us." This applies not only to ABA staff lobbyists, but to bankers who visit lawmakers to press the industry's case.
"You may not be a fan of that particular Senator or House member," says Ballentine. "But that member has a vote. And that's the person you have to work with from now until the next election. You try to find some areas where you can work together."
Coming to the table
The point is, for the industry to accomplish what it needs to in Washington requires a realist's approach to the players and to the game as it is played.
Seeing industry-favored legislation pass requires more than the support of longtime friends. "You can spend eternity promoting bills that will easily pass the House," says Ballentine, "and you can watch them die in the Senate, which some call the âcongressional graveyard.' Alternatively, you can try for something that will be done in a bipartisan way, so that when it goes over to the Senate, there is a stronger likelihood that it will pass."
The same, but different
Consensus building isn't easy, even within a single committee. Ballentine points out that the new leaders of the House Financial Services Committee, Chairman Jeb Hensarling (R.-Texas) and Ranking Member Maxine Waters (D-Calif.), have rarely agreed. However, if the industry is going to achieve its goals, consensus building "is simply what's going to have to be done," says Ballentine.
As ABA pointed out in a members-only election analysis, after $6 billion in campaign spending, America voted for precisely the same balance of power in Washington that it had before. However, whatever the issue-Dodd-Frank reform; Basel III; the "fiscal cliff"; the future of the mortgage business; the CFPB; or the reform of the bank-exam process-there is a difference now. The passage of time-as well as earlier airings of certain bills-may help the banking industry achieve things it couldn't have a year ago. Simply putting the reelection of the President and the congressional elections behind it sets up the Washington chessboard just a bit differently.
"We're hoping that with the elections being over, the political fun with the banking industry is now also over," says Wayne Abernathy, executive vice-president, financial institutions policy and regulatory affairs. "Now, maybe, people here can recognize that the banking industry can actually be an important part of economic recovery. And that kind of depoliticizes it."
Wishful thinking? Not to Abernathy, an old Hill hand. "It's more than a hope-I call it an operating hypothesis," says Abernathy. "I believe that bank policy on the Hill and among the regulators is going to be far less politicized."
What gives Abernathy such optimism? He believes we've already seen the beginnings, in the way Congress reacted to Basel III.
Basel III: Concern across the aisle
ABA had two priorities as the original Basel III implementation dates approached: first, to push them back, and then, to get U.S. regulators to take a fresh look at their version of the international templates. Banking interests pressed for oversight hearings in the House and Senate to show lawmakers how the proposals could harm their constituencies.
"And Congress reacted in the old traditions, not even in a bipartisan way, but in a non-partisan way," says Abernathy. He ticks off some of what developed: the entire Maryland congressional delegation joined in a letter to regulators pointing up problems in the proposal, and 53 senators from both parties sent in a similar message to the agencies.
"I thought it would take us much longer to get the attention of Congress on this issue, and to get congressmen and senators to venture out and say something," Abernathy says. "Instead, they stopped being Republicans or Democrats and simply asked, âWhat are you trying to do to my local economy?'"
And that is when Abernathy began to think the long run of bank bashing had run its course.
"Bipartisan or non-partisan banking policy and legislation is a tradition that has been violated plenty of times," says Abernathy. "But it's a tradition that tends to reassert itself."
Good news, potentially-but still only the end of round one.
"There's been a sea change among the regulators," says Hunter. "There seemed to be a mad dash to get Basel III implemented. It's clearly slowed down. The delay was certainly welcome. The next challenge is to fix it. In a perfect world, they would start over and not assume that a group of European regulators can gather in a small town in Switzerland and redesign the American banking industry."
How did Basel III go so far from what the industry could work with? Abernathy blames it on a process that "gave development over to committees of experts who weren't really high-level policy folks. The more they worked on it, the more complex the whole thing became. They just got carried away-Basel III became an effort to manage everything in the bank."
What's more, Basel III has other issues wrapped up in it that have been tackled, or proposed to be handled, in other ways. For instance, when you review the treatment of "AOCI" (accumulated other comprehensive income) you see "mark-to-market" accounting rearing its head once again, points out Donna Fisher, senior vice-president of tax, accounting, and financial management. And Bob Davis, executive vice-president, mortgage markets, financial management, and public policy, points out that the currently back-burnered "qualified residential mortgage" (QRM) test "is really a capital rule, because it basically says that mortgages of certain characteristics you have to retain risk on-and that is just another way to say that you have to hold capital."
QRM proceeded before Basel III did, Davis notes. "Now Basel III would change capital requirements on mortgage assets, too. We have disagreements with some of what's been proposed, but it makes no sense to go forward with QRM until you have some clarity with respect to what you're going to do with Basel capital standards." In time, Davis suggests, QRM may become absorbed into the Basel process in some fashion, or simply fall out.
Bankers still have much hard work ahead, Abernathy admits. So far the agencies have hit the snooze button and promised a judicious review. Now, says Abernathy, bankers must gather data about the impact "not just on their bank, but even more importantly, on their cities, towns, and villages, and customers." If they do that and push their data hard, they may budge regulators.
The part that Congress will play as the regulators reconsider Basel III is fluid at this point.
"We're not taking legislation off the table," says Hunter. "It's certainly an option. One of the responsibilities of Congress is to police the activities of regulators, to ensure that they operate within the parameters of their delegated constitutional or statutory authority. Congress is clearly concerned that regulators are outside the lines here."
Congress acts, often, by raised eyebrow or cleared throat, rather than through direct override. "I don't know if legislation ever comes to pass on this," says Ballentine regarding Basel III. "There's been no bill on it, but already there have been 14 congressional-delegation letters written."
Dodd-Frank: Focus on adjustments
In two words, the name of this law capsulizes a world of hurt. When asked if he agreed with the Wall Street Journal's characterization of the act's regulations as a coming "avalanche," Mike Hunter says:
"I couldn't agree more. When you look at the progress that's been made on Dodd-Frank implementation, we're not even halfway through what's necessary to put the statute into effect. And many of the regulations still pending are those that will have the most significant impact on banking."
ABA's hope, going into the new Congress, is for legislation that, in Hunter's words, takes the "incongruities and rough edges" off Dodd-Frank.
Is this doable? Hunter hopes, like Abernathy, that with the bank-bashing season over, Congress and the Administration will be willing to delve into some fixes, while regulators get moving on the rules.
In seeking Dodd-Frank fixes, Hunter and his team acknowledge that the Administration will resist. "There is no question that Dodd-Frank, in many ways, channels the President's view of financial services. He's invested in Dodd-Frank and sees it as part of his legacy," Hunter says.
Where does ABA begin then? "Our overture is that we recognize that Dodd-Frank is law," Hunter explains. This includes ABA's position, for instance, that the CFPB has come to stay-only its structure is up for discussion.
"We will be results-oriented, and target-and demonstrate-that areas of Dodd-Frank need modification so they can work," maintains Hunter. "If you want to look at this idealistically, we'd be helping the President perfect his legacy, because as the law stands, there are areas where goals won't be met, or only imperfectly."
ABA will seek adjustments both broad and specific. As an example of the former, ABA believes the industry will be better served if the Financial Stability Oversight Council (FSOC), created by Dodd-Frank, were empowered to take a more activist position when required.
More than a dozen ABA experts contributed their insights to this special combined magazine and online report. Covered in the magazine story (this article): Basel III, Dodd-Frank changes, mortgage reform, exam bill prospects, and more. Plus the outlook for compliance and the Consumer Financial Protection Bureau ("The Bureau and the Burden," see link below). Here are the online extras promised in the print edition.
â˘ Farm Lending: Notes on the farm bill and Farm Credit System--with John Blanchfield and Ed Elfman. Read more
â˘ Bank Accounting: Major shift on loan loss reserves coming--with Donna Fisher and Mike Gullette. Read more
â˘ Payments & Cybersecurity: Prospects for 2013 legislation and more--with Ken Clayton and Bill Boger. Read more
â˘ Mortgage Lending: Untangling Dodd-Frank's mortgage market machinations--with Bob Davis. Read more
â˘ Mutual Issues: Pursuing mutual savings institutions' special concerns through Basel III debate--with Bob Davis. Read more
â˘ Compliance: The Bureau & the Burden--Richard Riese and ABA's compliance experts look at the challenges ahead from CFPB. Read more
Why does ABA want a government entity to be more "activist"? "FSOC needs to be a much more front-and-center element of financial-services regulation," explains Hunter. "There needs to be much better coordination of what's going on under Dodd-Frank, a much better effort to synchronize the different rulemakings. If you don't have that, you are potentially creating systemic problems."
Bob Davis points to a strong example of good intentions gone awry under Dodd-Frank in the mortgage area. "They're trying to build a new regulatory structure by outsourcing different parts of this massive body of work to different regulators and regulatory groups," says Davis. "Now, we-ABA-might not even agree that each module has strong internal consistency and logic. But we believe that when they come to bolt all the modules together, that plane's not going to fly."
Indeed, that's going to be part of ABA's approach to obtaining all the fixes to Dodd-Frank that it can.
James Ballentine says his message on the Hill has been that, "I've never seen a perfect bill come through Congress, and I've certainly never seen a perfect bill that's 2,000-plus pages long." The message relayed is: It's been two years; we know what needs fixing; let's do it.
Easier fixes will be items like the application of the municipal-advisor provision to community banks. "Those are what I call âunintended-consequence provisions,'" points out Ballentine.
More challenging will be hopes of changing CFPB so that it is led by a commission or board, like the SEC or FDIC, rather than by a single director, presently Richard Cordray. Ballentine says there has been support for this on the Hill already-indeed, that's what draft legislation called for. "The commission structure has worked very well in other agencies, and CFPB as currently set up has nobody overseeing an agency with very broad authorities," says Ballentine.
What about the Durbin Amendment? Repeal isn't likely, and the battle may be to keep Sen. Richard Durbin (D-Ill.) from expanding his retailer-backed viewpoint to more payment mechanisms, beyond debit cards. Durbin serves as Senate majority whip, a powerful post.
"He's very close to the retailers, and we are always vigilant of his activities," says Ballentine.
Attempts to make progress on Dodd-Frank overall will begin on the House side. Incoming Chairman Hensarling has already indicated that he plans to hold hearings-including legislative hearings, not just oversight hearings.
Results can be harder to get in the Senate, says Ballentine, but ABA works with Chairman Tim Johnson (D-S.D.) and Ranking Member Mike Crapo (R.-Idaho). "They'll be active, too," he says. "Chairman Johnson has been a broad defender of Dodd-Frank. That's caused bankers some concern. But after two years, we will have to make our case to the chairman that there are some facets of Dodd-Frank that clearly need to be reviewed. Whether he will go down that road with us remains to be seen."
Ballentine says the Administration has given no indication it will support fixes, but ABA recognizes that all parties to Dodd-Frank must be engaged to get the job done. "The continual message we have to share with the Administration is that you need a strong banking industry if you're going to not only help small businesses but the housing sector and lending overall," he says.
Getting that conversation started is key. "Every relationship starts with a first date," says Ballentine. "So we have to have a first date in the post-election world. We'd like to see banking called to the table more often, as an industry-not just ABA, but the industry-to share our thoughts on key issues."
All this said, Hunter warns bankers that they must make some adjustments in expectations, in the wake of the election. "We've got to figure out how to adapt," he says. "This is a new reality." The American people just had the opportunity to reassess the policies and core beliefs of the Obama Administration and gave the President a second term. "You can't ignore that."
As this article was written, the fiscal cliff hung over the Capital and the nation. ABA lobbyists held no illusions that anything Congress does on the matter will permanently solve the issues nor cap them for long. Post January 1, they were right.
"We're not going to be able to cut our way out of this problem. We're not going to be able to tax our way out. Nor will a combination of the two solve it," says Hunter. "There's got to be a multi-year approach that will produce cuts, bring in more revenue, and produce growth."
Adds Abernathy: "The cliff was a small trial run for the bigger problem: Government services promised to people have outrun revenues. The gap is growing wider. This is a story that will continue to play on and get worse and worse."
"In a time of broad-based tax reform, you have to consider everything," says Bob Davis. "Everything's got to be on the table."
And that includes housing and mortgages. "Most housing policy in the U.S. is tax based," explains Davis. This encompasses many items, including tax credits for low-income housing and the mortgage-interest deduction. On the other side of the coin is the deep federal spending on housing-related functions, says Davis, notably the hundreds of billions of dollars put into supporting the Freddie Mac and Fannie Mae conservatorships.
GSE (government-sponsored enterprise) reform once considered a fast-track issue following the crisis, went into a political holding pattern in anticipation of the elections.
In the House, says Davis, "you've already had proposals for faster resolution of the GSEs, rather than a never-ending time frame. And Chairman Hensarling has been an advocate for that." In the Senate, Davis cautions, there may not be such enthusiasm for rapid action. Regulators, he adds, favor a gradual resolution.
Davis believes the necessary debate and resolution will occur over several years. A core element: setting realistic prices charged for government involvement in the mortgage markets. "You need to raise guarantee fees on mortgage securities so they truly reflect the services government provides," he says. "Said another way, you will not have a private mortgage market unless the government-guarantee fee is high enough to ensure that private investors will want to hold mortgage assets that don't have a government guarantee."
Another factor, says Davis, is that "in the future, there are not going to be any high-risk mortgage assets." He says the pending qualified mortgage (QM) and ability-to-repay standards will drive much more homogeneity in mortgage pools.
"So the differentiator between pools of mortgages will not be asset quality so much," says Davis. "The differentiator will be, âDo I want to pay a lot for the guarantee?' The future mortgage market will develop all around that one question."
Regarding the potential timetable for reform, James Ballentine expects that much of the groundwork for change will be set during 2013. He expects the issue to come up in this Congress-in 2014, if not 2013.
"This is something that just has to be addressed," says Ballentine. "There's no way that Fannie and Freddie can continue to live in the existence that they're in right now."
Exam reform: Over the hurdle?
In the last Congress, bankers won much support for the Financial Examination Fairness and Reform Act. Many were disappointed when it failed. But did it? Bills go in with differing purposes. "You can introduce a bill just to have it introduced," says Ballentine. "You can introduce a bill for messaging. And you can introduce a bill to get it passed." Ballentine says ABA's intent was both to send a message to regulators that they were being too harsh, especially on loan classifications, and to see the bill become law.
On the message point, Ballentine believes it was successful. "We've heard from banks that they've found regulators much more receptive to discussion," says Ballentine, "but we still think the bill is needed." Regulators will resist, Abernathy predicts, claiming that they've eased up.
"I think our point would then be, âYes, well, why are they improving? Because you guys were trying to avoid legislation.'" â˘
[This article was posted on January 18, 2013, on the website of ABA Banking Journal, www.ababj.com, and is copyright 2013 by the American Bankers Association.]