Bank Lawyer's Blog

Barney Bites Bernie (And Neel)

2016-03-27T22:07:00-05:00

Now that hell has frozen over, I find that all kinds of amazing things are occurring, one of which has created the danger of ripping a huge hole in the space-time continuum: I find myself in agreement with Barney Frank.

While watching the PBS News Hour this past Thursday night, who should pop up but the former House Banking Committee Chair and favorite Bank Lawyers Blog Bullseye, Barney, who was interviewed by Jeffrey Brown about Frank's reaction to statements by Neel Kashkari, currently president of the Federal Reserve Bank of Minneapolis and former Bush Bailout TARP Toolmaker, and the ever-cranky Bernie Sanders, Gen Y's favorite "Democratic Socialist," about "To Big To Fail Banks." Sanders also alleged that the way to break up big banks is to reimpose the Glass-Steagall on commercial banks. Frank, now that he's out of the political arena and no longer feels compelled to be what every politician feels he or she must be, i.e., a caster of shade upon of the truth, was remarkably critical of two gents who are spouting the Democrat Party line about the evils of Wall Street's "TBTF" banks.

Barney may have gained some objectivity, but he's lost none of the pungent-tongued arrows from his verbal quiver.

In the first place, both Senator Sanders and Mr. Kashkari continue to evade the biggest question. That is, how big is too big? The crisis which touched off when Lehman Brothers couldn’t make its payment, Lehman Brothers was about $650 billion in assets. We have banks four and five times that size

And the question is, does everybody have to be smaller than Lehman Brothers is today? But that would have consequences. Getting there would be a problem. By the way, it should be very clear, Glass-Steagall doesn’t do it. There is a disconnect between Senator Sanders insisting that the banks be broken down to the point where they won’t by their own size threaten, if they have too much debt, to undermine it.

And Glass-Steagall — Glass-Steagall would reduce — it wouldn’t do anything to Goldman Sachs and to Morgan Stanley, which are almost Glass-Steagall-ized themselves. But looked at Citicorp, or J.P. Morgan Chase, or Bank of America, Wells Fargo, even if they were subject to Glass-Steagall, they would still be well beyond the size that Lehman Brothers was.

There is just a disconnect between saying we’re going to do Glass-Steagall and getting the banks down to a size where, if there was a complete failure, you would get damaged by it.

The entire response above by Frank is remarkable for the fact that he's right. It's obvious that he's not been spending his time since retirement sampling the wares of Mar Jane-related "legal" businesses in Colorado.

Frank also jumped all over Kashkari's comparison of the 2008 meltdown to the S&L crisis of the 1980s, and Kashkari's statement that the reason the S&L crisis didn't bring the economy down was because none of the S&Ls was "too big to fail." Again, Frank asks why Kashkari won't tell us how big is too big? He also correctly notes that the bailout of the S&Ls cost a lot more than the bail out of big banks in 2008, although he does not also observe that this was because the 2008 TARP allowed the big banks to survive, while the S&L "bailout" allowed them to fail (or most of them, at any rate (outside the Southwest Plan thrifts), and established the Resolution Trust Corporation, staffed by the FDIC, to liquidate their assets. If the politicians, including Frank, had stayed out of it in the 1980s and let the initial bailout template concocted by the former Federal Savings and Loan Corporation play out, there's a chance that the money from that bailout might also have been largely repaid.

Frank says the primary risk is not size but "indebtedness," and on this point he's got a point. However, I disagree with his assertion that his bloated namesake, Dodd-Frank, has dealt successfully with the risk of bank's engaging in excessive borrowing and hinky derivatives that made "The Big Fail" such a hit (his misapprehension of the effect of the Volcker Rule has been lambasted previously), and his assertion that now, no bank is too big to fail.

If a large institution can’t pay its debts, it fails. It is not too big to fail. It is put out of business, by law. No federal official can advance any money to pay its debts under the law until it is dissolved.

TARP also required legislation to create, and the wide-open authority it provided the federal government to bail out banks was induced by panic among folks at the highest levels of the federal government (including Frank) of immanent widespread economic collapse. We'll see how effective Franken-Dodd is when the next crisis hits, as it inevitably will. There's no prohibition on a future panicked Congress changing the rules on the spur of the moment to do what Frank claims can never again be done.

To prove that I haven't completely turned to the dark side, I think his statements about overturning Citizens United are bunk. Nevertheless, all-in-all, startlingly, he makes a lot of sense.

False Promise

2016-02-28T21:57:00-06:00

Former FDIC Chairman Bill Isaac once called Franken Dodd "the worst piece of financial legislation in modern history" and blasted the law's "Durbin amendment," in particular, as "pure and simple, special-interest politics."

I think the Durbin amendment is really a terrible precedent," Isaac says. "It weakens the banking industry at a time when we need it strong, and the folks who supported the Durbin amendment should be ashamed of themselves."

The subsequent cap placed on interchange fees by the FRB in response to Turban Durbin's amendment caused many bankers and credit union executives, and their trade group representatives, to predict that the only result would be to fatten the pockets of retailers at the expense of both financial institutions and their customers. Over five years down the road, that dire prediction appears to have been spot on, according to a recent opinion piece in the American Banker by the CEOs of the ICBA, CUNA, and NAFCU (people who sometimes are at each others throats on bank vs. credit union issues).

The price controls lawmakers were able to impose on those providing electronic payment options have resulted in an $8 billion annual handout to retailers that they have not passed on to consumers. Five years after the Federal Reserve issued a rule to implement the amendment, retailers have kept most of this revenue — an estimated $32 billion — for themselves.

While Congress may have thought this legislation would provide a benefit to consumers, data from a survey of merchants contained in a recent Federal Reserve Bank of Richmond study indicates that the amendment is simply not working as intended. The report found that "few merchants are found to reduce prices or debit restrictions as debit costs decrease." This just reinforces the argument that the Durbin amendment is essentially a merchant handout from Congress.

Consumer research echoes the reality that retailers are not passing on this revenue in the form of savings for customers. In September, Phoenix Marketing International conducted its fourth annual survey of nearly 2,000 consumers and found that the vast majority of shoppers have not experienced a price drop at the point of sale. In fact, in each of the 15 categories measured, at least 92% of shoppers reported that prices rose or stayed the same over the past year.

The authors further assert that the retailers' trade association claims of several years ago that retailers were passing along the savings to customers, and, more recently, that the fee reduction benefited banks and credit unions, as bald-faced lies.

A study released last week by the Credit Union National Association reported estimated reduced revenue of $1.1 billion for credit unions resulting from Dodd-Frank's regulatory costs, all of which the report attributed to the swipe fee provision. Real data in the form of costs of processing changes and declining fees since 2011 debunks claims that credit unions and small banks below $10 billion in assets are not feeling the pinch. Further, there has been a decline in the interchange rate since the price controls went into effect. It continues to remain around 4 or 5 cents below where it was pre-Durbin, according to a survey by the National Association of Federal Credit Unions.

The authors conclude that rather than trying to blow smoke up the nether regions of financial institutions and consumers, perhaps retailers' time would be better spent figuring out ways to pass along the savings on interchange fees to consumers. Don't believe that conclusion any more than you should the retailers' claims. What financial institutions really want is the repeal of the Durban amendment and the Fed's limit on interchange fees. That won't happen in 2016, but perhaps the next Pontifex Maximus of the Disunited States of America can spare a moment from building "the greatest border wall of all time, a wall that will make the Great Wall of China look like Tom Sawyer's picket fence" to promote some Republican-sponsored legislation to benefit community banks and credit unions for a change, instead of the Wal Marts and Home Depots of the world.

Yes, I know: and perhaps pigs will sprout wings.

Yes, Virginia, There Is A Regulatory Burden On Small Banks

2016-01-24T21:38:00-06:00

Preston Ash of the Federal Reserve Bank of Dallas, sent me (on New Years Eve, no less) an article co-authored by Preston and Christoffer Koch and Thoma F. Siems of the Dallas Fed, entitled "Too Small to Succeed?--Community Banks in a New Regulatory Environment." Notwithstanding my semi-inebriated initial misunderstanding as to whether or not Ash was calling me out for stealing his idea for an article, it quickly was made clear to me that the authors wanted to share their thoughts with me because we all are thinking along the same lines (as evidenced by my blog post of December 27, 2015) to wit: the regulatory burden on community banks is reducing their number.

An excerpt from their article:

In 1992, community banks accounted for 64 percent of $4.6 trillion in total banking assets. By 2015, their market share had dropped to 19 percent of $15.9 trillion in total assets (Chart 1). Despite this decrease, community banks still account for the largest share of small-business loans. Currently, small- and medium-sized banks hold 55 percent of small-business loans and 75 percent of agricultural loans.

In twenty-three years, total assets of financial institutions in the U.S. have nearly quadrupled, yet community banks share of that total has shrunk from nearly two-thirds to less than one-fifth. At the same time that the big banks were getting bigger, they were leaving it to the incredibly shrinking community banking segment to make the majority of small business loans and three-quarters of all agricultural loans. The large banks are growing ever larger, yet are failing to serve the majority of the nation's main job creators, small businesses, leaving that task to the ever-decreasing number of remaining community banks.

After noting what we (and many others) have observed, that the lack of new charters since 2008 is an "alarming" contributing factor to decreasing the total number of community banks, the authors state that from their own conversations with bankers in their district, bankers seem to believe that the top reason for the shrinkage is "regulatory burden." The authors ask, "Are their concerns justified?" Among the factors that lead them to conclude in the affirmative are the following:

Call reports have grown from 30 pages in the 1980s to 84 pages today.
"At the end of 1970, Call Reports contained 53 items that banks filled out; this past quarter's filing included 2,379 items, with recent additions of more off-balance sheet and memoranda items."
"From 2001-10, 10 major banking acts became law, totaling 1858 pages."
"Feldman, Schmidt and Heinecke (2013) at the Federal Reserve Bank of Minneapolis find that the median reduction in profitability (return on assets) for the smallest banks—those banks with assets less than $50 million—is 14 basis points if they have to increase staff by one-half of a person and 45 basis points if they increase staff by two people." In other words, the smaller the bank, the more of a proportionate burden it is to hire the staff to comply with increased regulatory compliance and reporting requirements.

The authors conclude that community bankers have a legitimate beef.

[S]maller community banks appear to have a valid concern that their compliance burden is rising and the playing field is becoming more uneven. Regulatory oversight should match the level of risk an institution poses to the financial system and economy at large. Otherwise, more banks may become too small to succeed.

It's not just bloviating bloggers who are sounding the trumpet for regulatory relief. Some actually responsible regulators are also playing the same tune. Of course, it's a presidential election year and the masters of gridlock in D.C. are not likely to cooperate on much until the grass crown is awarded to the next Cynic-in-Chief. Still, bank lobbyists need to use this ammunition to fire away at their senators and congresspersons, because this is a trend that will not likely reverse itself of its own accord.

A Generation Later Rapidly Approaches

2015-12-27T22:04:00-06:00

My last post, on small banks and credit unions doing "good works" for the communities they serve, prompted this email from the CEO of a community bank in the Midwest:

I recently read a quote from Margaret Thatcher where she said that if all the Good Samaritan had was good intentions he would not be remembered. He also had money. When privately owned banks go away, taking prosperous small businesses with them, who will remember a generation later? Very sad.

That post also prompted a credit union executive to unsubscribe from the blog, on the basis, I presume, that I ended mu post with "Merry Christmas" as opposed to "Happy Festivus."

While I didn't intend to anger or depress anyone, my community banking correspondent is correct to be pessimistic. The number of banks is decreasing rapidly, and the evidence is coming from all quarters.

Minnesota Business Magazine asks if the regulatory burden is "killing small banks" and answers itself in the affirmative.

In banking, numbers tell the story. If so, these numbers have the making of a tragedy: In 2000 there were 513 community banks in Minnesota. Now we have 332, a drop of 35% in just 15 years. What’s going on? There are two factors at play according to Joe Witt, president of the Minnesota Bankers Association. One is increased competition from large players like Wal-Mart entering the financial services industry and from tax-exempt organizations like credit unions. “Right off the top they’ve got a 30% or 40% operating cost advantage,” says Witt.

But the dominant factor that is causing small banks to sell out or close shop is what Witt calls the “cumulative effect” of government regulations.

[...]

The problem with adding regulation isn’t that small banks can’t adhere to the standards, it’s that they simply can’t keep up.

“We are getting paddled and beaten in terms of additional compliance responsibilities,” says Bill Patient, vice president of compliance at BankCherokee in St. Paul. “Everyone is in the same playing field and working with the same regulations.”

Patient says that beyond just the sheer pages of new documents, the hardest part for small banks is spending time to understand new rules and regulations. Compliance officers must sort through the new laws to figure out what they mean, how the rules work with current regulations and which rules apply to their institution. Many small banks have no compliance officers on staff, and the increased workload can be devastating for small institutions.

The article also notes other factors, like the difficulty of making a buck in banking with narrow interest rate margins and the Fed's artificially low rates, as well as the dearth of new charters since 2008 to replace banks failing or merging. Nevertheless, bankers believe its the regulatory burden that is the major factor driving the trend, a trend that has seen the annual rate of decrease in the number of banks in Minnesota double post-Dodd-Frank from 2% to 4%.

Several years ago Witt sent a letter outlining his concerns to the Federal Deposit Insurance Corporation. In the letter he quoted a banker who said, ”We used to do banking in compliance with the laws and regulations. Now we do compliance and hope that it allows us to do some banking.”

The magazine echoes my correspondent in its view of the collateral damage from this incredibly shrinking universe of community banking.

Losing community banks isn’t simply about less choice for consumers. In rural communities, the local bank can be the lifeblood of the town, and being a small town bank might not be worthwhile anymore, says David Reiling, president of Sunrise Banks in Minneapolis. “There’s a lot more risk and the return may be uncertain at best.”

Clinton Promises to Fly Beyond Dodd-Frank

2015-12-13T21:52:00-06:00

Hillary Clinton, in trying to out-Warren Warren, is ensuring that many bankers, of whatever stripe, will have to take a moment to ponder what a Clinton presidency might mean for the entire banking business before pushing the lever for her in November 2016. Unlike many Republican candidates, who publicly promise to roll back Dodd-Frank's more onerous provisions (regardless of private intent), Hillary promises to take Dodd-Frank to places that even its most ardent supporters have only dreamed about.

But it’s not enough simply to protect the progress we have made," Clinton wrote. "As president, I would not only veto any legislation that would weaken financial reform, but I would also fight for tough new rules, stronger enforcement and more accountability that go well beyond Dodd-Frank."

On Clinton's wish list are the usual proposals to strengthen the Volcker Rule, reimpose Glass-Steagall, break up big banks, restrain "risky" derivative trading, put Jamie Dimon in thumb screws, and force Wall Street interns to entertain donors to the Clinton Foundation at various strip clubs, she gets into the ominous "bad bankers" proposals that threaten to turn a danger of "trickle down" of big-bank regulation onto community banks into a virtual Niagra Falls.

Extend the statute of limitations for major financial crimes to 10 years
Require financial firms to admit wrongdoing as part of settlements
Increase transparency about terms of settlement and fines actually paid to the government
Penalize executives when their firm pays a fine

She also wants the SEC and CFTC to be "independently funded," just like the CFPB. That way, behavioral psychologist and utopian intellectuals can team up to remove any checks-and-balances on the social engineering agendas of the Progressives that Hillary is courting in her bid to grab the grass crown. As King Richard and his minions have been attempting to do with the CFPB.

Her desire to insert "strong regulators" into bank regulatory agencies also bodes ill for community banks. If you love the way that for the last eight years, bank regulators have second-guessed executive decision making on a continuous basis, used regulatory power to attempt to choke off bank access to legal but politically and/or "morally" disfavored businesses, and pushed the envelope of theories like "disparate impact" to find discrimination where no one has ever found it before in order to reward favored constituencies, you'll love another eight years under the current president's "logical successor." At least she's giving you a "heads up" and not hiding the ball. Don't say you weren't warned.

Now, if the opposing party could only nominate something other than the south end of a horse traveling north to run against her. If they can find one, that is.

The Lesser Of Two Evils

2015-11-08T21:53:00-06:00

In a fascinating bit of humbuggery, the US House of Representatives decided last week not to follow the lead of the US Senate and, instead, chose to screw the Federal Reserve rather than the banks who are members of the Federal Reserve System. Of course, both houses of Congress are robbing Peter to pay Paul, his cousin Guido, and their extended family back in Sicily, but that's beside the point. The point is that bank-bashing took a back seat to the realization that next year is an election year, and pissing off bankers might have to take a back seat to fundraising needs until after the first week of November 2016.

Nobody likes the Fed (except when it bails out the world), so messing with that august entity is usually fine and dandy, politically speaking.

The New York Times lays it all out for us.

The banking industry scored a surprise victory on Thursday when the House voted to pay for part of a new highway bill by draining a rainy-day fund at the Federal Reserve rather than cutting federal payments to some of the nation’s largest banks.

The Senate, scrounging for road-building money, voted earlier this year to reduce the Federal Reserve’s annual dividend payments to large commercial banks, saving about $17.1 billion over the next decade. The House was to follow suit, but after loud protests from the big banks, its final version of the highway bill preserves those dividends and instead requires the Fed to provide $59.5 billion over 10 years instead of putting the money into an account intended to cover potential losses.

Now congressional negotiators must decide which to hit, the Fed or the banks.

The Times notes the ultimate injustice of either alternative funding source: funds for highways are supposed to come from the gasoline tax. Naturally, politicians don't want to pass a tax raise that would enrage supporters of both Bernie Sanders and Ben Carson (which covers the political spectrum from coast-to-coast). Moreover, banks are (almost) lower than lawyers in the mind of the average mouth-breathing, knuckle-dragging voter, and bending banks over the back of the sofa isn't generally a risky play. So, whether it's the Fed or its member banks that pay the unjust price of this latest boondoggle, the banking system will pay a price.

If the banks pay the price by being shortchanged, considerably, on dividend income from the Fed, that will hurt their bottom lines. Moreover, Fed Chair Janet Yellen is probably correct in her warning that the Fed will lose members. On the other hand, if the Fed is the direct loser, its surplus will take a hit, which is not something that is in the interest of the financial system. The article points out that the surplus is in addition to capital the Fed raises by selling shares and it may not be needed to bail out the Fed if it goes negative over the next few years as it unwinds the stimulus. It also observes that Congress has tapped the surplus in the past. Setting aside the fact that just because you beat up an old lady and steal her Social Security check one month does not justify making it a habit, this would be the first time since the Fed was created that Congress would completely drain the surplus and prevent it from being refilled.

Other commenters, including some members of Congress, also think either choice is a loser.

"They’re both bad," said Aaron Klein, director of financial regulatory reform at the Bipartisan Policy Center, although he noted Congress has a history of tapping the Fed’s reserves.

Even the author of the House plan sounded apologetic. "This is not perfect policy, but it is much better than the alternative," Representative Randy Neugebauer, a Texas Republican, said on the House floor early Thursday. Mr. Neugebauer said he hoped that future transportation funding "comes from transportation users and not completely unrelated sectors of our economy."

When Porky sprouts wings, Randy.

One silver lining to this dark cloud is that it has upset Maxine ("The Socializer") Waters.

"How many of my colleagues or their constituents have a safe investment that pays this well?" Representative Maxine Waters, a California Democrat, asked on the House floor Thursday morning. "Most of my constituents are lucky to earn a penny a month on their bank accounts."

The fact that the dividend rate paid by the Fed to its members has absolutely nothing to do with the appropriate source of funding for highway construction is beside the point to The Socializer. The money's there, banks are getting it, they're making a better return than me and my friends, the federal government wants the money, so what's the problem? Take it!

I can't wait for either Hillary Clinton or The Greatest Show On Earth (EVER!) to get into the White House in 2017 and set all this right.

Hear Me Now and Believe Me Later

2015-10-29T22:01:00-05:00

In The Land of Liars, it's occasionally hard to separate the professionals from the merely proficient amateurs. However, when I'm in desperate need of affirmation that the spirit of the late, great Tommy Flanagan has not departed our nation's capitol, I need search no further than the latest news story about the Queen Bee of prevaricators, Hilarity Clinton.

Democratic presidential candidate Hillary Clinton would not bail out big banks to save them from collapse in the event of another financial crisis, she said on Tuesday.

During a late night television appearance with comedian Stephen Colbert, Clinton said her priorities were focused on raising the minimum wage and bolstering the middle class.

"If you're president and the banks are failing, do we let them fail?" asked Colbert.

"Yes, yes, yes, yes... " Clinton said.

No, no, no, no...

In 2008, when she was a beloved senator from the Empire State, Clinton gave a hearty thumbs up to bailing out the big banks. That was the smart move. As Hank the P warned us then and since, it was either TARP or "disaster."

In 2015, of course, she's running against an opponent who was one of the small minority of senators to vote against the bailout bill. Bernie was anti-big-bank then and he's never changed his tune. Lindsey Graham may have amusingly tweaked Sanders last night by claiming that he honeymooned in the Soviet Union and has never came back, but the dude has one thing that is rare in D.C.: integrity.

There's also the nettlesome problem that Lizzie Warren is the left's darling and she's opted out of the race this time around. To assure herself of the nomination, Clinton has to try to pull as many Spouting Bull supporters as she can away from the grumpy old man. Telling Colbert that she'd let the big banks fail plays well with a crowd that doesn't let reality get in the way of ideology. She's like Ted Cruz in that respect, I suppose.

If we ever were to face the prospect of the collapse of the banking system again and Clinton was at the nation's helm, she'd steer the ship full speed ahead into the bailout iceberg and be the first one in a lifeboat. Count on it.

She's not in Flanagan's class, but she's close. Really, really close.

The Fed On MJ Banking: Nyet

2015-10-25T21:57:00-05:00

Over the summer, while I was downing cold beers by the barrel rather than blogging, the Federal Reserve Bank of Kansas City and the NCUA finally acted on the applications of Fourth Corner Credit Union for, respectively, a "master account" for access to the Federal Reserve System and for insurance of share accounts. In both cases, the answer was not only "No," but "Hell, No!" Fourth Corner sued both the NCUA and the Fed. last week, the Fed filed a Motion to Dismiss Fourth Corner's complaint that ought to send a chill down the spine of every bank in Colorado, Washington, Oregon and Alaska that thinks it can "work around" the federal banking regulators on the Supremacy Clause when it comes to banking a state-legal, federal-illegal marijuana business.

In broad strokes, the Fed alleges that federal law, in this case the Controlled Substances act, trumps state law on marijuana use by virtue of the Supremacy Clause of the US Constitution. This should be "Hornbook Law" to any bank regulatory attorney. The manufacture, sale, and distribution of marijuana is prohibited by the Controlled Substances Act. Therefore, "any affirmative action that Colorado has taken to facilitate the distribution of marijuana is preempted by federal law."

In the present case, Colorado attempted to grant TFCCU a charter that would, in effect, intentionally allow TFCCU to aid and abet violations of federal law by offering banking services to businesses engaged in the manufacture and/or distribution of marijuana. Such an act is preempted by federal law and is void and without effect...The Court would not aid other such attempts--such as if Colorado enacted a scheme to allow trade in endangered species or trade with north Korea in derogation of federal laws, and then chartered a credit union to handle finances for companies conducting such illegal trade...TFCCU is not an entity that can be recognized under federal law" and the credit union's complaint must be dismissed.

Beyond the "master account" and insurance of accounts applications at issue here, the Motion to Dismiss contains a broad condemnation for any existing financial institution--credit union or bank--that thinks that it is somehow safely avoiding federal criminal law prosecution and/or bank regulatory agency enforcement action because it follows the "FinCEN Guidance" issued in early 2014 that, in turn, followed the "Cole Memorandum" guidance provided to US Attorneys on prosecutorial discretion in the area state-legal marijuana businesses. The Fed contends that such "guidance" is not a protection from criminal prosecution (which the guidance itself states, if read carefully). Even if it affords such protection, the Fed makes clear that the Fed would not be bound by it.

The Fed also makes clear that it considers any financial institution that engages in providing financial services to a state-legal marijuana business to be engaging in aiding and abetting a criminal activity under federal law, and that federal law controls. Under that analysis, the Fed should, if it is consistent, take enforcement action against any Fed-member bank that is so engaged. I fail to see why the OCC, FDIC, or NCUA would take a contrary position.

An anonymous (naturally) critic from Dogpatch, U.S.A., attempted to leave a comment on the blog a few months ago that criticized my support of (the critic's phrase) "federal infallibility" regarding state marijuana laws. The poor soul apparently conflated "Papal Infallibility," a theological doctrine of the Roman Catholic Church, with the constitutional principle of "Federal Supremacy. The issue at stake is not who is "right" or "wrong" regarding whether the manufacture and distribution of marijuana for recreational use should or should not be illegal, it is whose law prevails when state and federal law conflict on this matter. My view is that federal law prevails and that any financial institution (and its directors, officers, and employees) that "banks" a state-legal marijuana business is running a serious risk of being hammered by different federal agencies for violating federal criminal laws.

If your credit union's or bank's business plan is "I feel lucky today," more power to you. I think that you're playing with fire and not wearing an asbestos suit.

Wallison Whales On Dodd-Frank

2015-10-21T22:22:00-05:00

While he'll convince no one in love with Big Government of his thesis, the American Enterprise Institute's Peter Wallison is making the case that recent academic research supports the proposition that Dodd-Frank and other regulatory burdens imposed by the federal government in the wake of the economic recession of 2008 are hampering the economic recovery of the U.S. (hat tip to a community bank CEO and blog reader for sending me the link).

First, a study by Michael Bordo and Joseph Haubrich showed that recoveries after financial crises are actually sharper than other recoveries. After studying 27 recession-recovery cycles since 1882, they concluded that “the stylized fact that deep contractions breed strong recoveries is particularly true when there is a financial crisis.” So we should have expected a steep recovery after the sharp 2008–09 recession rather than the stuttering and stalling economy we have experienced.

Also, studies of Dodd-Frank’s effect have shown that the regulatory burdens imposed by that law have been particularly harsh for community banks. The Fed defines community banks as banks with $10 billion in assets or less; 98.5 percent of all US banks fall into this category. A 2012 Government Accountability Office study showed that 7 of the 16 titles in Dodd-Frank had potential adverse effects for these banks, and studies by scholars at George Mason University and Harvard’s Kennedy School have found significant compliance cost increases attributable to Dodd-Frank. “Since the second quarter of 2010,” said the Harvard study, “around the time of [Dodd-Frank’s] passage, we found community banks’ share of [US banking] assets has shrunk drastically—over 12 percent.”

Of course, the regulatory costs to community banks are not a new story; Congress has been attempting to mitigate these costs for years. What is new is the data that shows the effect of these regulatory costs on small business and hence on economic growth.

Wallison asserts that the vast majority of small businesses (traditionally, the primary drivers of job growth) require bank financing because they do not have the access to capital markets that larger business have. Increased regulatory costs mean less credit. Less credit means slower growth. Slower growth means less job creation.

This is where the costs loaded on small banks begin to affect US economic growth. Regulatory costs affect small banks more than large banks because the costs are largely fixed and large banks by definition have a bigger asset base over which to spread these costs.

When a small bank is required to hire a compliance officer, that is an employee who is not making loans or producing revenue. When the Consumer Financial Protection Bureau—set up by Dodd-Frank and the bane of small banks—sends out a 1,099-page regulation on mortgage lending, that means a community bank must engage a lawyer to interpret the new regulation, a compliance officer to apply the regulation in individual cases, and a tech firm to retool its mortgage underwriting system. All costs, no revenue, and fewer funds to lend. When a bank examiner criticizes a loan because the bank does not have audited financial statements for a customer who has never missed a payment in 20 years, that forces a bank to revise its business model and change its customer relationships. Again, costs for the bank and less financing for the small business.

If the costs Dodd-Frank has imposed on small banks are hurting small business, we should see a significant difference between the growth rates of small and large businesses since 2010. That is exactly what the data shows. In a Goldman Sachs report published in April 2015 and titled “The Two-Speed Economy,” the authors found that firms with more than 500 employees grew faster after 2010—the year of Dodd-Frank’s enactment—than the best historical performance over the last four recoveries. These firms largely had access to the capital markets for credit. However, jobs at firms with fewer than 500 employees declined over this period, although this group had grown faster than the large-firm group in the last four recoveries.

Here, then, is the source of the slow recovery from the 2008–09 recession. Although 64 percent of net new jobs in the US economy between 2002 and 2010 came from employment by small business, this source of growth has disappeared since the enactment of the Dodd-Frank Act. While larger firms have access to credit in the capital markets, millions of small firms, limited to borrowing from beleaguered community banks, are not getting the credit they need to grow and create jobs.

As I said above, Wallison won't convince the Bernie Sanders/Elizabeth Warren crowd with facts. One of the commenters to Wallison's article makes this point ably.

To blame the slow recovery on Dodd Frank is frankly hilarious. It defies logic. Big banks were the major contributors to the 2008 recession and their failure to re-inflate the lending system after the government had made them whole will go down as one the major acts of treachery against small business. Small banks are doing poorly for a far different reason. See the growth of a strong aggressive regional banking structure.

You'll notice that, unlike Wallison, no studies or statistics are cited by the commenter to back up his arguments or even his factual assertions, nor to counter those that support Wallison's arguments. Instead the basic ad hominem attack is made that Wallison's position is "hilarious."

No, it's anything but "hilarious." As people who have actually made a career in the community banking business understand, it is many things, but "hilarious" is not among them.

Small Bites of the Apple

2015-10-08T21:57:00-05:00

It's a drop in the bucket, but for hundreds of community banks lost in a regulatory dessert, even a small amount of water is welcome.

The U.S. House of Representatives unanimously passed legislation Tuesday that would ease regulatory rules for small community banks.

Congressman Scott Tipton, R-Cortez, has proposed the Small Bank Exam Cycle Reform Act, H.R. 1553, to help well-managed community banks.

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The Small Bank Exam Cycle Reform Act amends the Federal Deposit Insurance Act to raise the qualifying asset threshold from $500 million to $1 billion for the 18-month exam cycle [as opposed to the current 12-month exam cycle].

This would allow an additional 676 banks across the U.S. to qualify for a longer exam cycle. Under the act, small banks would be able to better focus their employees and resources on serving the banking needs of customers, he said, rather than on onerous paperwork.

The longer exam cycle for smaller banks also should be a cost-saver.

Let's hope that in the land of grid-lock, the Senate can manage to pass what ought to be a fairly noncontroversial bill.

In terms of overall regulatory relief, this may not seem like much. On the other hand, it's something.

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On a completely unrelated subject, I have received a couple of inquiries from readers as to "what I am hearing" about the FFIEC's Cybersecurity Assessment Tool. In the interest of brevity (a welcome relief to most readers), here's what the Chief Cybersecurity Officer of one of my larger ($20 billion+) banks offered me:

We do have it and have looked it over. Basically, if an organization has a decent security program with a foundational framework, it is nothing to worry about. I wouldn’t say it offered much value, but validation.

I suppose that if a bank is behind the curve, then the "Tool" may be more useful than simply a "check" on what you have already considered. As with relatively recent vendor management and social media guidance, and before that, the multifactor authentication guidance for online banking, the regulators seem to be putting out material for folks who are in need of catching up with their more sophisticated brethren. Moreover, even for those who believe that they are locked and loaded, it provides "validation" that you are not missing something fundamental.