Bank Lawyer's Blog

FDIC: Bring Me Your Tired, Your Poor, Your Huddled De Novos, Yearing To Be Free

2016-04-10T21:50:00-05:00

Last week, FDIC Chairman Martin Greunberg announced that the FDIC was rescinding a policy that it instituted during the depths of the last recession, of requiring heightened scrutiny of de novo banks during their first eight years of existence, and was returning to the policy of the "good old days," when new banks suffered life under an regulatory electron microscope for only three years. Gruenberg claims that "the FDIC welcomes applications for deposit insurance, and we clearly have a role to play in facilitating the establishment of new institutions." He also claimed that the reason that de novo applications have slowed to "a trickle" since the start of the Great Recession is because of economic factors, not a real or imagined FDIC moratorium on insurance of accounts for de novo banks.

I should note that establishing even a small community bank is a challenging endeavor. Developing a sound business plan, raising the needed financial resources and recruiting competent leadership and staff takes work and we want to ensure that every new institution that is established is in a position to succeed.

But we are very committed to working with and providing support to any group with an interest in starting a community bank. To that end, we are developing a handbook to guide applicants through the review process.

There is ample room for new community banks with sound funding and well conceived business plans to serve their local markets. It is essential that they have a clear path to approval.

This all sounds well and good on the surface. However, I'm with attorney Charles Horn who, writing in the National Law Journal, indicates that he is, like me, from Missouri on this matter.

That said, the dearth in new deposit insurance approvals in recent years has, to some extent, become a self-fulfilling prophecy in that a perceived FDIC reluctance to approve new deposit insurance applications has helped suppress industry interest in establishing new banks. Chairman Gruenberg is correct, in part, in attributing the decline in deposit insurance applications to post-financial crisis economic conditions. At the same time, experience has shown us that persons wanting to organize a new insured depository institution have been discouraged by the FDIC’s failure to approve more than a small handful of new deposit insurance applications in the past few years (none so far in 2016, two in 2015, none in 2014, three in 2011, and two in 2010, according to the FDIC’s website).

While we state the obvious in saying that the best way for the FDIC to encourage the formation of new banks is to approve more deposit insurance applications, the point here is that it is actions—not words—that will speak the loudest on this subject.

There is no question that these are still difficult times to make money in the community banking business, no matter how much lipstick Gruenberg paints on the lips of the community banking business in the course of his address (and he lathers it on in rosy red hues in the linked article). A good portion of that difficulty is due to the small interest rate spreads and low interest rates imposed by the Federal Reserve's policies over the past nine years, which, as of today, seem rooted in place. Nevertheless, as the Federal Reserve's own economists have noted, the dearth of de novos is also due to the regulatory burdens placed on the small banks by the FDIC, FRB, and OCC. Greunberg does state that a "gentler approach" and "tiered regulation" are on the way. If true, this relief will be welcome.

We'll have to wait and see whether this promise of more de novos is true or false. As we noted just a few months ago, even those applicants who have weathered the storm and made it over the finish line have painted a grim picture of the time and expense required, as well as of much higher capital requirements (which means reduced return on equity). If organizers expect to pay consultants and attorneys hundreds of thousands of dollars to assist them in raising capital, creating extensive business plans, and preparing detailed applications for insurance of accounts, I think that they want to feel more confident that they will have a decent shot at approval.

As Horn observes, in this area, actions will speak louder than words.

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.

Stressing Stress Testing

2016-03-13T21:29:00-05:00

A recent White Paper from the consulting firm Invictus discusses what those of us who represent community banks have been aware of for some time now: the requirements for "stress tests" that were supposed to apply only to those "Too Big To Fail" banks are "trickling down" to community banks. The buzzwords that apply to banks both large and small are "forward-looking risk analytics." While Invictus notes that bank regulators initially publicly stated that stress testing was only for the Big Guys, their actions belied their words (or, they simply changed their minds).

Regulatory actions in the waning months of 2015 should serve as notice that ignoring forward-looking analytics will lead to lower CAMELS scores, more examiner scrutiny and higher regulatory capital requirements. The new current expected credit loss model (CECL), which is expected early in 2016, is also a forward-looking tool.

Behind the scenes, however, regulators began changing their own methods for examining community banks, relying more and more on forward-looking analytics. In recent months, with signs that community banks are again accumulating higher concentrations of risky commercial real estate loans, regulators are reminding community banks that stress testing is indeed required to manage concentration risk in their portfolios and to develop realistic scenarios for interest rate risk management.
Regulatory actions in the waning months of 2015 should serve as notice that ignoring forward-looking analytics will lead to lower CAMELS scores, more examiner scrutiny and higher regulatory capital requirements. The new current expected credit loss model (CECL), which is expected early in 2016, is also a forward-looking tool.
The large banks have already adopted forward-looking risk analytics and are using the results with regulators. Although community banks are not subjected to the same stress testing requirements as the large banks, the regulatory trend is in the same direction. Those community banks that fail to incorporate new analytics into their risk management systems will find it difficult to communicate effectively with regulators.

The White Paper traces recent public issuances by the FDIC, FRB, and OCC in this direction. A specific red flag is the December 2015 joint agency guidance on CRE concentrations. Those of us who represented community banks and their directors in the aftermath of the last meltdown, when commercial real estate brought a number of community banks to grief, took special note of that guidance. It's "guidance" in the same way vendor management guidance is merely "guidance." Try violating it and see how "sticky" the wicket gets. You'll be up to your eyeballs in MRAs on the your next report of examination...or worse.

Even if you thinkl your CRE isn't all that "concentrated," Invictus thinks that you ought to seriously consider hoping on this forward-looking train.

Even if your bank doesn’t have CRE concentrations, use forward-looking risk analytics to stress test your capital, your strategic plans and any potential acquisition you might be considering. Present the results to regulators. Invictus’ clients that have used stress testing results with examiners have seen their capital requirements decrease, their management piece of their CAMELS composite increase, and their strategic plans win fast regulatory approval.

At the very least, it's worth pausing for a moment and, while you stoop to smell the roses, thinking about whether you might benefit from this approach (if you haven't already adopted it).

De Novo Deep Freeze Thawing? Not So Fast!

2016-01-31T21:54:00-06:00

Although SNL's Nathan Stovall tantalizes readers with the headline "De novo market could be warming up," I think that--reading between the lines--the De Novo Deep Freeze of the past 8 years is not going to be thawing this year.

Stovall cites the recent de novo charter approval of California's Core Commercial Bank. However, that bank's investment adviser's CEO, Edward Carpenter, while stating his belief that "you can expect to see more applications in the relatively near future," warns that the path to approval of a de novo charter is a rocky one.

[T]he application process for de novos is "considerably more difficult" and requires much greater preparation now than before the credit crisis...

[...]

"We believe that a new bank requires more capital than it did in the past. It requires a stronger and deeper management team than it did in the past. And it needs to make a more persuasive case than was often made in the past about community need."

Core Commercial, like the two other most recent de novos, Pennsylvania's Bank of Bird-in-Hand and New Hampshire's Primary Bank, "plans to target a fairly narrow customer base as well, catering to small and medium-sized businesses that might feel disenfranchised by the nation's largest institutions." I assume that the geographic market area is also relatively focused, and that the applicants had to prove with more than lip service that the community was not being adequately served by existing financial institutions.

While Carpenter seems optimistic (and, I'm sure, stands ready to assist other potential clients with their de novo needs), others, including some regulators, are less pie-eyed.

Candace Franks, commissioner of the state banking department in Arkansas, acknowledged that de novo banking activity certainly slows during a recession, but said prior downturns have been followed by a "generous" era of de novo applications. She said that certainly hasn't been the case this time around. Franks, the immediate past chairman of the Conference of State Bank Supervisors, said the lack of de novo activity is "very concerning to us," particularly in rural areas like Arkansas, where community banks serve as the engine of small business activity.

Some observers have argued that regulators were hesitant to grant new charters since many banks that failed during the crisis were de novos formed in early 2000s. The Federal Reserve discussed the issue on a handful of occasions. Robert Mahalik, director of applications at the Federal Reserve Bank of Dallas, said at a conference in April 2014 that he saw no hint that new charter activity or approval would be on the near horizon.

Stoval also discusses other disincentives that may restrain a de novo deluge.

While regulators might be easy to blame for the dearth of de novos, Stevens noted that bankers have not painted a very attractive picture for parties considering entering the industry, often complaining about heightened regulatory burdens. Such rhetoric could serve as a deterrent to potential investors.

Some advisers say there simply are not many investors looking to form new banks. DD&F Consulting Group President Randy Dennis, who has helped launch a number of de novos in his career, said there is a whole new breed of investors that want to put money to work in the banking sector, but some are concerned they will not be able to receive regulatory approval. He further said the higher capital requirements facing de novo banks have limited investor interest.

[...]

...Tom Brown, longtime bank investor and CEO of Second Curve Capital LLC, said at a conference in mid-November that he understood why there is so little investor interest in forming a new bank charter. He believes the capital constraints on de novos make it difficult for investors to earn adequate returns on their capital.

"Who in their right mind would start a bank today? The FDIC requires $35 million in capital to start a bank. And no one can pencil out an annual rate of return on $35 million in the next five years, so you're not seeing new chartered banks," Brown said at the event.

Well, obviously the investors in Core Commercial, who we presume are not insane.

Noted bank attorney Walt Moeling of Bryan Cave also is cautiously optimistic. He thinks the prospects of additional de novo applications is "real," but that there numbers will be far less than in the past.

All the observers seem to agree that the application process will not be easy. The organizers will need to present a convincing case, based on hard data, of the need for the new institution. Capital will be king, and as Tom Brown asserts, the more capital required, the more difficult it is to earn a decent return on equity, especially when private investors have places to place their capital where the returns are larger, quicker. Management will also be critical, with both expertise and probity playing critical roles. Finally, the application process is likely top much more time-consuming and expensive than it ever has been.

And, of course, once the doors are opened, what you have is a community bank, trying to make money in a Post-Franken-Dodd world chock-full of Maxine Waters, Elizabeth Warrens, and other "progressive" ideologues who will look over your shoulder 24/7/365 to "guide" you on the path to righteousness, if not necessarily to profitability.

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.

Fourth Corner Painted Into A Corner

2016-01-10T21:37:00-06:00

This past week, a federal district court judge in Colorado slapped down, hard, Fourth Corner Credit Union. In the process, the judge was equally hard on the federal government that has done a half-baked job in dealing with the problem of state-legal marijuana businesses inability to to obtain access to the nation's financial system because their activities largely remain illegal under federal criminal laws.

As regular readers may recall, Fourth Corner Credit Union is a state-chartered credit union in Colorado that was formed in 2014 by (in the lofty rhetoric of the credit union's attorneys) "ten courageous citizens" to provided banking services to the "compliant, licensed cannabis and hemp businesses and to thousands of persons, businesses and organizations that supported the legalization of marijuana." In order to effectively operate, however, Fourth Corner needed a "master account" from the Federal Reserve Bank of Kansas City. The FRB-KC turned down Fourth Corner's application for such an account on several the grounds, including that federal law preempts state law and that the FRB KC won't grant a master account to a financial institution that is engaged in the facilitation of illegal activities (like the laundering of the proceeds illegal drug sales). Fourth Corner sued for a mandatory injunction by the court that would compel the FRB KC to grant the master account. The district court denied the motion, dismissed (with prejudice) the credit union's complaint, and awarded the FRB KC its reasonable costs.

That had to hurt.

Although the court declared that it did not need to reach the issue of federal preemption, it observed in a footnote that "[i]t is clear, however, that Congress has the power to prohibit cultivation, distribution and use of marijuana notwithstanding compliance with state law." In other words, even though I didn't have to decide the issue, if I had, I would have upheld federal preemption of state law.

That blasted the "Supremacy Clause" of the US Constitution (Article VI, Paragraph 2)! It's so inconvenient.

In the course of its opinion, the judge blistered the backsides of federal regulators, with special emphasis on FinCEN and the US Justice Department for their "guidance" on this issue. Fourth Corner alleged that such guidance provided federal "authorization" to serve marijuana-related businesses ("MRBs"). The judge didn't buy it (anymore than I did).

The problem is, the FinCEN guidance and Cole memorandum do nothing of the sort. On the contrary, the Cole memorandum emphatically reiterates that the manufacture and distribution of marijuana violates the Controlled Substances Act, and that the Department of Justice is committed to enforcement of that Act. It directs federal prosecutors to apply certain priorities in making enforcement decisions, but it does not change the law. The FinCEN guidance acknowledges that financial transactions involving MRBs generally involve funds derived from illegal activity, and that banks must report such transactions as “suspicious activity.” It then, hypocritically in my view, simplifies the reporting requirements.

In short, these guidance documents simply suggest that prosecutors and bank regulators might “look the other way” if financial institutions don’t mind violating the law. A federal court cannot look the other way. I regard the situation as untenable and hope that it will soon be addressed and resolved by Congress."

Since next year is a presidential election year, "soon" is not likely to be prior to 2017. Until then, to repeat ourselves, any bank that serves marijuana related businesses "is playing with fire and not wearing an asbestos suit."

playing with fire and not wearing an asbestos suit. - See more at: http://www.banklawyersblog.com/3_bank_lawyers/2015/10/over-the-summer-while-i-was-downing-cold-beers-by-the-barrel-the-federal-reserve-bank-of-kansas-city-and-the-ncua-finally-ac.html#sthash.qKIhqoJx.dpuf

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.

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.