The following post first appeared on American Banker’s BankThink blog. It is reprinted below with American Banker’s permission.
By Cornelius Hurley
Dec. 18, 2014
In his impactful book Don't Think of an Elephant, cognitive scientist George Lakoff illustrates how framing a discussion from the beginning is key to winning the argument. No one has learned this lesson better than the country's too big to fail banks. Since the beginning of the financial crisis, they have framed the debate over financial reform as being about everything but the subsidy that TBTFs receive because of their elite status.
Millions of lobbying dollars and thousands of pages of regulations are devoted to capital ratios, liquidity requirements, resolution regimes and an endless stream of regulatory complexity that numbs the mind. The net effect of this ceaseless patter is to divert our attention from the one key issue at the heart of the TBTF debate.
Now, in a moment of supreme hubris, the masters of debate framing have overplayed their hand. Big banks succeeded in repealing the swaps push-out rule enacted under the Dodd-Frank Act by holding the government funding resolution hostage. But in so doing, they inadvertently thrust the issue of taxpayer subsidies back into the spotlight — where it belonged from the beginning.
The swaps push-out provision of Dodd-Frank would have required the five big banks that account for 95% of swaps activity to move a portion of that business out of their taxpayer-supported banks and lodge it in their nonbank, uninsured affiliates. It is widely understood that removing the safety net of Federal Deposit Insurance Corp. coverage would have increased the cost of this activity and reduced its profitability for the five banks.
The big banks claimed that without FDIC insurance, they would be forced to pass the increased cost on to innocent end users like farmers, airlines and oil distributors. The implication of this risible threat was that the big banks were in the habit of sharing the entire financial benefit they received from this free insurance with their customers.
Even the most casual observer of our financial system can smell a subsidy as pungent as this. It was only a matter of time before progressive icon Sen. Elizabeth Warren pounced on this issue, warning of the prospect of a "#Citigroup Shutdown."
One would have thought that the big banks that benefit in so many ways from their size would be more subdued when dealing with their government subsidy, lest they reframe the TBTF debate.
Last summer, after all, a credulous General Accountability Office came forward with a report claiming that the subsidy flowing to the TBTF banks is negligible and may even be negative. The GAO made no mention of the subsidy the banks receive for conducting swaps activities in their insured banks. Perhaps the researchers ignored this significant part of the TBTF subsidy because they knew, by law, it was about to be pushed out of the depository institutions.
Naturally, the GAO report was received by a skeptical Senate Banking Committee, several of whose members questioned the validity of the findings. Their questions were, it turns out, warranted. After all, despite all the complex machinations built into Dodd-Frank, most observers are well aware that the TBTF banks are larger, more complex and more subsidized than they were before the crisis.
Now that the TBTFs have taken the latest of their many victory laps, what comes next? The legislation will force the FDIC and others to recalculate the subsidy big banks receive from taxpayers. This could well make the banks wish they'd never unleashed their lobbyists to gut this important part of Dodd-Frank.
Since FDIC deposit insurance now has exposure to a potentially massive amount of new risk, it must recalibrate. The agency should immediately undertake a risk assessment analysis to determine how its deposit insurance fund, currently valued at over $51 billion, will be impacted by the new exposure that has been thrust upon it by the big banks successful campaign.
To assist in this process, the FDIC should solicit bids from the private insurance industry for reinsuring against the risk that the Deposit Insurance Fund may have to make payouts in the event that previously-banned swaps are part of the estate of a failed TBTF bank.
Lastly, the Congressional Budget Office should study the financial impact that amending Section 716 of Dodd-Frank will have on the federal coffers. Had the TBTF lobbyists not chosen to take the federal government hostage in this process, such a study might have been conducted beforehand.
These responses will reframe the entire debate over TBTFs, shifting the argument away from capital requirements and the like and back toward the subsidy and how we make it go away.
If you happen to be one of the five banks that benefit from last week's disgraceful lobbying effort, you can file this under "be careful what you lobby for." If you're a taxpayer frustrated that six years after the financial crisis we still have TBTF banks corrupting our financial system and the body politic, you can file these proposed changes under, "Reframing the TBTF debate."
Professor Cornelius Hurley is the director of the Boston University Center for Finance, Law & Policy. Follow him on Twitter at @ckhurley.
Antonio Weiss Not Right for Treasury Post
Reasonable people can disagree. I’ve always firmly believed that individuals can look at the same set of facts and come to differing conclusions without necessarily holding any lingering animosity or disrespect.
So when ICBA announced its strong concerns
with the nomination of Antonio Weiss for a leading role at the Treasury Department, we did so because we have legitimate concerns with his experience and because of the need for community bank representation at Treasury. This isn’t personal.
Treasury’s undersecretary for domestic finance plays a leading role in developing policies that affect financial institutions across the U.S. financial spectrum. Whereas Mr. Weiss has a relatively narrow professional background as a Wall Street executive specializing in international mergers and acquisitions, the Treasury position requires someone with a broad background in financial services, not just Wall Street.
As MIT professor Simon Johnson noted in a recent blog post
, the Office of Domestic Finance oversees domestic finance, banking and other related economic matters. It also develops policies and guidance for financial institutions, financial regulation and capital markets in addition to its role in managing federal debt.
In other words, this is a position that requires an extensive understanding of our financial system and how it functions at all levels—including the local level. And it is one that is essential to reforming how the nation’s largest and riskiest financial firms are regulated to prevent another Wall Street crisis and taxpayer-funded bailout.
ICBA has long advocated the creation of an assistant secretary for community financial institutions position at Treasury to ensure Main Street’s perspective is represented at the department. Community banks need protections against excessive regulation, which poses a threat to local banking and economic growth. Our industry also opposes excessive concentration in the banking industry, which has put the financial system at greater risk.
Without such representation at Treasury, we believe the undersecretary for domestic finance should have a strong understanding of local community banking. The facts are clear—Mr. Weiss has no such qualifications. He is simply not the right person for this position. And as the representative of our nation’s community banks, ICBA cannot endorse his nomination.
A Thanksgiving Blessing: the Libor Fix
As we look toward Thanksgiving with thoughts on all of life’s blessings, community bankers recently got a bit of good news that we can all be thankful for. Following relentless ICBA outreach, the administrator of the Libor index announced it is waiving a $16,000 annual fee for more than 6,000 community banks. That is a savings to the community bank bottom line that can go directly toward supporting local economies.
Let me back up a little bit and tell you the whole story. Libor, the London Interbank Offered Rate, is a floating interest rate index set by participating banks in London. It is used for trillions of dollars of transactions ranging from adjustable-rate mortgages to student loans and interest-rate swaps. The Intercontinental Exchange, or ICE, which administers Libor, announced earlier this year that as of July 1 any financial institution using or referencing Libor in any financial products would be subject to the $16,000 annual fee.
ICBA repeatedly communicated its concerns to ICE and urged a complete exemption for all banks with less than $50 billion in assets. Again and again we cited the damaging impact that such high fees would have on community banks for even sporadically referencing the Libor index in their documents and transactions. For a community bank working day in and day out to help their local communities thrive, this $16,000 fee isn’t chump change.
Fortunately, persistence pays off. The new rate categories
will exempt all banks under $1.5 billion in assets. Further, more than 300 banks under $10 billion in assets will pay $2,000 per year—$14,000 less than originally proposed. The total discounted fee schedule will save community banks under $10 billion potentially more than $100 million annually.
That’s a lot of turkey and mashed potatoes, and it certainly sounds like something to be thankful for. Have a Happy Thanksgiving, community bankers. Keep doing what you’re doing to help your neighborhoods thrive, and ICBA will keep on looking out for you in Washington, London and everywhere else. Because the opportunity to serve those who serve so many is definitely one of my greatest blessings.
The Midterms Are Over, but the Community Bank Battle Continues
Well, the 2014 midterm elections are in the books. It’s all over but the shouting (almost). With all the close calls, potential recounts, and even a runoff in the Senate—there’s still some shouting left to do. What’s not in question is that we witnessed yet another wave election, this time with Republicans handily taking control of the Senate in the next Congress. Now Congress is back in Washington to start wrapping up the current session.
Of course, ICBA and the nation’s community banks have friends and allies on both sides of the aisle, and the elections again proved our industry to be an effective advocate. In the 2014 election cycle, our industry’s political action committee—ICBPAC—contributed $1.7 million to more than 290 pro-community bank candidates and committees. These are the folks who understand the challenges community banks face and who are committed to fighting for us in Washington.
Community bankers can rest assured their contributions, grassroots outreach, and Election Day votes are a positive investment in the future of our industry. In fact, while it’s too early to tally our success rate because some races are yet to be decided, we know it will be more than 90 percent. Think about that the next time someone tries to tell you your vote doesn’t count.
I could keep going on about the midterm elections—believe me—but instead I’ll direct ICBA members to our memo recapping the key races
and laying out what they mean for community banks. Suffice it to say, ICBA is in a very good place to continue advocating on behalf of our beloved industry. And that is due to the outstanding reputation and commitment of community bankers, plain and simple.
So thank you. Thank you, community bankers. Your everyday business helps local economies run and your unrelenting commitment to local development helps your communities thrive. It is up to ICBA to ensure Washington recognizes that and allows community bankers to do their jobs of supporting their communities.
So even though we’ve had a successful election, let’s not forget we still have a couple of crucial weeks remaining in the 113th Congress. ICBA will continue fighting to advance several key measures to provide relief from excessive regulations. But with the 60-vote filibuster threshold in the Senate and the presidential veto, challenges to passing ICBA-advocated legislation through the legislative process remain.
So we encourage community bankers to get on ICBA’s grassroots resource center
to join the fight. There’s not much time left, but we’re going to have to keep doing our share of the shouting if we want Washington to hear us.
Millennials Are the Future for Community Banks
Forget what you think you know about Generation Y. The nation’s millennials—the biggest and most diverse generation of customers in our nation’s history—account for more than $1 trillion in annual purchasing power. And according to ICBA’s recently released 2014 American Millennials and Banking Study
, this generation represents a major opportunity for community banks.
This is a generation raised amid the Wall Street financial crisis, plagued by large amounts of student loan debt, and so risk-averse that more than 60 percent don’t have a credit card. It should come as no surprise that they are looking for financial institutions that are locally owned and can help achieve their entrepreneurial dreams.
According to our survey, locally owned and operated banks are the first choice of all Americans for a business loan or other funding. Further, being a locally operated banking institution is almost twice as important to Americans as being a national or international banking institution. Now isn’t that something? Community banks with less than $10 billion in assets make nearly 60 percent of all small business loans, and that is what sets Main Street apart from Wall Street.
If small business lending is important to your community bank, then the millennial generation is very important. Some business-focused millennials intend to start their small businesses within the next two years. More than 40 percent are very interested in starting their own business at some point in their lifetime, and almost a quarter currently earn part of their income from a business they started or have a stake in.
The millennial generation is also hungry for financial education. They want to be more financially literate, and the nation’s community banks are an excellent resource to quench this thirst for knowledge. This generation is beginning to take the reins of their careers and financial wellbeing, and now is the time for community bankers to become their trusted entrepreneurial advisors.
Millennials have a greater lifetime value as customers than any other generation in the market and are the most likely to refer their friends and family if they have a great experience with your company.
All community banks should embrace this new generation. Millennials are unique and belong with their local, one-of-a-kind community bank. This generation is ready to become community banks’ newest customers, and it is time for community banks to rise to the challenge of serving them.
Regulatory Capture Old News for Community Banks
A new report exposing the New York Fed’s coddling of Wall Street megabanks—particularly Goldman Sachs—is making waves in Washington. And why shouldn’t it? The ProPublica report
exposes the New York Fed’s culture of deference to the megabanks it is charged with regulating as well as its marginalization of the few examiners who have spoken out.
In one memorable passage, a Columbia University professor hired to conduct a no-holds-barred investigation of the agency cited in his report
“regulatory capture,” in which regulators are co-opted by the banks they oversee. Fittingly, officials at the agency—who had hired professor David Beim to tell it like it is—nevertheless asked him to remove the phrase.
While news of this regulatory capture is causing an uproar in Washington, it is frankly old news to community bankers. We appreciate the investigative reporting, with its secret recordings and bureaucratic inertia in the face of Wall Street power. But, please, tell us something we don’t know.
ICBA and community bankers have been saying for years that the regulatory playing field is heavily tilted in favor of the megabanks. While regulators defer to systemically risky institutions and their teams of compliance lawyers, they pounce on local community banks every chance they get. Call it “regulatory capture” if you like—it sounds to me like Stockholm syndrome. You know, when hostages have sympathy for their captors.
In fact, one of the reasons ICBA has long opposed the consolidation of the federal banking agencies into a single agency is the threat that this new regulator would become quickly co-opted. How long do you think it would take the multi-trillion-dollar banks to lobotomize the single national regulator, to the detriment of our financial system and global economy? In a New York minute!
After all, just look at what the New York Fed did with David Beim’s all-access report on the agency’s problems. After he handed over his report to the regulators, Beim never heard from them again.
Making Progress on Making News
What a difference a year makes. Last summer I embarked on a media tour of New York City. Joined by ICBA’s media expert, Senior Vice President of Media and Public Relations Aleis Stokes, I met with representatives from several of the nation’s preeminent financial news outlets.
It wasn’t exactly a Hillary Clinton book tour, but some of the top editors and reporters in the financial world were genuinely interested in what we had to say. Nevertheless, it was often an educational process. We were frequently informing them of the regulatory burdens facing community banks or introducing them to the community bank perspective on too-big-to-fail banks and credit unions.
This time was different, and in a good way. I was back at The Wall Street Journal, The New York Times, Bloomberg, and American Banker. But instead of laying out our industry’s top policy priorities and concerns, I was engaged in a two-way discussion. This time around, these journalists were fully familiar with the issues on the table. In other words, instead of talking at them, I was talking with them.
To me and Aleis, this was a big development for ICBA and community banks. It shows that ICBA’s relentless effort to raise awareness of our issues is making progress. Our voice—the voice of community banks—is being heard loud and clear. For example, when I brought up the impact of growing government overreach into the community banking sector, they were ready to talk about Operation Choke Point. When we talked regulation, they were ready to hear about the progress of our Plan for Prosperity and our petition advocating streamlined call reports.
And while these editorial meetings are often about the long-term payoff—i.e., ensuring these outlets remember to get the community bank position in their reporting—this year’s trip has paid immediate dividends. American Banker has already covered ICBA advocacy on regulatory relief
, de novo charters
and Federal Home Loan Bank membership
, and Bloomberg included us in a report on new mortgage rules
In Wall Street’s backyard, the nation’s top financial reporters and editors showed that they understand and want to cover the issues that matter most to Main Street institutions. That’s a testament to the hard work and dedication that community bankers across the nation and ICBA have put into raising our industry’s profile.
Take Charge: Combat Call Report Encroachment with ICBA Petition
Before I was ever a community banker, I was a cadet at the Virginia Military Institute and an officer in the U.S. Army. One of the core principles instilled in me during my military training was the importance of never giving up ground—of always looking for opportunities to take ground from the enemy.
Well, in ICBA’s constant war on excessive regulation, we are mounting a new assault to halt and roll back what has become a significant burden for many community banks—the quarterly call report. Last week we launched a petition urging relief
from the increasing length and complexity of the call report and advocating streamlined reporting rules for community banks.
But just like in combat, we need boots on the ground. In this case, we need a massive show of force to demonstrate to regulators that we are not about to lay down our arms. That is why I’m calling on every community banker, every staffer, every director, every industry ally—join the fight! Sign our petition today
to help us turn the tide.
Let’s be clear what we’re fighting for here. The massive growth of the call report—to nearly 700 pages of instructions and 80 pages of forms—has a tangible impact not only on community banks and their compliance staff, but also on the success and economic growth of the local communities they serve. Like other regulatory burdens, the additional time and resources that community banks devote to the call report cannot
be dedicated to local economies.
And there is no question that the size and complexity of the call report burden is rapidly growing. ICBA’s recently released call report survey
found that the annual cost of preparing the report has increased for 86 percent of community bank respondents over the past 10 years. Further, 98 percent of respondents said ICBA’s proposed short-form call report, which qualifying community banks would submit twice annually, would reduce their regulatory burden. Seventy-two percent said the reduction would be substantial.
That is why we must act now! Community banks and the communities they serve can’t cede any more territory to the growing call report threat.
As part of our broader fight for regulatory relief, we must hold our position on this crucial issue. Let’s turn out in force, let’s halt the advance of this costly burden, and let’s strike a blow for smarter and more equitable regulation! Sign ICBA’s call report petition
, enlist reinforcements, and make sure Washington hears every single one of us loud and clear!
Let’s Cut Call Report Paperwork Down to Size
Regulatory paperwork continues to occupy far too many community bank resources that could be dedicated to improving local communities, and the problem is only getting worse. A new ICBA survey spotlights the tangible impact of one of the more onerous burdens that is only getting heavier—the quarterly call report.
While regulators are proposing to yet again expand call report requirements for all banks, ICBA’s new survey details the impact of existing reporting rules.
The 2014 ICBA Community Bank Call Report Burden Survey
found that the annual cost of preparing the call report has increased for 86 percent of respondents over the past 10 years. Meanwhile, the total hours dedicated to preparing the call report increased for 73 percent of respondents. Further, one in three survey respondents said the number of employees involved in call report preparation has increased, with more than 60 percent saying they have at least two employees who prepare their report.
Why the increasing time and expense? Here’s a reason—the call report has grown from 18 pages in 1986 to 29 pages in 2003 to nearly 80 pages today! The instructions alone are 630 pages, and regulators are considering padding that with another 57. In fact, the call report—which community banks have to submit every 65 business days—has more pages than the typical U.S. community bank has employees.
Make no mistake—the additional staff time and resources that community banks devote to the call report are resources that cannot be used to expand our economy. That is why ICBA is proposing a simpler and more streamlined approach for smaller and less complex banks.
Instead of continuing to add to the paperwork overload, we propose that regulators allow highly rated, well-capitalized community banks to file a short-form call report twice per year. This report would cover the first and third quarters of the year, with community banks continuing to submit the usual long-form call report during the second and fourth quarters.
Think it will help? Community bankers sure do. According to our call report survey, 98 percent of respondents said the short-form call report would reduce their regulatory burden, and 72 percent said the reduction would be substantial.
Look, enough is enough. The truth is that new regulatory burdens detract from the ability of community banks to serve their communities. Instead of tying up local institutions in knots of red tape, let’s free their hand and allow them to promote the sustainable economic growth our nation desperately needs.
Note to Regulators: Exercising Fiduciary Responsibility is Not a Community Bank Board Problem - But You Might Make It One!
As community bankers we have a fiduciary responsibility to our customers and communities as well as our shareholders. While it may not always be an explicit legal duty, it’s inherent to the community bank relationship business model and serves a key role in our success—after all, community banks only succeed when their customers and communities do the same. That’s why, when I read a recent speech given by Federal Reserve Governor Daniel Tarullo during the Association of American Law School’s 2014 Midyear Meeting in Washington, D.C., which hovered on the possibility of broadening directors’ fiduciary duties, I was taken aback.
In his speech, Gov. Tarullo alludes to whether the fiduciary duties of the boards of regulated financial firms should be modified to reflect what he has characterized as regulatory objectives. He says, “Doing so might make the boards of financial firms responsive to the broader interests implicated by their risk-taking decisions even where regulatory and supervisory measures had not anticipated or addressed a particular issue. And, of course, the courts would thereby be available as another route for managing the divergence between private and social interests in risk-taking.”
As a former community banker, and one that now represents the premier association for the community bank industry, I’ve seen a lot. And that’s why this struck such a nerve. While I realize that a change of this nature, and magnitude, would require statutory changes, it nevertheless is a slippery slope. Combine this with the fact that community bank boards have been subject to a broad fiduciary duty for decades, and you have a very volatile and dangerous situation.
Community bank directors should not be subject to a broader legal fiduciary duty. It’s one that could lead to more emphasis being put on the community bank system than the megabank system. We already see this happen when a small bank director gets sued by a regulator. The problem is that you never see the same situation play out with a megabank director being caught behind the lines. Doesn't it seem as though the small guys are always low hanging fruit for the regulators? Why is that? Are they just easier to spot? I guess you could say that small banks don’t have nearly as many layers of leaves to hide behind as those at the megabanks do.
That’s why if the possibility of broadening directors’ fiduciary responsibility to include risk management is ever put on the table, it should absolutely apply to the systemically important financial institutions or SIFIs. The forest is way too dense in those tall skyscrapers on Wall Street anyway, and that’s exactly why regulators need to hold the megabank board directors to the same standards that they already hold community bank board directors to.
The bottom line is that no bank should be more camouflaged than the other when it comes to fiduciary responsibility—no one. We all need to wear the same fatigues on this one.
Free Societies and the Rule of Law
Operation Choke Point is a U.S. Department of Justice-led joint effort with federal regulators designed to choke off access to banking services by businesses engaged in fraudulent or otherwise illegal activities. The public policy end was to protect Americans by driving seedy, fraud-laden businesses out of business. The means were to deny targeted businesses the basic but vital banking services that any business needs to process payments, thus forcing them out of the marketplace.
However, as members of Congress from both parties have protested, the cure has become worse than the disease as the scope grew to include whole classes of perfectly legal but politically controversial businesses. Banks continue to experience regulatory intimidation to drop long- standing customers that include Internet-based businesses, payday lenders, telemarketers and debt collectors.
Some of the darkest days in history have started when government intervention into free markets is driven by a political agenda and not the rule of law. Quiet pressure of this sort from an all-powerful government cannot be tolerated in a free society.
These days it is rare that Congressional Republicans and Democrats agree on anything, much less on protecting the freedom of banks to serve unpopular, but legal, businesses. I applaud them for standing together to defend the rule of law and demanding an end to government-sponsored, politically motivated, subtle bureaucratic intimidation.
Let’s be clear, no credible voice is talking about protecting illegal or fraudulent businesses. The federal government has plenty of appropriate tools to enforce state and federal laws. Justice and regulators should take aggressive enforcement action against law breakers. Likewise, Justice and regulators must stop undermining the rule of law by encouraging banks to discontinue serving legal businesses, many of which are regulated companies they have successfully banked for decades. Government must clean up Operation Choke Point and end subtle pressure from regulators to discontinue banking politically unpopular groups.
Two Congressmen from my home state of Missouri, Republican Blaine Luetkemeyer and Democrat Lacy Clay, pointed out the human cost of Operation Choke Point on consumers who are further shut out of the free enterprise system, and the need for a safe harbor for insured depositories to bank the legitimate companies who serve them. There must be immediate relief and indemnity for insured depositories to continue providing basic banking services.
We must stand ready to work with regulators to restore confidence and clarity so that community banks can serve a broad range of legal businesses that follow state and federal laws. A solution could include a regulator-certified safe harbor and indemnity for insured depositories that provide banking services to companies that demonstrate compliance with laws and regulations applicable to their business.
The regulators started Operation Choke Point; they can stop it.
Too-Big-To-Jail Talk is Cheap
Here in Washington, I hear a lot of talk. People will say just about anything and claim it’s the truth, no matter what the record shows. Well, I’m from the Show-Me State, where actions speak louder than words.
U.S. Attorney General Eric Holder recently said that there is no such thing as too-big-to-jail. In a video address
, Holder said no individual or company, no matter how large or profitable, is above the law.
In isolation, Holder’s words—that the 2,500-year-old principle of equality under the law still exists in the United States of America—are somewhat comforting. But context is key, and Holder’s remarks simply do not mesh with reality.
For one, Holder’s statement directly contradicts congressional testimony he gave last year. Testifying before the Senate Judiciary Committee
, Holder said that law-enforcement officials have hesitated to pursue financial wrongdoing at the largest banks because of the potential economic impact. So he should at least get his stories straight.
Further, there are no results to back up Holder’s current claims. No high-level executives have been prosecuted in the wake of the 2008 financial crisis. When it comes to Wall Street, the Justice Department simply has no record to run on.
Finally, the current dust-up at Credit Suisse and BNP Paribas isn’t going to quell concerns about the aftermath of the crisis. As Politico
reporter Ben White recently noted
, “a pair of pleas from foreign owned banks is hardly going to reverse the fact that U.S. prosecutors completely failed to make any significant criminal cases against top executives or institutions in the wake of the largest financial crisis since the Great Depression.”
I couldn’t have said it better myself.
Here’s another quote, this one from former Rep. Willard Duncan Vandiver: “I am from Missouri. You have got to show me.”
If federal prosecutors want us to believe that they are not shy about taking on Wall Street for its role in the financial crisis that still haunts us to this day, then they should prove it. Because all I’m hearing is just more talk.