If the first step in recovery is admitting that you have a problem, then Wall Street might need an intervention to wean itself from the too-big-to-fail problem. In the past two weeks we have seen the Wall Street spin machine working overtime. The megabanks and their supporters have issued forceful denials that too-big-to-fail exists and benefits these institutions.
The latest came in an issue brief
from the nation’s largest financial firms and five of their water-carrying national trade associations denying that they benefit from taxpayer-funded subsidies. The Financial Services Forum, Financial Services Roundtable, Clearing House, Securities Industry and Financial Markets Association, and American Bankers Association say they question the methodology of a study that found that megabanks enjoy an $83 billion subsidy from their explicit taxpayer support.
The megabanks also cite a separate International Monetary Fund report that found that their funding advantage amounts to “only” 20 basis points. Of course, community bankers know that 20 basis points can make or break the bank on Main Street. But to Wall Street firms used to periodic taxpayer bailouts, that’s chump change.
Anyway, they said, the Dodd-Frank Act has fixed the problem. Yes, the very Dodd-Frank Act that, until yesterday, has been vilified by these same associations and too-big-to-fail banks as horrible, wrong, destructive, and in need of a complete repeal. After trillions of dollars in taxpayer support following the 2008-10 Wall Street financial crisis, they say, this one piece of legislation has solved everything, neglecting to mention that the size of the five largest banks have increased nearly 20 percent since the beginning of the financial crisis in 2007.
The response is reminiscent of a recent American Banker op-ed
declaring that the too-big-to-fail problem is a myth. The op-ed from the Cato Institute’s Louise Bennetts similarly cited the Dodd-Frank response as reason not to downsize the megabanks into more manageable parts. In my own response to that op-ed
, I wrote that the end of too-big-to-fail is great news for the financial markets and for community banks, but that someone needs to tell the Justice Department and the financial market about all this.
You see, U.S. Attorney General Eric Holder just last week told Congress that the size of the largest financial firms is inhibiting prosecutions because of fears of the subsequent impact on the financial system. So if too-big-to-fail and too-big-to-jail do not exist, the Justice Department can move ahead with its prosecutions.
But I don’t think Wall Street wants to hear that either. I’m sure they’ll come up with another excuse why they do not need to be held accountable. (And, really, isn’t accountability what this is all about?) In fact, I’d guess that their Wall Street spin machines are already on it.
Denial of accountability, it’s not pretty. Wall Street, we need to talk.
Stage is Set for Key Congressional Battles
With the 113th Congress’ committee assignments and leadership structures in place, the legislative wheels for the next two years of policymaking are beginning to turn. While headlines are centered on automatic federal spending cuts scheduled for March 1, ICBA is focused squarely on its legislative agenda for the next two years.
Relieving the nation’s community banks from undue regulatory burdens will continue to be a top ICBA priority. The good news is that progress is already underway. Separate ICBA-advocated bills were recently introduced to exempt community banks from proposed municipal advisor regulations, to ease requirements on annual privacy notices and to allow thrift holding companies to take advantage of lower Securities and Exchange Commission deregistration thresholds. Meanwhile, the House Financial Services Committee declared that the health and growth of community banks—and the excessive demands of Basel III and mortgage-lending regulations—will be among its top oversight concerns.
But ICBA’s offense will have to be complemented by a strong defense against campaigns by community banks’ government-supported competitors. The tax-exempt credit union industry is again working to advance legislation that would increase their member-business-lending cap and to unfairly expand their powers to raise outside capital. The association continues to oppose any expansion of authorities for the Farm Credit System, which enjoys tax and funding advantages as a government-sponsored enterprise. And ICBA will never relent from its efforts to ensure stricter and more meaningful oversight of too-big-to-fail firms and the risks they pose to our financial system.
Due to the Republican majority in the House and Democratically controlled Senate, any advancement of legislation through Congress will require bipartisan support. As the clear and uncompromised voice for community banks, ICBA looks forward to continuing to work with the nation’s community bankers and our affiliated state and regional community banking associations on behalf of this great industry. With the legislative wheels beginning to turn, now is the time to continue our push for fair and sustainable regulations through the 113th Congress.
Too-Big-To-Fail is NO Laughing Matter
Isn’t it nice that we can all look back at the financial crisis of 2008-10 and just laugh? Isn’t it about time we forgive the too-big-to-fail financial institutions that wrecked our economy and once again revere them as masters of the universe? I didn’t think so, either. But apparently if you’re one of the too-big-to-fail firms that caused the financial crisis and have made it through relatively unscathed thanks to billions of dollars in taxpayer assistance, it’s easy to move on.
Speaking in Miami, JPMorgan Chase CEO Jamie Dimon recently got some laughs
with the understated acknowledgment that the big banks have made some mistakes. Further, while discussing the “big dumb banks” that brought the country to its knees, Dimon said that the resolution authority over these institutions should involve “Old Testament justice” and not taxpayer assistance.
Well, I couldn’t agree more. But pardon me if I’m not laughing. I don’t think that the financial and economic damage that these megabanks have created is particularly funny. And while it’s nice to hear that the CEO of the nation’s largest bank thinks too-big-to-fail firms should be subject to the same set of rules as every other bank in the country, actions speak louder than words. While the leaders of the community banks that have failed in the years following the financial crisis have been held accountable, megabank CEOs have enjoyed golden parachute retirement packages while the institutions they managed were propped up with government support.
It’s easy to get up on a stage and talk about fairness and accountability in financial regulation. But if you are one of the beneficiaries of favorable treatment, actions speak louder than words. As ICBA and the nation’s community bankers continue their campaign for equitable treatment from regulators and tiered regulation, I hope Mr. Dimon and his colleagues on Wall Street do not forget his plea for taking on the too-big-to-fail problem.
Megabanks Boost Business Portfolio—By Changing the Rules
When your competitors start moving the goalposts, you must be doing something right. A new report from one of the megabanks that contributed to the recent Wall Street financial crisis is defending these institutions and taking on community banks. According to American Banker
, the JPMorgan Chase paper says that megabanks lend more relative to their size than do smaller institutions.
How can this be? The Federal Reserve Bank of Dallas recently released
the latest in a long series of reports from regulators that have found community banks to be the industry leaders in business lending relative to size. So, what’s changed?
Well, apparently it’s the calculation. JPMorgan has simply changed the rules of the game. In its paper, the megabank expands the definition of credit to include categories of funding that rarely apply to community banks, such as municipal bond originations and residential mortgage securitizations. By simply adding in other sources of funding to the traditional measures of bank lending, JPMorgan has concluded that the megabanks come out on top.
Well, that’s convenient. Of course, every other measure of bank business lending finds that, pound for pound, community banks reign supreme. While they represent a small fraction of the banking industry’s total assets, community banks with less than $10 billion in assets provide nearly 60 percent of small-business loans between $100,000 and $1 million. Community banks remain second to none in making the kinds of loans that drive business and economic growth and stability.
The megabanks can say what they want—this certainly is not the first time they’ve gotten creative with their numbers. But the truth remains that community banks are business-lending leaders. Of course, you don’t need creative formulas and spreadsheets to know that—you could just ask most any small-business owner. I wonder if anyone at JPMorgan knows any by name.
Too Big To Jail?
While senior Wall Street executives have been repeatedly tried in the court of public opinion and implicated by hundreds of whistleblowers within their own organizations, they have thus far escaped criminal indictment for the irresponsible behavior that fueled the 2008-09 financial crisis. The latest damning evidence came in this week’s episode of “Frontline,”
which shines a light on possible reasons why the executives who sank our economy and received billions in taxpayer assistance have not been held accountable.
In case you missed it, I highly recommend you take an hour to sit and watch this recount of the inexcusable hubris that led to the meltdown and the unexplainable failure to pursue criminal prosecution that followed. Words of warning: you might not be sitting down for long.
The program, titled “The Untouchables,” describes irresponsible mortgage underwriting standards written by Wall Street securitizers, risk officers who were directed to ignore faulty loans, and congressional inquiries that found prosecutors either unwilling or unable to pursue criminal investigations of senior executives.
Most distressing are revelations that the Justice Department has been hesitant to advance criminal charges because prosecutors are concerned about the impact of lawsuits on large financial institutions. The assistant attorney general of the department’s Criminal Division said he has lost sleep worrying not about the evidence of the case or the pursuit of justice, but about the result of such a lawsuit on the financial system as a whole. In other words, the health of the financial industry was a determining factor in whether to indict executives for fraud.
If this isn’t a textbook definition of the problem of too-big-to-fail, I don’t know what is. These financial firms are so large and so interconnected that they not only have access to lower-cost funding and to a seemingly limitless taxpayer backstop, but they are also immune from criminal prosecution. Have we come to a point where we truly have people who are above the law? Are we willing to accept that they are too big to jail? These individuals wrecked our financial system and have been allowed to walk away, bonus checks in hand, like nothing happened, leaving community banks to pick up the pieces under the weight of crushing laws and regulations enacted to halt such reprehensible behavior.
It is high time to restore sanity and accountability in our financial system. Too-big-to-fail firms should be downsized and split up. And while the executives of too-big-to-jail firms might think they are untouchable now, we should stand up to ensure they no longer have the ability to single-handedly drive our economy into the ground without facing consequences. Only then can we begin to restore our financial system to proper health.
FDIC TAG Preparation Now Essential
For all of us who’ve spent the better part of a year calling on Congress to extend the FDIC’s Transaction Account Guarantee program, last week’s Senate vote against an extension was hard to swallow. Following a 76-20 procedural vote
in favor of S. 3637, a 50-42 vote
was not enough to overcome a procedural motion blocking advancement of the bill just a couple of days later.
Failing to get the 60 votes needed to advance the legislation puts the measure on hold in the Senate. But ICBA is not giving up. It was a procedural hurdle, not the merits of S. 3637, that put the TAG extension on hold. Congress has until midnight on the night of Dec. 31 to extend this coverage, and ICBA is going to use every minute until then to urge lawmakers to act.
But it’s not going to be easy, and community bankers should do their due diligence to ensure they and their customers are ready for every eventuality. While ICBA is working to remind members of Congress how important this legislation is to Main Street, community banks should prepare for and notify their customers of the scheduled expiration.
The FDIC recently released guidance
encouraging banks to remind depositors that would be affected by the coverage change about the scheduled end of the coverage. Banks may use “any reasonable method” to remind depositors. If the coverage expires, banks are obligated to remove any notices about the coverage from their offices or websites.
Make no mistake, ICBA is doing everything it can to procure this much-needed extension, but community banks must be ready for whatever the New Year brings. Let’s hope for the best, prepare for the worst and work this issue until the clock runs out.
Trillions for Wall Street, but not one cent for Main Street
“Millions for defense, but not one cent for tribute.” When Robert Goodloe Harper uttered that famous statement he was referring to America's undeclared war with the Barbary Pirates in 1798. Today, that famous rallying cry has been perverted and turned on its head with the letter sent to the Congress by the Financial Services Roundtable (FSR) opposing a temporary extension of the Transaction Account Guarantee program. Wall Street has a new rallying cry, "Trillions for Wall Street, but not one cent for Main Street." Is that the smell of hypocrisy wafting in the air? And what of that "one voice for the industry" tune that some have been singing at banker gatherings around the country the past couple of years? I guess as long as the tune is Wall Street's tune, then we are all "one voice." Otherwise, not so much.
So now, those who brought you the worst financial crisis since the Great Depression and sucked down trillions of taxpayer dollars want to vacuum up billions of dollars from thousands of small local community banks still reeling from the carnage wrought by Wall Street.
What is most tragic about the FSR letter is that it is not even apples to apples. Not one cent of taxpayer money (tribute?) is involved in the TAG program that pays outsized benefits for community banks and the small businesses they serve on thousands of Main Streets from coast to coast.
Apparently, as Bloomberg reported last year, $7.7 trillion in guarantees and secret loans that kept the "Zombie" brain-dead banks of Wall Street alive in 2008-09 is just not enough. Now they want to go after the relatively modest commercial deposits in community banks by gutting the bank-paid transaction guarantee program. Does Wall Street have no shame? Just 50 banks, less than 1 percent of more than 7,200 banks, already control more than $10 trillion of the $14 trillion in the banking system. Do those 50 banks just want to scoop up every damn penny on Main Street and milk it dry? Has their "too-big-to-fail" hubris reached a new high? Judging from their letter, the answer is yes.
It is the holiday season, and a famous Frank Capra holiday movie will be shown on the TV screens of millions of homes this holiday season. And just like in the town of Bedford Falls, Mr. Potter, owner of the town's "mega" bank, wants total control of Main Street by trying to shut down George Bailey's little community bank. Mr. Potter did not succeed. Like George Bailey, let's all fight and keep these modern day Mr. Potters from sucking up Main Street.
“Wall Street (and the Government) Get the Gold; Main Street Gets the Shaft”
It seems that Wall Street can take billions of taxpayer dollars on a phone call to Treasury and that Wall Street wrongdoers and their boards can get away unpunished and unsanctioned for their misdeeds (unlike scores of local community bank directors who are being sued by the FDIC simply because they sat on a bank board). However, community banks can’t even catch a break on a bank-funded deposit program, not a dime of which is paid for by taxpayer funds. The Transaction Account Guarantee (TAG) program gives community banks a sliver of equal footing with their government-supported, 100 percent guaranteed, too-big-to-fail megabank competitors. This inequity is a sorry state of affairs.
The Fitch rating agency analysis of the end of TAG put it this way:
End of Demand Deposit Protection May Affect Smaller Banks
The upcoming expiration of unlimited FDIC insurance for non-interest bearing demand deposit accounts (DDAs) could have a negative impact on deposit bases at both smaller and less creditworthy banks, according to Fitch Ratings. Large institutions that depositors still regard as too big to fail and financially strong regional banks are likely to be beneficiaries if the insurance program ends as scheduled. …
Any large movements of high-value account balances out of smaller and more financially vulnerable banks could drive a weakening of liquidity and a further erosion of depositor confidence at these institutions. This could drive more consolidation in the industry…
As you can read, hundreds, perhaps thousands, of community banks will be damaged by the end of TAG. With near-zero interest rates through 2015, new tax burdens, Basel III capital guidelines and new mortgage rules going online about the same time as TAG ends, community banks are going to be hammered from multiple directions, which means small-business lending and local financial support for smaller towns, cities and rural America grinds to a halt. And that helps whom? The business case for allowing that to happen is what? It reminds me of the old country song; “Wall Street [and the government] get the gold; Main Street gets the shaft.”
And the saddest thing of all is that I get calls from heads of regulatory agencies, the Treasury and the administration asking, “Why aren’t community banks lending more?” and “What can we do to help?” Really? How sad is that? There are times when I just want to say, “Are you kidding me? This is a joke, right?” But the sad reality is that it is not a joke, it is real. And that reality is crushing Main Street community banks, small businesses and the customers they serve across America.
Here They Go Again
I’m sorry, but if you repeat a lie often enough, it still doesn’t make it the truth. That hasn’t stopped Wall Street apologists from continuing the stale assault that the Transaction Account Guarantee program is a taxpayer-supported government bailout. The latest potshots come from The Wall Street Journal, which has again concluded that because the government should reduce its support for the banking system, somehow TAG should be the first to go.
We’ve screamed and hollered about how inaccurate and unfair this statement is—that in a time of too-big-to-fail government guarantees, a bank-funded deposit insurance program is on the chopping block. But it hasn’t gotten us very far. They refuse to publish our responses on their op-ed page, and they seem to forget our perspective when they repeat their half-truths. Well, we’ve once again responded, but I’ll be darned if it’s nowhere to be found in the pages of the Journal
. Here’s what the editors don’t want you to read.
Bank-Funded Deposit Coverage Is Anti-Bailout Measure
The Independent Community Bankers of America and the nation’s community bankers fully agree that the banking system should be weaned off of taxpayer support (“Time to Wean Banks From Crisis Backstop”). That is why ICBA and others advocate the breakup of the too-big-to-fail financial institutions that enjoy unlimited government support and have, essentially, become indistinguishable as private businesses or units of the federal government. However, not a dime of taxpayer dollars goes toward the FDIC’s full coverage of noninterest-bearing transaction accounts. The Transaction Account Guarantee coverage, like other deposit insurance, is fully paid for by the banking industry.
And while detractors point out the largest banks hold the bulk of TAG deposits, this should come as no surprise—they hold most of all the nation’s deposits. The four largest banks alone hold 40% of the nation's deposits, a dangerous concentration that continues to grow. This is all the more reason why extending TAG is so important: if the program is allowed to expire, the largest banks will still hold over $1 trillion in TAG deposits, yet only the first $250,000 of each account will be explicitly insured. The rest will enjoy an implicit guarantee, based on the banks’ too-big-to-fail status. If the author is so concerned with government backstops for the private sector, he should be doubly troubled by the thought of the American taxpayer underwriting all those concentrated deposits in the absence of a bank-funded TAG program.
Although they might hold fewer TAG deposits because of their scale, community banks do more with less. In addition to helping small businesses, farmers and municipalities meet payroll and other recurring expenses, community banks use their limited TAG deposits to support relationship-based lending in local communities. This type of banking is fundamentally different from the transaction-based banking practiced by large banks, which use deposits for all kinds of investments that do nothing for local communities. This further illustrates why any flight of deposits from smaller banks due to a TAG expiration would be so devastating to local communities.
So, instead of continued government subsidies to too-big-to-fail banks, let’s temporarily extend TAG to support Main Street economies and jobs.
By God, That is Enough! It is Time to Stop the Madness!
In G.K. Chesterton’s short story titled “The Three Tools of Death,” a character named Patrick Royce says, “I give myself to the gallows; and, by God, that is enough.” It is the gallows that awaits this nation’s community banks if proposed Basel III capital rules go into effect.
Simply put, the Basel III capital proposals
by the federal bank regulatory agencies are a disaster for the commercial banking industry—especially for community banks! Any bank not designated a Systemically Important Financial Institution (SIFI) by the Financial Stability Oversight Council (FSOC) should not be subject to the Basel III capital guidelines as currently proposed.
Basel III was never meant to apply to the smallest banks in our nation. In fact, we don’t think it should be applied to any bank below $50 billion in assets. It was meant to apply only to internationally active, highly interconnected financial firms. So why impose rigid, arbitrary and impossibly high capital regulations to smaller, relationship lenders like community bankers?
Unchanged, these Basel III capital rules, together with the extended near-zero interest rate environment and extremely restrictive proposed mortgage and other new credit rules, will significantly impact in many and very negative ways every community bank in this nation. Basel III (together with all the other piling on) will have the aggregate effect of not only significantly damaging Main Street and rural America and millions of credit-seeking consumers and small businesses, but also will likely do what the Civil War, the Great Financial Panic of 1907, the Great Depression and the Great Recession could not do—wipe out the community banking industry by the end of this decade. If the federal banking regulators truly want to reduce this nation’s commercial banking system to a handful of banks, imposing Basel III capital rules on community and midsize banks will do it!
ICBA is not going to stand by and watch our precious community banking industry be destroyed. We are going to fight back against all this burden and all these new capital regulations with every weapon in our arsenal. I hope the nation’s community banks will join us. We never give up!
ICBA Welcomes ABA to TAG Extension Effort
This week’s American Bankers Association announcement that it will join the ICBA-led push for extending full FDIC coverage of noninterest-bearing transaction accounts is welcome news indeed. We at ICBA are happy that ABA has joined us in actively working to extend the transaction account guarantee (TAG) coverage for all banks.
ICBA has been working with both the regulatory agencies and Congress for many months on this critical issue for community banks—especially community banks in the economically hardest-hit areas of our nation. Community banks must operate in the free market with no balance sheet guarantees or perceptions of too-big-to-fail government support.
Accordingly, until the nation’s economy is on a strong growth path, TAG coverage of business and municipal accounts is vital to the deposit and loan stability of community banks. We look forward to ABA joining the campaign to extend TAG coverage. And with just nine legislative days until the August congressional recess, we encourage all community bankers to make their voices heard as well.
Contact Congress To Support an Extension.
View a Timeline of the Program.
Ending Crushing Regulatory Burden Job #1 at ICBA
Ending the crushing regulatory burden on Main Street community banks is and has always been Job #1 at ICBA. But over the past four years, our mission has become more urgent than at any other time in our nearly 90-year history. We have reached a regulatory tipping point that will be the end of the U.S. community banking system if the regulatory agencies and Congress don’t act now! Because of the systemic pattern of misdeeds, greed and corruption on Wall Street (think LIBOR scandal), community banks have been staggered more than ever before by the sheer volume of individual regulations with which they must comply. It has to stop or not only will the community banking industry be wiped out, but small town and rural America will be decimated as well. The very heart of our nation will be torn out and the heartbeat of thousands of towns, cities and rural areas across America will stop.
After Hurricane Katrina, the first banks to reopen (in some cases within 24 hours) were the community banks, while the megabanks abandoned their branches never to reopen. After the devastating tornadoes in southern Indiana, the first banks to reopen were the community banks serving the small towns and rural areas of that state. That same story repeats whether you are talking hurricanes along the Gulf Coast and Eastern seaboard, tornadoes in the great heartland of America or devastating fires and floods in the West. It is always local bankers who are not only there to support their communities, but whose own families are part of the community, often for many generations. Community bankers are this nation’s financial first responders.
If we lose community bankers to an avalanche of bureaucratic rules and regulations whose value is dubious at best and ruinous at worst, then we lose the very soul of what made the great economic engine of this nation work. It is our community banking system that sets America apart from all other nations in the world. It is the entrepreneurial spirit of community bankers that provide the fuel for our nation’s small businesses and that in turn create millions of new jobs across the country.
ICBA is declaring a regulatory emergency—it is our mission to do whatever it takes to not only end the crushing weight of regulatory burden on America’s community banks, but also to roll it back. Enough is enough! ICBA will not stop our crusade until community banks can once again start working for their customers and communities and stop working for the regulators and government. This insanity must stop! And ICBA is going to stop it!
Join us in our crusade to end the crushing weight of over-regulation—contact your members of the House and Senate and tell them that enough is enough!
The Antidote to Deposit Concentration? TAG
I recently wrote that extending full FDIC coverage of noninterest-bearing transaction accounts is a matter of urgency. And it is. Congress has to act by Dec. 31, when coverage of $1.3 trillion in deposits is slated to end overnight. On Capitol Hill in an election year, getting anything done by Dec. 31 is a tall order.
But extending TAG coverage is also crucial to stopping the further concentration of the nation’s deposits into a handful of the very largest banks. Known as “TAG” after the original FDIC program launched in 2008, the coverage has helped stabilize the banking system and slow the ever-rising concentration of banking deposits into fewer and fewer banks. Whereas Wall Street institutions can easily attract small-business and municipal deposits because of their implicit government guarantee (even Moody’s affirms the government guarantee of the nation’s largest financial firms), community banks rely on TAG to provide certainty to their customers in the midst of a fragile economic recovery. So the TAG program helps prevent even greater deposit concentration in a handful of large institutions while also mitigating their funding advantage—at no cost to taxpayers.
Meanwhile, keeping deposits in community banks is vital to sustain our economic recovery. Community banks are the nation’s leaders in small-business lending, so turning off an important source of funding would be a disaster for Main Street communities.
We at ICBA are calling for a temporary, five-year extension of the FDIC’s TAG coverage. This will help preserve the economic recovery on Main Street and support equity in our banking system. Help us make the case by calling on Congress to take action
. It’s only right.