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I have read several summaries of the Dodd-Frank Act, but this is the first I’ve heard about a rule requiring companies to publish their CEO’s salary in relation to the mean salary atthe company. I am trying to figure our the merit of this requirement. Clearly, the author of this rule wants some kind of compensation reform — either lower wages for CEOs or higher wages for staff.

Let’s be clear that this kind of information is already available. Many newspapers and other publications publish the compensation of big company leadership. And there are many services, including the U.S. Census Bureau, that publish mean income, by household and/or individual. Looking at the two sets of data, we all have a pretty good idea of what’s going on in this country. There already are a lot of people outraged by the disparity between top earners and staff.

The Dodd-Frank Act provision will surely exacerbate the outrage. If such disparity is a legitimate Congressional concern, I would be much more impressed by actual measures to address it than mere efforts to incite hostility over it.

There is a lot of anger in this country now over a lot of issues; I am not comforted by the idea of pouring gasoline on this fire at this time. Congress needs to focus on taking real action; it needs to do much more than simply whip up sentiment. But with our polarized Congress and political scene, this may be the best they can do.

I have been a fan of Ben Crabtree for many years; he is an analyst who has following the banking industry for decades. He currently works with Oak Ridge Financial Services Group. He is kind enough to send me is month analysis, and his July essay caught my eye. While banks might be inclined to “hunker down” given stressful economic conditions, he suggests the strongest banks will make the most of the current market.

He writes:

Given the regulatory uncertainties in this highly-regulated industry, the probability that asset quality pressures will remain quite high (though probably not increasing much) well into next year, and the prospect for no more than a muted recovery in a de-leveraging economy, it would not be surprising to see a lot of basically sound banks decide to pull back into their shells until they could look into the future with more clarity and confidence.

Ultimately, that may not prove to be the best strategy, however; the confluence of pressures on profitability and balance sheet ratios, the increase regulatory burdens, and the poor odds that the industry will get “bailed out” by a strong economic rebound should mean that the bank industry will be in a period of significant restructuring and market share shifts. Banks that are highly threatened by this environment are likely to at best stay dead in the water, and are more likely to shrink. This will mean that banks that are well positioned with strong management, capital ratios that are clearly more than adequate, a loan portfolio that has truly been scrubbed, “best practices” in all important procedures and policies, and healthy regulatory relationships can make substantial market share gains by taking customers away from weaker banks and/or actually expanding via accretive acquisitions, thereby taking advantage of the industry turmoil that will almost surely occur.

 My translation: Expect increased industry consolidation in the coming year or two.

One of the good things to come out of the Dodd-Frank Act was the permanent increase in deposit insurance protection to $250,000 per account. Typically, Congress increases coverage when the national median household income reaches a level equal to about half of the deposit insurance cap. The current median household income for the nation is about $50,000, which was half the old coverage cap of $100,000 — time to raise the cap.

In 1980, when the cap was raised to $100,000 from $40,000, the median household income across the country was about $17,700. In 1973, when the cap was raised to $40,000 from $20,000, the median household income was about $10,500. In 1968, when the cap was raised to $20,000 from $15,000, the median household income was about $7,700.

Whether it makes sense to tie deposit insurance to median household income is a debatable point. Whatever the cap is, I like to see it tied to real economic data; I really don’t like to see the FDIC and the Deposit Insurance Fund manipulated for political purposes.

The increase to $250,000 may certainly have been the result of political horsetrading. In “On the Brink,” former Secretary of the Treasury Henry Paulson writes about a Sept. 30, 2008 meeting with top Treasury officials. He writes:

“We had a meeting Tuesday morning and then a conference call to discuss raising the FDIC cap on insured deposits from $100,000 to $250,000 per account as part of the TARP sweeteners.”

So the increase in coverage had nothing to do with the economy and appropriate levels of deposit insurance. It was all about getting enough support to pass TARP.

The $250,000 cap is a good thing, even if I don’t really like the way it was achieved.

ICBA President/CEO Cam Fine took exception to something Iowa Bankers Association Chairman Roger Claypool wrote in his column that appeared in the July 16 edition of the IBA Exchange (it appeared earlier on line). The column was mostly a reprint of this ABA memo to community bankers. Fine was “irked” by point No. 11, in which it says that raising the Deposit Insurance Fund minimum ratio to 1.35 from 1.15 sets a “precedent to use premiums as a revenue raiser to support other government spending programs.”

Fine, who spoke to members of the Community Bankers of Iowa via speaker phone on July 15, said: “That’s a lie. I don’t know if they don’t know their history or if they were intentionally trying to mislead you. But the FDIC premiums have been on the unified federal budget since 1967… In 1967, President Lyndon Johnson placed the FDIC on the unified federal budget to reduce the deficit so he could hide the cost of the Vietnam War. That’s a true story, that’s fact. Look it up.”

Fine further went on to explain that Congress puts things on budget or holds them off budget all the time to achieve their desired political purposes. Putting the FDIC on the unified federal budget makes the deficit look smaller, and keeping Fannie and Freddie off the budget, he noted for further example, keeps the deficit looking smaller. “It’s all politics, folks,” he summarized.

Fine, of course, is right, but ABA also has a point. The precident is not that the DIF balance will count toward the budget, but that its statutory minimum is being increased by Congress for purposes other than protecting bank deposits.

The integrity of the Deposit Insurance Fund is something to be concerned about. Although the FDIC always has existed in a political environment, deposit insurance has enjoyed overwhelming public support; the public views the FDIC as a credible, reliable agency. The more politicians play with the fund, the greater risk they run that the public will wonder about the integrity of the fund.

Moving the minimum ratio up is actually one of two moves in the Dodd-Frank Act which further politicize the DIF. The other is the move toward the asset-based formula on premiums. Proponents of the switch often say “deposits don’t fail, assets do.” But the fund doesn’t protect assets. It would be more pure to keep the formula centered on deposits. Nonetheless, I understand the reasons for going to an asset-based formula and I think an asset-based formula can be credible also, but it definitely is more political.

I am sure the public trusts the government on these two counts and will continue to respect deposit insurance for what it is, but how far can you push the public? I think that is a question worth contemplating. Further politicization of the deposit insurance system may erode the credibility behind the system, and that would be bad for everyone.

For a long time industry observers have suggested that the banking industry is poised to move toward the public utilities model. There are enough policy-makers and elected officials who believe the payments system is similar enough to the sewer and electric systems, that banking really should be treated like a utility.

I think you can make an argument that we are headed in that direction. Sheila Bair’s interest in creating a small dollar loan product is a big step. The FDIC, a government agency, is devising a product for the industry to offer. Notwithstanding the merits of the product, why is it appropriate for the government to create financial products?

The creation of a Consumer Financial Protection Bureau as part of the Dodd-Frank Act is another huge step in the direction of “utilitizing” the industry. Some press accounts have referred to CFPB as the most powerful financial regulatory body ever created, with unbelievably little accountability. The truth is, we really don’t know what this agency is going to look like or what it will do, but certainly its potential is ominous. It is not crazy to believe that it will evaluate financial products for the purpose of telling financial services organizations which products they should offer and which they should discontinue. They may also have a thing or two to say about product pricing. All this sounds an awful lot like the way public utilities are regulated.

Since it is the largest institutions which will be hit hardest by the CFPB, I see them as being most vulnerable to being neutered into utilities. Certainly our country can function with a utility-like financial services sector, but we will lose innovation, creativity and fresh ideas. If the people working in financial services have to worry more about pleasing regulators than customers, then it’s all over.

A functioning financial services sector isn’t good enough; we need a thriving financial services sector. If the banks thrive, the economy thrives and the whole country thrives. Sure regulators have a role; they need to stem abuses, but they don’t need to suck the creativity out of the whole system. Because, frankly, I expect more from my bank than I do from my water company.

One of the things I hear from bankers is that their regulators are encouraging them to hire a full-time information technology professional or — but in some cases, and — a full-time compliance officer. These are typically big-ticket employees, commanding salary and benefits that easily top $80,000 or $90,000 per year. So for a bank that needs to hire both, they are looking at a bottom-line hit of $150,000 to $200,000. Both are completely defensive hires; neither add a dime to the bottom line.

Two hundred thousand dollars is a lot of money. In Iowa, for example, excluding the 48 banks that lost money last year, there were 33 banks whose entire net income for 2009 was less than $200,000. (The state has 367 banks total.) Or in Wisconsin, where there are 281 banks, there were 29 banks with total 2009 earning of less than $200,000, not including 73 banks that lost money.

I have not doubt that the owners of these banks want to comply with the requests of regulators, but you can see the difficult situation that puts them in. They end up doing something that basically wipes out their income. In many cases, these bankers will decide to sell. These are the kinds of things that lead to accelerated industry consolidation. Now the Main Street shop owner has only one bank to approach for a loan rather than two. That business owner’s chances of obtaining credit for expansion or other needs just dropped substantially. This is the kind of thing the corrodes our economy.

I once heard someone say that they thought the government was doing a good thing by requiring banks to hire more IT and compliance professionals, saying it was a form of job creation. Well, in fact, it is just the opposite. These kinds of mandates ultimately will make it much more difficult to get a job, not just in banking but any in field.

FASB announced last month that it wants banks to mark loans to market. This is the disaster that industry observers had been expecting for years. FASB has been moving in this direction for a long time, but some of us hoped they would never actually go all the way and demand mark to market accounting on loans.

Mark to market accounting works for investment managers, who buy assets to sell them. It does not work for bankers, who lend money with the idea of recovering it over time. A banker sells some loans, particularly home loans, but commercial loans and small business loans are typically held to maturity. Valuing these kinds of loans to current market conditions serves no useful purpose.

Rich Clayburgh, president of the North Dakota Bankers Association, had an interesting comment about FASB and bankers. He compared FASB’s interest in mark to market on loans to college hockey. “If you follow college hockey,” he explained, “you know that you can ice the puck when you are killing a penalty. You can’t ice the puck when both teams are at full strength.

“Well, the rule-makers at the NCAA wanted to make it illegal to ice the puck during a penalty. When they proposed that, all the coaches, and many players and fans, argued against it. They were adamant about needing the opportunity to ice the puck during a penalty.

“That was a classic situation where the people playing the game, the people in the trenches who have to live with the rules, know what’s best for the game, while officials in a distant office make up rules for them, and they don’t have a clue because they are not the one’s who have to live by those rules. Their livelihood is not impacted by their own rules.

“It is exactly the same thing with FASB and the banking industry,” Clayburgh continued. “FASB wants mark to market on loans and the people who would actually have to live with that are vehemently against it.”

I had an interesting conversation with Kevin Murphy, the deputy commissioner of commerce for the state of Minnesota, shortly after he presented some industry numbers at the Minnesota Bankers Association convention in Duluth last week.

He talked about the difficulty of gathering core deposits. He said that many of the banks that have gotten in trouble recently have relied heavily on brokered deposits and wholesale money to fund their loans. Banks have to pay up for this money, so the margins are thinner at banks that depend on brokered and wholesale money compared to those with healthy core deposits. That works fine in a good economy, but when things get tough, the thinner margins just don’t produce the earnings necessary to cover loan loss reserves. Also, brokered money is more volatile, so it is much more likely to leave a bank just when the bank really needs it.

He said that when a bank relies mainly on brokered funds, the financial institution becomes much more of an investment fund than a traditional bank. I think it is an interesting distinction. There is an important difference between lending money and investing money. Part of the difference has to do with the expectation of the person providing the funds. In the case of a bank, the customers who provide the funds are generally looking for safekeeping; in the case of the investment fund, the customers are generally looking for return.

It is one thing for a financial institutions professional to make a conscious decision to change from a banker to an investor, but it is quite another thing for the financial professional to subtly morph from one to the other due to market forces. Core deposits are getting harder and harder to come by. What does that reality mean for you? Is it making you into something you are not prepared to be?

In the past, much of the industry talk has been on lending, that is, the asset side of the balance sheet. But going into the next few years, my sense is much of the industry talk will be about deposits and funding, that is, the liabilities side of the balance sheet.

FDIC Chair Sheila Bear delivered an interesting speech on Monday to a housing non-profit group in Virginia. In the speech, she challenges the notion that home ownership should be a national priority. Here’s what she says:

For 25 years federal policy has been primarily focused on promoting homeownership and promoting the availability of credit to home buyers. While tax deductions for interest on most forms of consumer debt have been curtailed, the home mortgage interest deduction lives on. Local property taxes are also deductible, as are capital gains up to $250,000.

The government-sponsored mortgage enterprises, which flourished during most of the last 25 years, have required large federal subsidies to cover their losses in the crisis — formalizing the implicit guarantee that has long contributed to their success. Meanwhile, the supply of credit to riskier borrowers also expanded during this period — not as a result of CRA, as I have explained, but as a result of private securitization practices that turned out to be seriously flawed.

In the end, these public and private efforts helped to briefly push the homeownership rate as high as 69 percent. That’s a level that ultimately proved unsustainable, and that may not be reached again for many years, if ever.

Even as we emerge from this crisis, it is worth asking whether federal policy is devoting sufficient emphasis to the expansion of quality, affordable rental housing. It is estimated that when you add up the mortgage interest deduction, local property tax deductions, and exclusions on capital gains realized on the sale of owner-occupied housing … the taxpayer subsidies for homeowners are about three times the size of all rental subsidies and tax incentives combined.

In fact, you can argue that this huge subsidy for homeowners has helped push up housing prices over time, making affordability that much more of a problem for the very groups you’re trying to serve. I think we need a better balance. Sustainable home ownership is a worthy national goal. But it should not be pursued to excess when there are other, equally worthy solutions that help meet the needs of people for whom home ownership may NOT be the right answer.

As a nation, we need to take a hard look at the full range of housing policies and programs. And we need to ask: will they improve standards of living for all Americans or just a few? And will our policies lead to sustainable improvements for the long term, or are they just a short term fix?

I think this is really interesting. Since the economy peaked five years ago, home ownership across the country has actually declined. In 2005, the home ownership rate was 69.1 percent; first quarter 2010, it was 67.1 percent. This information from the U.S. Census Bureau provides a pretty clear picture. Note in particular the data on page 5. For a look at home ownership by state, have a look at this graphic.

When it comes to a home, renting is the right approach for a lot of people, and we should not downplay this option.

The FDIC released first quarter numbers on May 20 and NorthWestern Financial Review has subsequently posted its state-by-state list of banks, ranked according to assets. If you are a subscriber to our print magazine, you can view the lists by clicking on our premium section on the home page.

Among the largest banks in each of the 14 states we cover, there were no substantial changes. The most interesting was in Nebraska, where Cabela’s credit card bank, the World’s Foremost Bank in Sidney, moved from being the eighth-largest bank in the state with $810 million in assets at the end of the fourth quarter, to being the third-largest bank in the state with $2.8 billion in assets at the end of the first quarter. The change was not due to an acquisition, but to FAS 166/167 requirements which forced the bank to consolidate its trust and bring its credit card receivables on balance sheet.

Also notable in Nebraska is TierOne Bank, the state’s fourth-largest bank, which reported a $19 million loss for the quarter and reports equity capital of 2.82 percent.

In Colorado, Illinois, Michigan and Wisconsin, five or more of the banks ranked among their state’s 10 largest, reported net income losses for the first quarter. The biggest loss was M&I Bank’s $111 million negative number for net income; the bank, however, remains strongly capitalized. The biggest quarterly net income loss in the region was reported by Citibank in Sioux Falls, S.D., which lost $257 million. It also remains well capitalized.

No top 10 banks in Iowa, North Dakota or Wyoming reported earnings losses in the first quarter.

Three banks with appear among the top 10 in their state as of March 31, have since failed. CF Bancorp., of Port Huron, Mich., was the state’s 7th-largest bank when it was closed April 30. Amcore Bank, N.A., of Rockford, Ill., was the state’s 10th largest bank when it was closed April 23, and Midwest Bank and Trust Company of Elmwood Park, Ill., was the state’s 9th-largest bank when it was closed May 14.