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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.

It’s crunch time in the Senate for financial industry regulatory reform. Sen. Dodd needs to get his bill passed by Memorial Day for a realistic shot at enactment into law this year.

For community bankers, it boils down to this question: Are the TBTF remedies in the legislation compelling enough for community bankers to accept additional regulatory compliance obligations?

Questions will always surround legislative efforts to resolve TBTF “once and for all.” There were a lot of people who thought we solved that problem in 1991 when FDICIA was passed, and clearly it is a bigger problem today than ever.

Resolution authority on TBTF needs to extend beyond the confines of the traditional banking industry so it can address situations like AIG. The House bill and the Dodd bill does, and that’s a good thing. But there will always be this question: Who exactly will qualify as systemically important? Is it just the 19 original TARP recipients? Is it the top 50 holding companies? Who are the non-bank companies that qualify? Who will pay into the pre-paid resolution fund proposed by the House legislation and the Dodd bill? What if a company that never paid into that fund needs special handling? What if the government decides a company that did pay into the fund shouldn’t be treated special?

And how strong will the resolution authority be if the legislation drops the pre-paid resolution fund concept, as apparently is being discussed in the Senate to win support from Republicans? 

Clearly, the largest banks in the country have a cost-of-funds advantage over community banks. But if the law does in fact end TBTF, will community banks make more money as a result of the new, level playing field?

From the perspective of sound public policy, we need to resolve TBTF, but if we do, I am not sure how much that will improve the lot of community bankers. The American taxpayer will benefit from the resolution of TBTF but only community bankers will pay any kind of a price (that is, additional reg burden). Some bankers will say it is worth that price, but I wouldn’t be surprised if some say it isn’t.

President Obama wanted to hit the largest banks with a bailout fee; now the Congressional Budget Office has come out with a report saying consumers would end up paying that fee. Read about it here.

The president has also suggested that $30 billion in TARP funds should go to community banks to spur Main Street lending. Many bankers are lukewarm on the idea because there is such a stigma attached to TARP. Treasury is picking up on community banker reluctance and now I am hearing talk about the government giving the $30 billion to the Small Business Administration to make direct loans to small businesses. This, of course, would be a disaster. Bankers don’t need another government-sponsored competitor, and taxpayers don’t need a government lender with goals that put it at odds with safe and sound banking practices.

The president indicated in his weekly address that it was good to see banks paying back their TARP obligations (with interest) but “not good enough.” He scolded as audacious those who say “that it’s somehow unfair, that because these firms have already returned what they borrowed directly, their obligation is fulfilled.”

Leaving aside questions of whether it’s fair to change terms after repayment, or whether banks should cover the shortfall caused by non-bank TARP recipients, there is still the question of likely effect. In his earlier post, Tom conceded “a certain intellectual appeal” in the proposed fee. Mike Moebs, principal at a Lake Bluff, Ill.-based financial services consultancy, said that “for all the wrong reasons” President Obama may be doing a good thing by taxing big banks. “If the big guys are beyond their economies of scale, why not use the price mechanism?” Moebs said.

“In Great Britain they’re taking the likes of the Royal Bank of Scotland and Barclays and saying to Royal Bank of Scotland, you’ve got to get rid of 900 branches by the end of the first quarter of this year; Barclays, you have to get rid of 1,000 branches. That’s more of a hatchet-type of approach…but Obama is stepping in and saying, I’m not going to face those social and political consequences; I’m just going to tax you guys–and I’m not going to tax the small [banks]. So your prices for your services have got to go up, and the small guys [will] have a competitive advantage. Now, if you big guys don’t bring down your cost, the small guys are going to win.”

The tax could cause big banks “to reduce [their] long-term average cost of operation, which is what the economy of scale is, and get it back down [to where} the small guys [are],” Moebs said.

Meanwhile, the president discussed additional big-bank reforms today.

All bankers should be concerned about the bank tax President Obama announced he will include in his next budget proposal.

He proposes to charge the 50 largest financial firms 15 basis point on liabilities, less deposits, for something he is calling a Financial Crisis Responsibility Fee. In a move he says is designed to reduce the federal deficit, he said the fee will assure the government recovers its $700 billion in TARP money. Recently, the government said it expects not to recover about $117 billion of that. While banks are likely to repay all of the money they got, with interest, Treasury will lose money on investments it made in AIG, Chrysler and GM. President Obama’s proposed tax is expected to raise $90 billion in the next ten years and if that doesn’t cover all the TARP losses at that point, the tax apparently will be continued until every dollar is repaid.

The companies that will get hit with this tax are the American subsidiaries of foreign banks, and American companies such as Goldman Sachs, JP Morgan Chase, GE Capital, HSBC, Morgan Stanley, Citigroup and Bank of America. President Obama specifically noted that the tax will not impact community banks.

But I think community bankers do need to worry. The government has poured $110.6 billion into Fannie Mae and Freddie Mac, and neither is expected to return to profitability anytime soon. (Read the details in this CBO report.) When will Treasury want this money back? If President Obama is content to go after big banks to recoup losses on auto companies, how much more content will be be to go after all banks to help recoup losses at Freddie and Fannie? Certainly the connection between the banks and the housing GSEs is much stronger than the connection between the largest banks and the automakers.

The President’s proposed tax has a certain intellectual appeal, going after wholesale funding and other non-deposit liabilities. This can reasonably be called a tax on risk, and excessive risk-taking is part of what precipitated the financial crisis. On the other hand, like all taxes on corporations, it is citizens who will pay through higher-priced products and services.

For now, President Obama seems sensitive to the distinction between large and small banks but when he has to come up with a way to pay for the Fannie and Freddie bailouts, I really wonder whether that distinction will remain meaningful to him.

Jim MacPhee, chairman-elect of the Independent Community Bankers of America, shared a couple of interesting stories in Lincoln, Neb., on Friday, where he was attending the annual meeting of the Nebraska Independent Community Bankers. MacPhee is the chief executive officer of the $78 million Kalamazoo County State Bank in Schoolcraft, Mich.

He explained that last October, he and other ICBA leaders (including Cindy Blankenship of Bank of the West, Irving, Texas, and Mike Menzies, Easton Bank & Trust Company of Easton, Md.) met for 30 minutes with then-Secretary of the U.S. Treasury, Henry Paulson. The Troubled Asset Relief Program had just been announced. MacPhee described the following exchange.

Secretary Paulson looked at me and said, “Jim, are you going to take some of this TARP money so we can get business moving again in this country?”

“No sir,” I said. “My bank has 14.1 percent Tier 1 capital and 20 percent liquidity. I really don’t need any of the TARP money.”

Then he looked over at Cindy and Mike and said “What about you two, are you going to take TARP money?”

Mike said, “Well sir, we’re both sub S.”

He looked at them and nodded. One of his aids said, “Sir, a sub S doesn’t issue stock.”

Point is, Treasury really didn’t understand our model. They don’t understand how we function under sub S or as a highly capitalized bank.

In contrast, MacPhee told this story about a regulator who seems to understand the community bank model.

Last March at the ICBA convention, we had breakfast with Chairman of the FDIC, Sheila Bair, and Chairman of the Fed, Ben Bernanke. It was about a 45 minute breakfast. We could ask them anything we wanted. They were very candid with their answers.

 

That was the time that the 20-basis-point special assessment had been proposed. At the time, my bank is being examined. I asked Sheila Bair this question.

 

“The ‘E’ in CAMELS stands for earnings,” I said. “That E could be taken down fairly substantially, based on this special assessment. Is there any opportunity for you to consider not further reducing our CAMELS rating based solely on the special assessment? Examine my bank on its merit; you give me a 3 on earnings, I accept that. But if I had a 2 in earnings, don’t take it down to 3 just because of the special assessment.”

 

She said, “Jim, I see your point.”

 

She turned to her aid and said “I want a memo to go out on that. Tell our field supervisors not to lower the CAMELS rating based on the special assessment.” 

Look for coverage of the NICB convention in the November 15 edition of NorthWestern Financial Review magazine.

Community banks are definitely gaining clout. You can read in this earlier post about the carve-out the House Financial Institutions Committee is giving community banks on the consumer financial protection agency. Now, this. It seems the president is going to propose opening up TARP so that community banks have easier access to those funds. This is something community bankers have been asking for, and apparently the Administration was listening.

While I am heartened to read that U.S. Rep Keith Ellison (D-Minn.) acknowledges the difference between the nation’s largest banks and its community banks, I don’t buy into his argument that we need a CFPA, and I really don’t buy into the argument that such an agency would be a benefit to community bankers.

Here is an excerpt from Ellison’s essay:

One cause (there were many) was the failure of our system of consumer financial protection. No one was there to review transactions or protect consumers. The proposed Consumer Financial Protection Agency provides the lifeline that consumers need.

The most abusive and predatory lenders were not federally regulated. More than 50 percent of the subprime mortgage loans made in 2005 and 2006 were originated by lenders not subject to federal supervision. Mortgage brokers, finance companies and payday lenders made toxic home and consumer loans with few limits — loans with little or no documentation — commonly known as “liar loans.”

Ellison is wrong. It is illegal to lie on a loan document. It’s called loan fraud, and the FBI has jurisdiction. One of the real scandals of the financial system collapse during the last 18 months revolves around the question of why charges were not brought against mortgage lenders who encouraged borrowers to lie on mortgage applications. If I were in congress, I would not be advocating for the creation of a new federal agency, I would be calling for an investigation into the FBI to find out why it has not prosecuted more loan fraud cases and other financial crimes in connection with the mortgage crisis. Why hasn’t the FBI gone after those borrowers, those lenders, and — perhaps most importantly — the executives who encouraged their lenders to stoop to illegal practices to make predatory loans?

So Ellison and other lawmakers are wrong to say that no federal agencies had any ability to do anything that might have prevented the massive abuses that took place in the mortgage market. The FBI is a well-funded federal agency; if they fell asleep on the job, why should we have confidence that a new agency would do any better? We don’t need new tools to fix the potential for abuse in the financial services industry; we need to use the ones we have.

Today is the day the U.S. State Department begins processing H-1B visa applications for this year. These are the visas that permit people from other countries to work in the United States. At one time, the visas were plentiful. In the late 1990s, the United States granted 195,000 visas for foreigners seeking employment here. After 9/11, the number of H-1B visas was cut to 65,000 per year. Typically, as many as 120,000 applications were filed by April 1, the first day of processing every year. The visas are granted on a first come/first served basis but if more applications are submitted by the first day than slots available, the State Department uses a lottery to select those getting visas.

This year, the State Department is granting 85,000 H-1B visas. That may sound like a lot of people, but in the U.S. workforce of 135 million people, that works out to less than 1 tenth of a percent of the workforce.

In order to apply for the H-1B visa, a worker has to have employment already lined up with an American company. There is speculation that with the U.S. unemployment rate topping 8 percent, that American companies will not be seeking as many foreign workers as they have in past years. It will be interesting to note how many applications come in for H-1Bs this year.

The banking industry is in the middle of this question this year because some lawmakers don’t like the idea of TARP-supported banks spending money on foreign workers when there are so many workers unemployed right here. Although some of the largest banks do hire through the H-1B visa program, it amounts to only a very small number of people.

I think the real question is, why do American companies need to look abroad to find people with the skills they need? The answer is because the Americans don’t have the skills, training and education that so many foreigners have. I don’t blame any company for looking the world over to find the skills and talent it needs. The real problem is that our own very expensive education system is not turning out enough people to fill the employment needs of our companies, banks and otherwise.

Minnesota-based TCF signed up for CPP funds under the impression that they were for healthy institutions only. Now the bank has filed to repay more than $360 million in TARP preferred stock. TCF doesn’t need the money now and didn’t need it then, suggested Chairman Bill Cooper, who noted that “the rules have definitely changed.”

Key quote: “Recent actions by the U.S. Treasury and possible congressional or regulatory restrictions/mandates changed the rules. As a result, public perception views those banks that took the TARP money as having done so out of weakness and a need to survive without distinction among TARP programs or individual bank capital adequacy. We believe participation in TARP has created a competitive disadvantage for TCF and it is in the best interest of our shareholders to redeem these shares.”