NorthWesternFinancialReview.com Blog

The blogging bankers at Nicolet National Bank in Wisconsin have been on a roll over at The Vault lately. CEO Bob Atwell’s latest post addresses this month’s meeting between President Obama and a few of the country’s biggest bank CEOs. He makes some interesting points on too-big-to-fail, concluding that “centralized and politicized finance is financially and politically profitable for both politicians and financiers.” An excerpt:

“The pressing policy question is whether we are going to enact policies to ‘discourage and eliminate’ systemic risk or whether we are going to develop a ’super-regulator’ to ‘manage’ systemic risk. Policies designed to eliminate systemic risk will foster decentralization and force bubble manufacturers to raise private capital for their reindeer games. They’ll be small self-funded games if the private players have to fund them.  Those who want to ‘manage’ systemic risk will inevitably only further politicize finance. Megabankers and mega regulators will find the ‘management of systemic risk’ model mutually beneficial, to the detriment of the rest of us.”

Atwell mentions the president’s call to banks to lend. I have repeatedly heard bankers answer that saying, we will if a.) there’s a demand and b.) the person making the demand is creditworthy. Atwell notes that loan demand is down and should be. His reasons: 1.) People are deleveraging, not taking on new debt 2.) Bank capital is expensive right now, ergo so are bank loans 3.) Cheap cash is abundant but capital is tight. Check it out here.

Here is an interesting take on the financial reform legislation passed by the House on Dec. 11. Most interesting is columnist David Reilly’s observation that the term “too big to fail” appears nowhere in the 1,200-page bill.

Reilly applauds the creation of a Consumer Financial Protection Agency, but in fact, this is the most troubling component of the bill. The new agency would have rule-making authority that will affect all banks; this is a disaster. If there is a problem in the banking industry it is not a lack of rules. There are segments of the financial services industry — mortgage banks and brokers, for example — that could certainly be regulated more closely, but traditional commercial banking already is highly regulated. 

It is a good thing that banks with less than $10 billion will be exempt from exams conducted by the new agency; it also is good that CFPA will not be able to assess fees on community banks to fund itself. And it is good that rules will be enforced by existing bank regulators instead of CFPA directly. But all of these good things combined don’t come close to offsetting the potential harm CFPA will do. More rules simply mean banks will have less ability to offer credit and other products to consumers.

CFPA may start off as a small agency with limited jurisdiction, but like all government agencies and programs, it will grow. Count on it. Recall the Community Reinvestment Act, which was passed in 1977 as a very minimal piece of legislation. Today, CRA compliance is a huge responsibility for banks of all sizes, while it does very little good — if any — at the vast majority of banks. Furthermore, community groups still complain about inequitable allocation of credit.

The House passed the financial reform bill by only 21 votes. That means the support for this complicated bill is far from overwhelming. As the debate moves to the Senate, bankers need to remain engaged and work particularly hard to kill CFPA, or if Congress really wants a new agency, CFPA should have no jurisdiction whatsoever — rule-making or otherwise — over traditional commercial banks.

President Obama has met with bankers on two separate occasions earlier this month. He told bankers from large institutions that they should lend more, and he listened to bankers from smaller institutions as they told him about regulatory burden. These meetings were a public relations stunt for the President, who earlier had referred to bankers as “fat cats.” These meetings will do nothing to cause changes in lending patterns or regulatory practices.

Joe Witt, president and CEO of the Minnesota Bankers Association, wrote this essay which appears in today’s StarTribune. Witt’s most compelling point is about over-zealous examiners who are keeping bankers from making more loans.

If President Obama were really interested in stimulating the economy, he would not have called bankers to his office to tell them to lend more; he would have called bank examiners into his office to tell them to back off. If the President thinks there are worthy credits out there that banks are refusing to fund, he is completely wrong. If banks are lending less than the President would like, it is because regulators are requiring bankers to write down the value of assets too aggressively, and they are demanding higher levels of reserves and capital.

If we really want the economy to improve, we have to get beyond the political posturing, the public relations events and name-calling.

The government’s main tools for controlling the economy are monetary policy and fiscal policy. The Federal Reserve is in charge of monetary policy, while Congress handles fiscal policy.

Congress is about to vote to raise its debt limit. This story gives you some idea of how Congress has been handling fiscal policy. Clearly, there is no discipline in Congress when it comes to spending, regardless of who is in the White House.  Unabashed spending has completely gutted fiscal policy as an effective means of controlling the economy. Monetary policy alone is only minimally effective. If the value of the dollar keeps falling as our debt mounts, even low interest rates won’t be able to hold prices down in this country.

This is why I am bothered by Congressional attempts to reduce the authority of the Federal Reserve. Congress wags its finger at the Fed like the recession of 2007-2009 should be laid at the feet of Ben Bernanke. The fact is, the Fed has behaved far more responsibly during the last few years than has the Congress.

Fiscal and monetary policy in this country are way out of balance and power grabs by an undisciplined Congress threaten to throw that balance of power even further off the mark. Ultimately, such imbalance means our economy will be driven more by political forces than by market forces.

One of the problems with the Wall Street Reform and Consumer Protection Act (H.R. 4173), which the House passed Dec. 11, is that is threatens the independence of the Federal Reserve. As the Senate debates financial reform legislation, I hope it will get serious about controlling public spending and recognize the importance of a strong and independent central bank.

Eleven community bankers and one credit union official met with President Obama at the White House today. The delegation included four Midwestern bank leaders and one CEO with strong ties to Minnesota:

• James McPhee, chairman-elect of ICBA and CEO of Kalamazoo County State Bank in Schoolcraft, Mich.
• Mark Schroeder, President, German American Bancorp, Jasper, Ind.
• Deloris Sims, chairman and CEO, Legacy Bank, Milwaukee
• Matthew Gambs, CEO, Diamond Bancorp, Schaumburg, Ill.
• Dorothy Bridges, who left Minneapolis last year to become president and CEO of City First Bank, Washington, D.C.

In a release describing the meeting, ICBA gave some perspective on community banking’s role in a key White House priority: expanded lending to small business:

“while community banks with $1 billion in assets or less represent about 12 percent of all bank assets, they support 31 percent of all small business loans that are less than $1 million. “

ABA CEO Ed Yingling commended the meeting but commented on loan demand, an important variable in this discussion:

“As is typical during a recession, consumers and small businesses tend to save more and spend less.  In some regions of the country, loan demand is down considerably. However, lending is our business – it is what banks do, and we stand ready to make credit available to worthy borrowers.”

Beside the Midwestern bankers mentioned above, community bankers from New York, New Mexico, Arkansas, Connecticut and New Hampshire attended the meeting, as did an official from a credit union in Mississippi.

Bloomberg profiles an Ohio auctioneer that is very busy after 140 bank failures this year. A repossessed Ferrari 360 Spider F1 from a closed bank in Colorado was among the “other assets” acquired by FDIC in a rash of receivership. FDIC picked up a rapper’s repossessed tour bus after an Atlanta bank failed. The smell of marijuana smoke saturated the upholstery, which had to be removed and replaced before the bus could be sold.

The 2010 economic outlook for the Upper Midwest is “that we expect the economy to gradually mend,” said Toby Madden, regional economist with the Federal Reserve Bank of Minneapolis. Madden and Rob Grunewald, associate economist, presented an economic update this morning in a press event at the Federal Reserve Bank building in downtown Minneapolis. Here is the press release issued by the Federal Reserve, and here is the coverage from the Minneapolis Star Tribune.

“Employment levels are expected to recover in the western part of the district, but continue lackluster performance in the east, while unemployment rates are predicted to level off at relatively high rates throughout the district,” Madden said. “Wage and price pressures are expected to be moderate. The outlook for agriculture is relatively optimistic, while manufacturing activity is expected to be flat. Despite improvements in residential real estate markets, home building has been in the doldrums and recovery may be more than a year away.”

The commercial real estate market was hammered in 2009, and it appears as if it will be awhile before there is meaningful improvement in that area. “The housing sector meltdown is spilling over into commercial real estate and construction markets. Vacancy rates for office space in the Minneapolis St. Paul area rose to 18.1 percent, third quarter 2009, from 14.9 percent in third quarter 2008. At the same time, the percentage of available space in industrial building increased in 2009 to 11.4 percent, from 9.0 percent. Increases in vacancy rates reduce pressure on rental prices and dampen future construction,” Madden explained.

Home building is way off, he said, with recovery likely more than a year away. “During first 10 months of 2009, housing units authorized did not decrease as fast as in 2008, but still showed a 26 percent drop. In 2004, there were about 40,000 housing units authorized annually in Minnesota. Now it is down to about 8,000 units. In Minnesota and Wisconsin, housing units have not only dropped off sharply, although they are below levels served over 30 years ago.”

Grunewald said business owners running into tougher standards for credit. “Lending standards have risen, and quality of credit applicants has fallen,” Grunewald said. “A year ago, respondents to three District surveys of chambers of commerce members, manufacturers, and business leaders revealed that between 20 and 30 percent had seen their access to credit worsen in the previous three months. This year, we asked the same question of similar respondents and found that between 25 and 43 percent noted credit availability worsened. This suggests that credit conditions remain tight, and into 2010 will continue to have an impact on hiring and on investment decisions.”

In a broad survey of business leaders across the upper Midwest, 58 percent said they are pessimistic about the economic outlook for their communities. The good news, Madden and Grunewald said, is that is a lower percentage of business leaders who had a pessimistic outlook a year ago.

Independent Bankers’ Bank of Springfield, Ill., was closed Friday (Dec. 18), ending a chapter in the bankers’ bank movement. IBB was a good friend to NorthWestern Financial Review magazine and we are sorry to see this happen. IBB is the only bankers’ bank to close since the first bankers’ bank was founded in 1975; nine-teen bankers’ banks remain in operation, including six serving the Upper Midwest. 

The bank’s troubles became known when it entered into a written agreement with the Federal Resrve Bank of Chicago and the Illinois Department of Financial and Professional Regulation’s Division of Banking on June 30. Many people held out hope that the bank would raise the capital to solve its problems. At the annual convention of the Community Bankers Association of Illinois Sept. 24-26, IBB President John Jones hosted a special meeting to update community bankers on the situation and solicit additional support.

Bob Wingert, president of the Community Bankers Association of Illinois, used his speech at the convention to urge members to support IBB. Wingert and a group of CBAI bankers helped to form the bankers’ bank so that community banks could have access to correspondent services from a financial institution that would never compete against them with other services.

“Twenty-five years ago, the CBAI formed a committee to study the feasibility of forming a bankers’ bank,” Winger said in September. “The board approved the project, based on a strong indication of support from the CBAI membership. We funded the organizational cost, which was subsequently reimbursed. The association drafted and shepherded enabling legislation through the Illinois General Assembly, and we worked to obtain regulatory approval for the charter. When the Independent Bankers’ Bank opened for approval in September 1986, the fledgling institution had a mere $3 million in capital. Today, IBB has several hundred million in assets, with more than 400 bank clients, reflecting the popularity of a community bank-owned correspondent that will never compete with its respondent institutions for customers. Unfortunately, IBB’s capital position has been compromised during this financial crisis and it needs to raise more capital to survive… We do believe that IBB’s existence is as important today at it was 25 years ago.”

Within minutes of the news that the Illinois regulator had closed IBB, CBAI issued this statement from Wingert: “I am saddened to hear of the closing of IBB by bank regulators. For nearly a quarter of a century, IBB provided valuable banking services for Illinois’ community banks, which allowed those banks to efficiently and economically serve the everyday needs of their customers. Unfortunately, recent economic realities caused IBB to suffer some financial losses from which it was unable to recover. Although community banks were well-served by IBB, the closure of this chapter will not change the fact that community abnks throughout Illinois provide unparalleled serve to the citizens and small businesses of our state.”

Robin Loftus, CBAI Chairman and executive vice president and COO of Security Bank, s.b., Springfield, added: “Financial Institutions that were clients of IBB will find other avenues to compensate for the loss of IBB, and our customers will not be negatively affected.”

Bankers’ Bank of Madison, Wis., is in the bests position to pick up the business of community bankers who will be looking for a new correspondent. Bankers’ Bank expanded its market territory from Wisconsin and Iowa to include Illinois about four years ago. Ron Slater, president and CEO of Bankers’ Bank, issued a statement in which he commented: “We’ve witnessed IBB’s inception and growth for more than two decades — they were one of us. To their credit, the bank had a solid shareholder and customer base that remained loyal through recent difficult times.” Slater’s bank extended its operating hours on Dec. 18 and opened for business on Saturday, Dec. 19, to accommodate banks that might need services.

“We hope that IBB customers will make the business decision to work with us,” Slater commented.

In addition to Illinois, IBB served banks in Indiana and Michigan.

After the Illinois Department of Financial and Professional Regulation closed IBB, the FDIC set up a bridge bank to wind down the bank’s on-going business. A third party has been hired by the FDIC to manage the Independent Bankers’ Bank Bridge Bank, N.A. The FDIC said that since a bridge bank has been set up, the closing is not expected to have “any meaningful impact on the bank’s clients.”

As of Sept. 30, IBB had $585.5 million in assets and $511.5 million in deposits. At the time of the closing, the bank had $269,000 in uninsured funds. Read the FDIC press release here.

The FDIC estimates the cost to the Deposit Insurance Fund will be $68.4 million.

Silverton Bank, N.A., which was founded in 1986 as the Georgia Bankers’ Bank, was closed on May 1, but two years ago it changed its charter so that while it continued to offer correspondent services it could no longer be considered  bankers’ bank. For more, see “The Silverton Effect” in the Oct. 1, 2009 edition of NorthWestern Financial Review magazine by clicking here.

Yesterday, we posted links to statements regarding financial reform legislation from the three Minnesota U.S. Representatives who serve on the House Financial Institutions Committee. NorthWestern Financial Review, of course, covers banking in 14 Upper Midwest States. There are 71 congresspersons on the House Financial Services Committee, 18 of those are from NorthWestern Financial Review’s coverage area: 12 Democrats and 6 Republicans.

Following are links to statements from some of the other committee members.

Rep. Luis Gutierrez (D-Ill.) government assistance for large banks.

Gutierrez on too-big-to-fail.

Rep. Dennis Moore (D-Kan.) on the passage of financial reform legislation. (Moore announced in November that he is not seeking re-election after six terms in Congress.)

Rep. Melissa Bean (D-Ill.) on the bill’s passage.

Rep. Gwen Moore (D-Wis.) has not published a statement on her web site about the financial reform bill, but she had this to say about credit card legislation passed earlier this fall.

Rep. Ed Perlmutter (D-Colo.) sees financial reform legislation helping Main Street businesses. This is the statement he issued on Dec. 11, immediately after the House passed the bill.

Rep. Joe Donnelly (D-Ind.) issued this statement on Dec. 11.

Rep. Bill Foster (D-Ill.) said he voted for the bill in order to prevent future bailouts to financial services firms. Foster also urged Speak Pelosi to use remaining TARP money to pay down the deficit.

Rep. Andre Carson (D-Ind.) made this announcement after voting for reform legislation.

Rep. Gary Peters (D-Mich.) supported the bill, focusing on his amendment to require banks to repay all government money.

Rep. Don Manzullo (R-Ill.) voted against the bill, supporting instead efforts to strengthen existing regulation.

Rep. Judy Biggert (R-Ill.) explained her vote against the bill with this statement.

Rep. Thad McCotter (R-Mich.), who voted against the reform legislation, explains his views in this interview on CNN.

Rep. Lynn Jenkins (R-Kan) voted against the bill, saying she doesn’t want to make the bailout permanent.

As the House passed financial reform legislation last Friday, it is very interesting to look at various statements published by different interested parties. This post on our blog includes links to the ABA and ICBA statements. But I am interested in the contrast between statements from the two Minnesota Representatives who serve on the House Banking Committee. Here is Rep. Keith Ellison on the legislation (he voted for it) and here is Rep. Michele Bachmann’s take on the legislation. (She voted against it.)

Rep. Erik Paulsen, representing Minnesota’s 3rd District, also is on the committee. Here was part of his contribution to the discussion. His amendment to end the TARP program by the end of this year didn’t go anywhere; he voted against the financial reform bill.

Minnesota State Senator Tarryl Clark is running against Bachmann for the 6th Congressional District seat. The election is almost a year away, but Clark is taking shots at Bachmann. Here is Clark’s response to Bachmann’s statement. Also interesting, here is analysis from one local blog, “Let Freedom Ring.”

While there are a few things to like about the House bill, ultimately it adds more regulation onto an already highly-regulated banking industry. More rules and regs are just going to make it more difficult for community bankers to serve customers. If those banks survive, it will surely mean more fees and fewer options for customers. A much better approach would have been to craft legislation aimed solely at the shadow banking sector, that is the non-banks that really caused most of the problems that led to our financial crisis.

I have a hard time believing the financial industry reform legislation under consideration in the Senate, drafted by Sen. Chris Dodd, will go anywhere soon. This battle could drag well into 2010; if the Senate doesn’t pass a bill by spring, it is quite possible there will be no reform legislation at all until a new Congress comes to town. Once summer hits, attention will turn to the fall elections and interest in financial reform legislation by our elected officials will fall off considerably.