NorthWesternFinancialReview.com Blog

The U.S. House of Representatives’ Financial Services Committee, subcommittee on oversight and investigations, conducted a two-part field hearing earlier this week. Part one was conducted under the name: “Too big has failed: Learning from Midwest banks and credit unions.” It took place Monday, Aug. 23 at Johnson County Community College in Overland Park, Kan. See this post. Part two was titled: “Empowering consumers: Can financial literacy education prevent another financial crisis?” It took place Tuesday, Aug. 24 at the University of Kansas in Lawrence.

Whether financial education can be effective in preventing financial crisis is an interesting question. Of course financial education is important. If people are smart enough to avoid bad financial transactions, everyone will be better off. But preventing the next financial crisis will require a lot more than financial education programs.

Note, for example, that numerous financial education programs already exist. Those testifying at yesterday’s hearing cited several of them. State Securities Commissioner Marc Wilson talked about the Kansas Council on Economic Education, and State Treasurer Dennis McKinney talked about a program called Save@School and yet another program called Kansas Investments Developing Scholars (KIDS). There are many other programs, many offered by the Federal Reserve Banks. And the American Bankers Association sponsors Teach Children to Save Day and other programs. So the problem is not a lack of programs.

Wilson noted the two main problems preventing additional success of these programs. The first is that teachers already have a full plate teaching the standard curriculum. It is difficult to ask teachers to present new material which crowds valuable and limited teaching time. Furthermore, many teachers are not particularly versed in financial knowledge themselves, so there is significant ramp-up time necessary to educate the teachers.

The second is that the biggest victims of financial scams are senior citizens. Many elderly people lack financial savvy. How do you reach this demographic with a financial literacy program? It doesn’t matter how good the program is if you can’t reach the people who need it most.

I actually don’t believe the financial crisis occurred because some people are stupid. I think it occurred because some people are greedy. And I think greed is a much tougher nut to crack than knowledge.

Tom Hoenig continues to be one of the biggest advocates for community banking. President of the Kansas City Federal Reserve Bank, Hoenig said the main threat to the community bank business model is bad public policy which gives advantages to the nation’s largest banks. The U.S. House of Representatives Committee on Financial Services, subcommittee on oversight and investigations, hosted a hearing in Overland, Kan., yesterday where Hoenig spoke.

“Over the past 20 years, as the banking industry has consolidated into fewer and larger banks, a perennial question has been, ‘Is the community bank model viable?’ The short answer is yes. The longer answer is yes, if they are not put at a competitive disadvantage by policies which favor and subsidize the largest financial institutions,” Hoenig said at the hearing conducted by U.S. Rep. Dennis Moore (D-Kan.).

“The community bank business model has held up well when compared with the megabank model that had to be propped up with taxpayer funding.

“Community banks will survive the crisis and recession and will continue to play their role as the economy recovers. The more lasting threat to their survival, however, concerns whether this model will continue to be placed at a competitive disadvantage to larger banks… If allowed to compete on a fair and level playing field, the community bank model is a winner.”

Read his entire testimony here.

Look for hearing coverage in the Sept. 15 print edition of NorthWestern Financial Review magazine.

I thought with the support of Goldman Sachs, BofA, Citibank, JPMorgan and others, that ShoreBank would survive. But, on Friday, the Illinois Department of Financial and Professional Regulation closed the well-known Chicago-based community development bank, which had been operating under a cease and desist order for about a year. Here is the FDIC press release. That bank long had been trying to raise capital, and in the second quarter it reported a $39.5 million loss.

You might remember that last May, many of the nation’s largest banks made large public commitments to the bank in an effort to raise $200 million in additional capital. With such an infusion, it was anticipated the bank would receive an additional $75 million in TARP money and it would survive. Media reports say the bank raised a little over $140 million, the TARP money never came and the bank didn’t make it.

The FDIC announced on Friday that the deposits and assets of the failed bank will be taken over by the newly-chartered Urban Partnership Bank, which is being capitalized to the tune of $120 million by some of those same large companies –American Express, BofA, Citi, GE Capital, JPMorgan, Northern Trust, Goldman Sachs, Wells Fargo and others. David Vitale, a former First Chicago executive who recently joined ShoreBank, is chairman of Urban Partnership; Bill Farrow is president/CEO. This story explains that the new bank will continue the community development mission of ShoreBank.

Urban Partnership Bank paid the FDIC a premium of 0.50 percent to acquire ShoreBank’s $1.54 billion in deposits and most of its $2.16 billion in assets. Urban Partnership Bank obtained a loss-sharing agreement with the FDIC on $1.41 billion of the assets.

ShoreBank was founded in 1973 when Ron Grzywinski, Mary Houghton, James Fletcher and Milton Davis bought South Shore Bank and created a community development bank that served low-income customers and focused on unbanked neighborhoods. I read about Grzywinski and Houghton in Muhammad Yunnus’ book, Banker to the Poor. Yunnus founded Grameen Bank in India, and came to the United States to see whether micro-lending could help the American poor. He found Grzywinski and Houghton, who latched onto the micro-lending concept and found it to be valuable.

Anne Arvia was president and CEO of ShoreBank in 2005 when NorthWestern Financial Review magazine honored her as an “Outstanding Woman in Banking.” In 2006, she became CEO of Nationwide Bank, a subsidiary of Nationwide Insurance of Chicago.

This is the kind of nonsense they are publishing today over at MSN, the folks who run hotmail. This article sets up the banker as the bad guy. The headline is Your Banker’s 6 Big Dirty Secrets.

Secrets? Are you kidding me? How dumb do they think people are? It’s a secret that if you have a checking account, the bank would like you to open a savings account too? Or, it’s a secret that banks have systems for assessing credit risk? Or, it’s a secret that banks leave it up to the customer to decide whether they need credit insurance? Come on! None of these things are secrets to anyone who has been around the block a time or two.

The implication, of course, is that bankers are deceptive, and that is just flat out bigotry against bankers. There is not an industry out there that is required by law to make more disclosures than banking. And, there is not an industry out there that has done more to promote financial literacy at all ages than banking.

I don’t understand these kinds of stupid articles, which insult both bankers and customers.

I wrote a couple days about about first quarter bank crimes. Came across this story; seems this bank’s got a strategy for foiling the robbers. Check it out.

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.

U.S. Rep. Erik Paulsen (R-Minn), who sits on the House Banking Committee, addressed bankers gathered for the ICBM convention on August 7. His short video message addressed the Dodd-Frank Act. He said:

While most of us can agree that some amount of reform was definitely needed, I don’t think anyone in this room was comforted by the bill’s final passage or by the fact that the legislation’s primary author wasn’t even sure that his bill will be able to prevent another economic crisis. Instead, as pointed out in a sobering opinion piece in the June 29 Wall Street Journal, the Dodd-Frank Bill, with its tangle of new regulations and as-yet unwritten financial rules, seriously threaten community banking by punishing the people and institutions like you who played no role in the crisis.

What is also important about this missed opportunity is that the financial reform bill fails to address many of the issues that caused the crisis in the first place. Instead, it paints everyone with a broad brush and gives more power to the regulators who missed the early warning signs and failed to do their jobs.

It also completely ignores reforming and restructuring government sponsored enterprises Fannie Mae and Freddie Mac, which taxpayers have already spent more than $100 billion bailing out and are on the hook for billions more.

What may be most troubling for many of you is that most of you will now be affected in some way in how you run your business … small community banks are being made subject to rules set by a new credit czar and the newly created Consumer Financial Protection Bureau which will have broad authority to set sales practices, limit credit products, and mandate compensation growth. This credit czar has been given broad authority to determine whether a consumer financial product is unfair, and as the legislation is written, will have nearly complete authority to review consumer products and ration credit. In the end this will raise the cost of credit to consumers and small businesses while also imposing a hefty regulatory burden on your banks.

You know for every page of this 2,300-page bill, you will see about 10 pages of new rules and regulations. This enormous new compliance burden will expose small community banks to lengthy mandates and more burdensome regulations. In my opinion, instead of creating new bureaucracies and limiting consumer choice strangling small banks and small business with red tape, we should be focusing on safety and soundness and real solutions that will get the economy going, getting the credit markets lending again and also creating jobs.

There were 1,183bank robberies across the country during the first quarter (including burglaries, larcenies and extortions), involving 1,160 financial institutions. Money or other valuables were taken in 92 percent of the incidents, totalling a little over $9 million. That puts the average take per incident at $8,318.75. Only $1.9 million of the stolen money has been recovered. Of 1,380 people known to be involved in these crimes, 38 percent (520) have been identified.

In the Upper Midwest, Illinois suffered the most bank robberies, burglaries, larcenies and extortions, with a total of 49 during the first quarter. Michigan had 45, while Indiana had 25 and Wisconsin had 22. Other states reported as follows: Iowa 4; Kansas 2; Minnesota 7; North Dakota 1, South Dakota 0 and Nebraska 3.

The FBI offers a summary press release and access to a detailed report here.

There have been debates inside the banking industry for years about the clearing order of checks. Now, a federal court in California has ordered Wells Fargo & Co. to repay $203 million in overdraft fees as a result of the way it clears checks. 

When a bank receives several checks written on the same account in one day, in what order should they be cleared? In numerical order? In order of check amount — lowest amount to highest, or highest amount to lowest? It’s an issue because if clearing checks No. 1 and 2 mean there’s not enough money in the account to clear checks No. 3 and 4, then overdraft fees may kick in.

Consumer advocates typically argue that a bank should clear the smallest checks first, so more checks will clear and fewer checks would be subject to overdraft fees, should the account balance fall negative. Some banks argue it makes more sense to cash the largest checks first because those are typically for the more important expenditures, such as house or car payments.

At a small bank, the check clearing volume is sometimes low enough that bankers can actually make decisions on a case-by-case basis. They may know the account holder and may know which order will work best for the customer. At larger banks where they are clearing thousands of checks per day, parameters need to be programed into a computer so clearing can be done on an automated basis. In these cases, there isn’t much room to take into account the peculiarities of individual customers and their accounts.

Overdraft situations, by nature, represent a breakdown in communications. The bank gets a mixed message from a customer when he or she has $200 on account and writes checks totalling $300. It is not surprising that resolution of these situations often leads to hard feelings. Miscommunications usually do.

I think what the Wells Fargo case really illustrates is that whatever system a bank chooses to implement, they need to communicate it clearly to the customer long before checks are ever written. Every bank customer should be able to explain how their bank clears their checks. If it is by amount, they should know whether the bank’s policy is to clear highest to lowest, or lowest to highest, or some other method. This way the customer can decide whether that system is suitable for them, and if not, they have the option of exploring other banks.

Customers don’t typically take great care to memorize the details of their checking account. But, banks have to do all they can to mitigate the opportunity for miscommunication or misunderstanding.  Banks can provide clear, plain-language disclosures in easy-to-read type. And recently enacted new rules from the Fed, and now from the FDIC, will reduce to likelihood of further miscommunication on these issues.