A Critical Election Day Approaches

October 29, 2014

Next Tuesday, Nov. 4, is an important election day for the future of our country, a day of historic determination. Control of the U.S. Senate will be determined for the next two years and, probably, for several years thereafter. It currently is controlled by Democrats, but is now up for grabs. By contrast, the U.S. House of Representatives is controlled by Republicans, who will continue to control it, according to political pundits. The future of the Senate is critical, from a banking standpoint. As a whole, the Democrats currently serving have not shown a willingness to forward regulatory relief that might help banks better serve their customers. They seem to have adopted the Dodd-Frank Act as inviolable.

Consider the evidence. Only three regulatory relief bills have been passed out of the Senate Committee on Banking, Housing & Urban Affairs in this legislative session, which is now nearly two years old. Yet the House Committee on Financial Services has passed over 25 bills dealing with various aspects of regulatory relief. Because of this reform record, banker groups across the nation are largely supporting Republicans in federal races this election year.

While there are about 10 elections across the nation that will determine Senate control, most pundits peg the races in Iowa and Colorado as the two most decisive. In addition to the aforementioned banking issues, these two races bring forth yet another battle of industry adversaries — banks versus credit unions. In Colorado, Sen. Mark Udall has been the darling of the credit union industry, authoring and promoting numerous bills on behalf of credit unions. In appreciation, last week the associations that represent credit unions contributed $400,000 to his re-election effort. His challenger, Congressman Cory Gardner, is not a supporter of credit union expansion, and he does support regulatory relief for banks and other businesses. Mr. Gardner has been singled out for support from the Friends of Traditional Banking (FOTB). It is impossible to determine how much financial support FOTB might ultimately provide to him, but this organization selects only two races each election.

In Iowa, the race is for an open seat that has previously been held by a Democrat. The candidates are Democrat Bill Braley, currently a member of the U.S. House of Representatives, who has been a friend to credit unions for many years. His opponent, Joni Ernst, who retired after 22 years of military service, shares the same philosophies as Cory Gardner. Ms. Ernst is the other candidate that FOTB is supporting.

Both of these races will be closely watched throughout election night as harbingers of who will control the Senate. Banking lobbyists and supporters will be keenly honed in on these two races, hoping both for regulatory relief and for constraints on further credit union powers expansion. Few times in my career has an election so crystallized issues of interest to bankers. I know that I will be watching to see how the balance of power will be determined by voters — just as the framers of the Constitution envisioned.

- S.  Joe DeHaven


Five Major Banking Changes in Past Years

October 22, 2014

Last week I turned 65 years old. It is hard to believe that I’ve reached this milestone, as it seems like just a few years ago that I was in high school. But the calendar does not lie. Another approaching milestone is that I have been associated with the banking business for nearly 45 years. That, too, does not seem possible, as it couldn’t have been that long ago that I began working in a bank as a college student. But the calendar does not lie.

During these 45 years, the business of banking has changed immensely, mostly within five prevalent areas. The first area is technology, particularly customer delivery channels. When I started in banking, customers came to the bank, or handled a limited number of services over the telephone. Today banking services are accessible by ATM, telephone, Internet, mobile and tablet … with far fewer people actually coming to the bank. This trend will continue to change the banking model significantly.

Second, the proliferation of regulations cast upon the banking industry is unfathomable. With over 100,000 pages of federal law to comply with, is it any wonder that banks struggle to know every rule in place? This plight drives many banks to sell, rather than continue to hire more and more non-income-producing employees. This issue is, and will continue to be, much more of a burden on rural communities. Banks are central to economic growth and, if the only bank in town sells, who fills the void to attract new jobs?

This leads to the third trend: bank consolidation. Nationwide there were around 20,000 bank and thrift charters 30 years ago. Today there are about 6,500. Granted, there are more branches today than three decades ago, but that, too, is changing. Since 2010, the total number of branches has declined, and those branches that remain are evolving. The branches that continue into the future will be less transactional and more focused on sales and providing financial advice. Consolidation is far from over, and the unique financial delivery system of the United States will be changed forever.

The fourth change has been the proliferation of unfair competition. Many companies that do not bear the same regulatory burden as banks are entering the financial services arena. This is like a boxing match, with one contestant’s arm tied behind his back. It is just not fair. Other competitors, such as credit unions and Farm Credit System banks, remain exempt from taxation on all or most of their income, yet banks on average pay nearly 40 percent of their net profit to taxes. How is it equitable for tax-advantaged entities to be selling the same services?

Finally, the image of banking has slipped within the past few years from the highest levels of respect to the lowest rungs of distrust – fallout from the financial crisis due to the missteps of a few. In contrast to the misdeeds of some organizations mistakenly lumped in with banks, traditional depository banks did not engage in risky behavior. As a result, the bankers that I know continue to provide the same high-caliber banking services to their communities that they always have. Nevertheless, all banks have suffered image erosion from those who did not adhere to time-tested banking principles.

These five areas have changed banking monumentally during my banking career. I hope that, within the next 45 years, the industry continues to find efficient channels to serve customers. I hope that bankers are able to continue to serve consumers in rural areas. I hope that our legislative leaders come to their senses and recognize that competitors providing the same products should be treated equally under the law. And I hope that banks and bankers soon regain the pristine image that they have worked so hard to earn.

-S. Joe DeHaven


TLAC – Yet Another Pricey Requirement

October 15, 2014

Federal Reserve Gov. Daniel K. Tarullo indicated last week that the Federal Reserve intends to introduce a proposed capital requirement that would be more stringent than requirements contemplated by the Basel III agreement. Tarullo indicated that the proposed requirement, Total Loss Absorbing Capital (TLAC), will “probably be a little bit more rigorous with respect to some of the qualifying instruments.”

The goal is to diminish the probability of future taxpayer bailouts. TLAC would require that banks maintain minimum amounts of long-term debt that could absorb losses and/or be converted into equity, if required, to keep the bank subsidiary solvent during the period that regulators are winding down the holding company. This appears to be an extension of the Federal Reserve viewpoint that Basel III is a floor and not a ceiling on capital requirements for internationally active financial institutions. Although Tarullo said that “in general what we will be doing is paralleling each of these major international frameworks with our own domestic implementation,” he further suggested that the Fed’s proposal to go above the Basel III guidelines “serves as a bit of an opportunity for other countries to think about what they will do.” Additionally he indicated that U.S. regulators intend to impose tougher rules on capital surcharges for the big banks that have been designated as systemically important financial institutions.

I find this worrisome on a couple of levels, even though I appreciate Gov. Tarullo’s goal of diminishing or eliminating the probability of future taxpayer bailouts. First, why do we want to issue rules on our largest banks that make them less competitive in the world marketplace? The Federal Reserve certainly had a seat at the table when the Basel III rules were agreed to. Those rules were intended to level the global playing field, so that all banks in the world would be equal relative to capital requirements. Why, then, is the Federal Reserve now proposing that the United States be more restrictive?

Second, while this requirement is pointed at the largest banks, history shows that what is imposed on the largest banks eventually filters down to all U.S. banks. A recent example was the stress testing, implemented less than five years ago, that was to apply only to the 19 largest U.S. banks. Now elements of stress testing are being imposed on even the smallest of community banks, to the extent that the Indiana Bankers Association has hosted educational seminars on stress testing. How long, then, before the TLAC capital requirements, intended exclusively for systemically important financial institutions, will be imposed on all banks?

As I have often voiced, it seems that there is an effort coming from Washington, D.C., to destroy the bifurcated financial services system that is unique to the United States. Our system of international banks, national banks, regional banks and local community banks is the envy of the world. It has made us the most powerful economic engine ever on earth. Should we not be preserving and promoting this successful system?

While Tarullo’s goal may be worthy, the proposal comes at the price of making our biggest banks noncompetitive on a worldwide basis and of potentially adding yet another log to the fire that is burning up so many community banks. That price, I fear, is far too high to pay.

- S. Joe DeHaven


Annual Convention: What’s Your Game Plan?

October 8, 2014

Last week the Indiana Bankers Association hosted its Annual Convention in beautiful French Lick. Over 500 bankers, service providers and guests came together for this successful event, themed “What’s Your Game Plan?” The convention is designed specifically to facilitate opportunities for attendees to network, explore the exhibit hall for innovative products and services, and learn about new ideas or products from the outstanding speakers who made presentations.

The meeting was virtually the “who’s who” of the Indiana banking scene. Bankers in attendance benefited from the insights of Board Vice Chairman of the Independent Community Bankers of America Jack Hartings, who also is president and CEO of The Peoples Bank Company, Coldwater, Ohio, and Board Vice Chairman of the American Bankers Association Dan Blanton, who additionally serves as CEO of Georgia Bank & Trust, Augusta, Georgia, who brought the latest news on their respective organizations to the attendees. The audience had no shortage of questions for both of them, covering everything from cybersecurity issues to credit union taxation to regulatory burden and more. These polished gentlemen certainly represented their national organizations well.

While there were several professional speakers who regularly travel the banking circuit, there were a couple of unique presentations. First was a presentation by Eric Doden, president of the Indiana Economic Development Corp., who introduced research regarding establishing regional cities throughout Indiana, primarily to accomplish economic development that benefits wider areas than current city/county efforts being used. Mr. Doden explained how the research was conducted and highlighted some interesting results. The study, which was recommended by Gov. Mike Pence and approved by the 2014 session of the Indiana General Assembly, was due last week on Oct. 1. Eric’s presentation to the IBA convention delegates certainly was timely, since it was delivered on Sept. 29!

The other unique presentation was by Dr. Ruby Payne, founder and owner of aha Process!, a company which produces research and support material in Dr. Payne’s committed effort to reverse the increasing trend of generational poverty. Her spellbinding presentation was the talk of the convention. Who better to understand the devastating results of poverty, not only on those experiencing it, but to the community at large, than banking professionals? Ruby’s research over many years includes projections that show the multiplier effect of the growing reach of generational poverty. The thrust of her presentation, however, is that there is hope through her Bridges Out of Poverty program, designed to reverse this trend. The program already is being utilized to some degree in some Hoosier communities, with a couple of Indiana banks providing instrumental support. Following Ruby’s presentation, she sat on a panel presentation, along with Home Bank, Martinsville, President and CEO Dan Moore and COO Lisa Arnold, as well as community representatives who have been working with the program. The insights presented were inspiring. IBA is working with Ruby Payne and her team to develop a banker initiated and led effort to establish her program throughout the state.

Current IBA Chairman Dave Heeter, CEO of MutualBank, Muncie, was appropriately recognized for his successful year, and he spoke eloquently about the importance and success of IBA. Chairman-elect Larry Myers, president and CEO of First Savings Bank, FSB, Clarksville, spoke with passion about his goals for the coming year. There is little doubt that Mr. Myers will continue the lengthy string of outstanding IBA leaders. IBA appreciates and thanks all who participated in the 2014 Annual Convention, and we look forward to even more success in 2015.

- S. Joe DeHaven


Walmart Rolls Out ‘GoBank’

October 1, 2014

In the early 2000s, banks were engaged in a war with the retail industry, particularly Walmart, to keep retailers from offering bank services. Walmart made many forays, or threatened to make forays, into the realm of banking. After years of butting its head against the wall trying to gain regulatory approval to obtain a banking charter, Walmart surrendered in 2007, when its effort to be granted a federal thrift charter faced massive opposition from the banking industry.

I recall reading comments by the person in charge of Walmart’s banking business model at the time, who conceded that Walmart would forgo a charter, but would still provide as many financial services as it could that do not require a charter. Over the years, Walmart has stealthily been adding services – the most notable being a partnership formed with American Express a couple of years ago to offer prepaid cards and debit card accounts.

Last week Walmart announced a partnership with Green Dot Corp. called GoBank, which will offer a basic checking account. Most accounts will be charged a flat $8.50 per month – with no fees for overdrafts or bounced checks – and will require no minimum balance. In order to be eligible for this account, GoBank has developed its own proprietary system for screening applicants, thus forgoing the established systems currently in use by banks. Walmart has stated that it expects most people drawing Social Security payments or on fixed pensions will qualify.

The Federal Deposit Insurance Corp. reported in a 2011 study that nearly 10 million U.S. households do not use banks for any services. Apparently Walmart sees this gap as a huge opportunity. Walmart needs an opportunity, as it has been losing some ground in the past few years to the upstart dollar stores, such as Family Dollar Stores Inc. and Dollar Tree Inc. In our ever more bifurcated economy, with a stressed and shrinking middle class, Walmart’s marketing appeals effectively to a wide range of customers, many who struggle financially. I recognize that banks also serve consumers of all economic strata and work hard to bring the unbanked into the safety of the depository banking system. However, the above statistic from the FDIC identifies that a gaping need remains. Neither has the tax-exempt credit union industry filled that need, despite its tax exemption based upon servicing this very population … but that is a another topic for another day.

Walmart is the largest retailer in the world. It will be a formidable competitor, whatever financial service it provides. It will be incumbent upon the banks and their trade groups to ensure that Walmart is playing on the same level as banks, regarding disclosures to consumers and other requirements. Banks already have enough tax-advantaged and regulatory-burden-advantaged competitors. The last thing banks need is a Walmart that is special advantaged in any way, particularly at its behemoth size.

- S. Joe DeHaven


More Listening Needed on Regulations

September 24, 2014

About 30 years ago, three of my friends and I would go on an annual fishing trip to Michigan City. Each year we chartered a boat for Saturday afternoon and again on Sunday morning. Of the four of us, only one was a real fisherman. He would bring along his father, Bill, who had been a local sports columnist and a sales representative for companies that sold fishing equipment. We also would meet with a longtime friend of Bill’s in Michigan City, who had a similar work history. Add in Captain Jack, another old friend, and we made up a motley crew of fishing novices and old pros. It was an eclectic assembly, and lots of fun.

Each year we also would mix in some serious talk on the Saturday night between fishing excursions, when we would all go to a nice restaurant. It did not take long before Bill and his two curmudgeon friends would start railing on about all of the things wrong with the world. Their favorite target was the federal government. They bemoaned all of the new regulations that were stripping them of their personal rights. (Sound familiar?) My three friends and I would listen to the arguments and vacillate between thinking these guys were either geniuses or crazy old men.

Looking back, I realize that they were neither. Instead they were well-informed, experienced gentlemen who had seen massive change to the world they had grown up in. Government was becoming more and more oppressive, and technology had upset every system they had become accustomed to during their careers.

Today I am much closer to being like these gentlemen than I would like to admit. I, too, believe that government is much more oppressive than when I was growing up. As for technology, clearly it has radically changed how I do my job today, compared to just a few years ago.

The technology challenge is simple: I can either learn it, or find someone who understands it to help me. The government oppression issue, though, is much harder to navigate. There are so many laws, compounded by regulations to implement those laws, that no one person has a complete grasp of the totality of our regulatory burden. For that reason, I am grateful that, last week, community bankers were invited to share their concerns before the Consumer Financial Protection Bureau following a field hearing that the CFPB had conducted on automobile financing in Indianapolis. Several community bankers took time to attend this “community banking listening session.” CFPB representatives listened to many concerns on a wide range of issues raised and, to their credit, took copious notes. I appreciate that CFPB reached out for candid feedback from bankers.

Yet, the CFPB is a poster child for an increasingly oppressive federal government. It is not charged with responsibility toward financial institution safety and soundness; its charge is to protect consumers financially. CFPB wields unbridled power that allows its agents to issue rules and regulations for all financial service providers, often handcuffing those providers. There needs to be a counterbalance. Every banker I speak to understands and agrees that consumers need to be treated fairly and respectfully, but those bankers feel they should be treated fairly and respectfully in return. Too often, regulations are written, and conversations with regulators begin with an underlying tone that bankers are guilty until and unless they can prove themselves innocent. Our country, of course, was founded on the premise that people are innocent until proven guilty.

Perhaps I have become the old curmudgeon that I witnessed 30 years ago, but this sure isn’t the environment in which I grew up. I do applaud the CFPB for inviting Indiana bankers to a listening session, however, and thank the bankers who took time from their hectic schedules to make the dialogue meaningful.

- S. Joe DeHaven


IBA Annual Washington Trip: Time Well Spent

September 17, 2014

Approximately 70 Hoosier bankers descended upon Washington, D.C., last week to assert their right to petition the federal government on issues of mutual concern to bankers throughout the country. We met with executive management of several bank regulatory agencies and conveyed our concerns about the impact of some of the excessive regulations written to fully enact the Dodd-Frank Act. This gross regulatory overreaction to the financial crisis has shifted bank risk management from credit risk to regulatory risk. For decades, bankers have measured credit risk so efficiently and effectively that the United States became the largest, most successful economic entity ever on earth. Yet despite that success, Congress has recently been punishing banks for the financial crisis in 2008 that the country has been recovering from so slowly. Never mind that much of the root cause of the crisis traces back to congressional and regulator policy malfunctions that permitted not only bankers, but many nonbank financial service providers, to make loans that were not appropriately creditworthy – all in the misguided zeal to increase the percentage of citizens who own homes.

Consequently much of our discussion with the Federal Deposit Insurance Corp., the Consumer Financial Protection Bureau and the Office of the Comptroller of Currency centered on the difficulty under which banks currently operate to provide mortgage loans to the consumers of our communities. New rules regarding a consumer’s ability to repay, that assesses hard debt to income ratio requirements, have eliminated the experienced judgment historically provided by local bankers, known as credit risk analysis. Now it is incumbent upon bankers to first heed the hard guidelines, so that the bank is not subject to frivolous suits or civil money penalties, now known as regulatory risk. Bankers hope that common sense prevails at some point, so that they can return to doing what they do best – assessing credit risk and growing the local economies of the communities they serve.

Our mighty band of bankers also called on Indiana’s 11 U.S. senators and representatives, along with House Financial Services Committee Chairman Jeb Hensarling of Texas. We certainly appreciate the time allotted to us by these busy elected officials, and we appreciate their understanding and support of our concerns about the overreaching regulatory environment in which bankers now operate. We spoke about the innate unfairness of the current tax code, by which banks pay very high taxes, yet are saddled with the inequity that competitors – such as credit unions and the Farm Credit System banks – pay little or no federal taxes. No one would design a system with such taxation unfairness, but it has evolved for reasons long since accomplished.

We were especially appreciative of the time provided to us by our national banking associations with whom we frequently work on issues of mutual concern. The Independent Community Bankers of America, the American Bankers Association and the Conference of State Bank Supervisors all met with us to present their respective views of the current atmosphere in Washington, D.C. Their insights always prove to be extremely valuable.

All in all, it was a productive investment of a few good days to carry the banner for the important business of banking and for the businesses, consumers and communities that rely on its services. The camaraderie among the participating bankers was also of importance, as we all work together to foster a stronger economy for Indiana and for the United States. We left for home with a sense of accomplishment and appreciation for the difficult issues faced by Congress each and every day. We thank our congressmen for their service and their consideration of our positions, and we thank our dedicated member bankers, who took the time to travel with us to DC to speak up for the business of banking and the consumers, businesses and communities it serves.

-S. Joe DeHaven


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