A Fiscal Domino Effect

December 17, 2014

I could hardly believe my eyes when I read it. How could this possibly occur again? Don’t they remember what happened the last time? But there it was, in print. Mel Watt, who was confirmed late last year as the president’s appointee to serve as director of the Federal Housing Finance Agency – which is the regulator over Fannie Mae, Freddie Mac and the Federal Home Loan Bank System – is going to liberalize the rules that guide what types of mortgage loans can be purchased by Fannie and Freddie. Mr. Watt wants to permit loans with as little as a 3 percent down payment and a credit score as low as 660 to be purchased.

Really? This is representative of decisions made by Congress and regulators that started the domino effect that created the recent financial crisis. While it is laudable to encourage consumers to aspire to homeownership, it is counterproductive and irresponsible to promote financially unrealistic homeownership. Not everyone is prepared for the fiscal demands of owning a home. Subprime loans, such as those that Director Watt advocates, were the tipping point that set the financial crisis in motion. Mortgage companies, many owned by residential homebuilders, and some banks kept pushing the envelope to get these loans on the books and the underlying real estate sold. Then the investment banks, encouraged by the rating agencies’ inflated ratings for these packages of loans, bundled them up and sold them to investors worldwide. Real estate prices then escalated to record highs … until, inevitably, there were no buyers remaining. The bubble burst, real estate prices plummeted, and those homeowners who had secured homes with very low down payments were suddenly caught in the trap of owing more on their homes than they could possibly sell them for. What began as a subprime mortgage crisis quickly grew into a monstrous mortgage crisis, resulting in massive job loss, which further worsened the destructive force of the crisis. Why doesn’t Watt remember this recent history?

We need a voice of reason, and it is the banking community that must lead the charge. Because banks have yet to recover from reputational damage miscast on them from the last crisis, they simply cannot let this vicious cycle reoccur. Fortunately, the bankers who are in leadership with the Indiana Bankers Association are concerned and are determined to bring this issue to the attention of bankers nationwide. Watt and those who share his illogic must be challenged and reminded of the cause of the recent financial crisis. If legislators and regulators repeat the same mistakes, nothing will stop another crisis from happening. Of course, when the next financial crisis hits, Watt will be long out of office and, I fear, everyone will again blame banks – not the misguided government policy that started the problem.

For the banking community, an extreme loosening of mortgage standards is a “lose-lose” situation. If banks refuse to participate, they lose, because they will face regulatory pressure, media criticism and damaged consumer relationships. And if they do participate, a likely result is that we all lose, because of the disastrous chain of events that may follow.

I hope to read better news soon: That people have come to their senses, and that this decision has been reversed. We must do all we can to stop the first domino from falling.

-S. Joe DeHaven


Cybersecurity: A Step in the Right Direction

December 10, 2014

In last week’s blog, I wrote about cybersecurity issues and shared that, in my 40+ years of working in the banking business, nothing has been scarier. The day after that blog post, a new group called the Merchant-Financial Cyber Partnership (MFCP) issued a letter to Congress in support of legislation that modifies constraints to improve information sharing, enables existing efforts through flexible mechanisms, provides liability protections for sharing, promotes government funding for research, updates the criminal code and enhances law enforcement abilities to fight cybercrime. The creation of MFCP is significant, because it represents a collaboration between the banking and retailing businesses. The co-chairs of MFCP signed the letter to Congress; those co-chairs are the CEO of the Financial Services Roundtable and the president of the Retail Industry Leaders Association ‒ organizations which historically have pointed fingers at each other regarding data breaches.

Finally, however, both industries recognize that they have more to lose than gain by holding onto the rhetoric of blaming each other for the problem. The reality is that neither is the cause of the problem, but both have a responsibility for helping to resolve it. Until that time occurs, both industries will continue to pay a heavy cost, as cybercrime continues to escalate. Therefore, despite the vitriol that has spewed between bankers and retailers on this issue and others, it is encouraging that these two important industries are starting to work together to go after the actual source of the problems.

The MFCP also released plans to address information sharing, cyberrisk mitigation, card and card-not-present security technology, and legislation. Success on these fronts would benefit both industries going forward. These principles encompass reaching formal agreements for information sharing and communicating them to both industries, developing and communicating breach notification procedures around the National Institute of Standards and Technology (NIST) framework, promoting more collaboration between the two industries in developing principles for protecting the system, and then sharing the results of all of this work with Congress, as it prepares legislation.

The MFCP partnership was formed earlier this year. Its members include seven financial associations; 11 merchant groups; and executives from the financial industry, card providers and retailers. While it is doubtful that the establishment of this organization will stop all of the sniping between bankers and retailers, it is a step in the right direction. Cyberthreats will continue to escalate, as more and more data becomes discoverable through new uses of cybercrime. Having all hands on deck to fight cyberthieves ‒ instead of each other ‒ is paramount to resolving these issues.

There will remain inequities in the system as to covering losses and expenses that result when thefts occur. Bankers will continue to believe that they should not be responsible for the losses caused by others. Retailers will continue to believe that bankers should create an impenetrable system for transacting electronic information. Regardless of those disagreements, it is a sign of progress that these two industry giants are working together to fight the real culprits.

- S. Joe DeHaven


Cybersecurity Awareness

December 3, 2014

Having spent over four decades in the banking business, I have seen an incredible amount of change. Some was good, some was bad. I also have witnessed, during that time, some scary events. Crisis-level issues – the oil embargo of the 1970s, deregulation of interest rates, the savings and loan crisis, regulatory overkill, the technology stock bubble, preparation for Y2K, the recent financial crisis, and yet more regulatory overkill – all come to mind.

However, perhaps the scariest issue is today’s catchphrase: cybersecurity. The reason that cybersecurity is so frightening is that we have little experience dealing with anything remotely resembling it. While the bad guys behind cybercrime have nothing else to do all day but devise ways to breach databases and siphon funds to themselves, government lags behind in deterring them, and many small businesses simply lack the resources to protect themselves.

This risk is infuriating in light of mounting evidence that some foreign governments are actually encouraging – or at least looking the other way – when their citizens participate in cybertheft or espionage, particularly against U.S. companies and governments. How do we combat this level of deceit? How do we adequately protect ourselves? How long before we identify effective defenses? These are only some of the vexing questions to which we have few, if any, answers.

Another level of frustration to the banking industry is that it is not possible to accurately quantify and segregate the risk. While bankers are skilled at assessing risk and appropriately pricing it into their products, the problem is that cybertheft – with its continual escalation – does not fit conveniently into any current risk-assessment models.

There is some encouraging news, though. First, for the banking industry, requirements from the Gramm-Leach-Bliley Act of 1999 have held banks to higher security standards than those of most industries. This certainly does not provide banks immunity from breaches, but it does make their security walls thicker and stronger than other organizations’ walls. Other industries must work to catch up, while banks must continue to bolster their security.

Second, there is worldwide coordination to combat cybercrime. A global organization called the Financial Services Information Sharing and Analysis Center, more commonly known as FS-ISAC, was launched in 1999 “to help members prepare for Y2K and establish an anonymous information sharing capability within the financial services industry.” The Federal Financial Institutions Examination Council recently issued a news release, encouraging financial institution participation with FS-ISAC.

Finally, cybersecurity awareness is growing, and this year the month of October was declared as National Cyber Security Awareness Month. Consumer awareness can take a big “byte” out of cybercrime; for example, according to amplifybankers.com, currently more than two-thirds of cybercrime attacks are made through phishing attempts. Helping consumers to become cyber-savvy is an additional way that financial institutions are working to combat the growing cybercrime problem.

In truth, every day is cybersecurity awareness day in the banking community. Cybercrime seems to be the most pervasive, least predictable, sneakiest, scariest threat I have observed in this industry throughout my 40-plus years in banking. The Indiana Bankers Association remains committed to helping bankers collect the necessary information and resources to address their cybersecurity needs.

- S. Joe DeHaven


In the Company of Bankers

November 26, 2014

Guest blog by Laura Wilson, IBA Vice President-Communications

Tomorrow is Thanksgiving – a day to give pause, give praise and give thanks. Like many of us, my gratitude list is too lengthy to share in a single writing, but the short version is that I am thankful for family, friends and meaningful employment … “meaningful,” in that the people I work with are committed professionals, passionate about their communities.

I joined the Indiana Bankers Association 27 years ago as associate editor of Hoosier Banker. One lesson I learned early on is that banking is, above all, a people business. A bank president shared that insight with me, and I was surprised at the time, because I had viewed banking as a purely transactional “numbers” business. By now, of course, after years of working with community-minded bankers, I see banking as so much more.

I see banking as the industry that makes all others possible. Any business endeavor, whether in the for-profit or nonprofit sector, needs capital, which the banking community is able to provide. Banks additionally support industry through guidance and advice to fledgling and growing businesses. Many an entrepreneur saw a dream become reality through bank assistance.

Banking also is the industry that, more than any other, helps build better communities. Banks are in the unique position to provide a mixture of fiscal support, leadership skills and hands-on volunteering. When I interview bank leaders for Hoosier Banker magazine, a common refrain is that their greatest satisfaction comes from helping others. Their eyes light up and their voices lift as they describe the joy of assisting a young couple, eager to become homeowners; or of driving by an industrial building, knowing that the bank helped a local business to grow; or of witnessing the good that comes from caring bank staff who donate time and talent to every community cause imaginable.

One example of bank support of community is the “Bridges out of Poverty” project, currently being implemented in Morgan County by Home Bank, Martinsville, and other area organizations. The Bridges out of Poverty concept takes a long-term approach to alleviating poverty, a topic of huge impact for the banking industry. Because of its wide-scale potential, the IBA has been introducing Bridges out of Poverty to Indiana bank leaders and to regional state bank trade associations. Certainly, if anyone has the right blend of compassion and intellect needed to effect solutions to poverty, it is banking professionals.

If in any small way, as an IBA staff member, I can stake some claim to being part of the Indiana banking community, I am thankful. And may Thanksgiving Day 2014 be safe and happy for all of us, as we reflect on family, friends and life’s many blessings.

 


Insights From Recent OCC Meeting

November 19, 2014

Amber Van Til, who leads IBA’s government relation team, and I had the privilege last week to attend a meeting in Chicago hosted by the Office of the Comptroller of the Currency (OCC) for bank trade association staff of the central division. Under the leadership of Bert Otto, deputy comptroller of the Central District, the OCC for many years has been reaching out to the industry through its trade associations. These meetings offer candid discussions of the issues faced by both the regulatory community and the financial institutions that they regulate. The conversations go a long way toward making bank examinations more efficient and meaningful to both parties.

While both parties would agree that, at times, these meetings have become a bit acrimonious, at this meeting both sides came away with steps to take to smooth out the process. One topic that prompted lively discussion was the examination of third-party service providers by the OCC and other prudential regulators. To the extent that these third-party relationships, such as core data processers, are critical to the bank, the bank is required to perform and provide to its examination team evidence that adequate due diligence has been and continues to be performed on an ongoing basis. We learned, though, that while the OCC performs examinations of these third-party entities, it may report its findings only to current users. What about a bank that is looking at a data processing company that the OCC has found deficiencies with? OCC cannot contact that bank and disclose the results of its findings. The prudent action of the bank, then, is to contact its primary regulator and discuss the change in relationship it is contemplating. While the primary regulator may not disclose its findings, if it suggests more due diligence, the bank definitely should do more due diligence. Certainly the bank would want to visit with current clients to determine the adequacy of the third-party provider.

One of the OCC representatives present was Carrie Moore, director of congressional liaison. A veteran of Washington, D.C., Carrie was forthcoming about the issues that OCC has flagged as needing immediate attention to help community banks. While the list is not exhaustive, bear in mind that, as a government agency, OCC responds to inquiries, rather than initiates ideas for legislation. Carrie listed three issues that OCC anticipates will draw attention early in the next Congress: (1) provide higher cap for an elongated examination schedule for highly rated banks of less than $750 million in assets; (2) exempt from the Volcker Rule all banks with less than $10 billion in assets; and (3) provide to thrift-chartered institutions the same powers that national banks currently have. The banking industry has a long list of regulatory cleanup to pursue in the next Congressional session, and it is encouraging that OCC is in agreement on most of those items.

Bert Otto has been a friend for the many years that our careers have overlapped. He has 42 years of experience with the OCC, has led the Chicago office for over 15 years and will be retiring at year-end. Phil Gerbick, who serves as senior thrift adviser for the OCC Central District, also will be retiring at the end of the year, after more than 40 years of service to OCC and thrift regulators. I thank these two gentlemen for their lengthy service to the banking industry, and I wish them well in this new phase of life.

- S. Joe DeHaven


Preserving the Community Banking Legacy

November 12, 2014

Many times over the years, I have written and spoken about my deep concern for the future of community banking. My concern is actually aimed more at the rural communities that so many of those banks serve. I fear that, without community banks, many rural communities will not survive. Clearly a certain portion of our population prefers to live in those communities, but will lose that option if their communities cease to exist.

Although I have addressed this topic many times, last Friday my good friend John Ryan, president and CEO of the Conference of State Bank Supervisors, stated it best when speaking before a community bank conference at the Federal Reserve. John simply said: “The future of community banking is not just about the future of community banks, but the ability of communities to define their future, the future of rural America, the future of small businesses across our country, and the future of individual choice.” Well said!

Considering the excessive regulatory burden that has been cast upon the banking industry within the past four years, particularly on the community banking industry, it is uncertain how many will survive. U.S. Senate leaders, for the past couple of years, have failed to consider any regulatory relief measures. Surely they do not think the Dodd-Frank Act (DFA) is so perfect that it requires no adjustments, yet that is exactly how they have acted.

I am hopeful that all of that changed last Tuesday, Election Day. The people spoke and replaced a significant number of Democrat senators, while not rejecting a single Republican senator, resulting in a Republican majority in the Senate for the first time in eight years. I assure you that the Republican majority members will make their share of mistakes, but I also believe they will be open to making needed tweaks to certain DFA provisions – those that are the most unfair, unnecessary and poorly drafted. With this revamped Senate working with the U.S. House of Representatives, which also remains significantly controlled by Republicans, I fully expect many regulatory relief bills to be passed and placed on President Obama’s desk. The question is, will the president sign them into law, or veto them?

This scenario surely inspired John Ryan’s remarks last Friday. He must feel encouraged that Congress will finally deal with some of the egregious Dodd-Frank Act rules that have been drafted in the past four years. John also has to be encouraged that community banking, as we know it, has a chance to survive. Consequently rural communities and small businesses, which are so dependent on community banks, likewise have a chance at survival. If all those factors play out, then the individual choice of where to raise a family will be preserved to include the option of a rural upbringing.

Thank you, John, for your leadership on behalf of community banks, small communities and freedom of choice. Thank you, voters, for creating an atmosphere that, we hope, will diminish partisan gridlock and move this country forward, at least regarding the current regulatory burden. As John so aptly closed his speech: “We have inherited an important legacy: a diverse banking system. I believe that by all of us working together, we can ensure its future.” May the legacy live on!

 – S. Joe DeHaven


FLD Bridging Bankers, Building Leaders Event

November 5, 2014

Last week the Indiana Bankers Association and its Future Leadership Division (FLD) held the second annual “Bridging Bankers, Building Leaders” conference. Attendee evaluations indicate that there is a great value to this event, designed for emerging bank leaders. IBA and FLD planners assembled an impressive list of speakers and panelists to discuss issues of relevance to the young bankers in attendance. While those speakers were outstanding, the opportunity to network with similarly situated banking peers from throughout Indiana may have been the key takeaway for participants.

Once again, I was struck by the intelligence and fundamental understanding of the business of banking displayed by these bright young people who attended. In the past, I admit that I have bemoaned what I misperceived as a lack of interest and skill among many young bankers. No longer do I harbor that concern. With programming such as this FLD conference, graduate schools of banking, our leadership development programs and overall attendance at a variety of skill-specific seminars, I have had the opportunity to meet many bright, energetic and engaged young bankers.

Part of my concern had centered on circumstances that, for many years, combined to create a vacuum of young talent. In 1980 Congress deregulated interest rates that could be paid on various deposit accounts. This artificial control of deposit rates also tended to artificially control loan rates. When deregulation occurred, prime rates ballooned to over 20 percent per year. Adding insult to injury, the 1986 Tax Reform Act devalued certain real estate property by about 20 percent. This series of unfortunate events, combined with the interest-rate deregulation which did not fairly allow for any protection of existing fixed-rate real estate loans, teed up the so-called savings-and-loan crisis.

Another ill effect of this bad combination of political decisions was that banks discontinued hiring young people for management training programs for nearly 15 years. As a result, there were virtually no young people entering banking for several years. Today, however, that trend has changed. Young professionals are being attracted to the business of banking – and banking surely needs to continue to attract them. The business of banking is changing so rapidly that the baby-boom generation, which currently leads most banks, simply does not have the necessary background to deal with some of the new issues. This is particularly true in the areas of technology and, to a lesser extent, the new regulatory environment.

Many of these newcomers to the business of banking are digital natives, and we welcome them with open arms. New product-and-service delivery systems, particularly mobile technology, require their expertise. The new regulatory world for these young folks is all they have ever known, so they waste no time pining over bygone days. Boomers, on the other hand, remember a much simpler time; for them, adjusting to this new world can be frustrating.

All of the above means that an influx of bright, young professionals is needed to carry banking into the future. Contrary to popular opinion, these newer bankers do not expect to be named president of the bank anytime soon. They do, however, expect to be appreciated for the contributions they make and to be given the opportunity to learn and contribute. With these common-sense aspirations, they are not really all that different from the baby boomers that they will eventually replace. I seem to recall, early in my career, that I also wanted the knowledge to assume responsibility and a fair chance at advancement. Not much has changed!

Thank you to those who participated in the FLD Bridging Bankers, Building Leaders event. It was a wonderful opportunity for attendees to grow and to learn about banking. And for me, it was a chance to observe the next generation of bank leaders. I am confident that our future is bright.

- S. Joe DeHaven


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