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

Revving Up for Fall Elections

September 10, 2014

Labor Day has come and gone, signaling the last hoorah for summer. Later this month we celebrate the start of fall, to be followed all-too-quickly by winter. As temperatures drop, we will no doubt bundle up in jackets and sweatshirts. Another fall tradition, one which we have the opportunity to exercise every other year, is the right to vote for national officeholders. In my opinion, the right to vote should be a responsibility. We enjoy freedom of choice in electing our political leaders, who are chosen to act on our behalf in matters of mutual concern. Sadly, the vast majority of those citizens who are eligible to vote abdicate that responsibility by not showing up at the voting booth.

This year all nine of our U.S. representatives are up for re-election, as are all 100 state representatives and 25 state senators. In addition, Indiana will be holding elections for secretary of state, treasurer of state and auditor of state. While every election is important, the fragile health of the economy plus worldwide instability surely make this election a standout among non-presidential election years. In Washington, D.C., the growing philosophical divide – crystallized by a split Congress, Republican-controlled House and Democrat-controlled Senate – has resulted in gridlock. Congress appears to be unable to deal with the issues that the populace should view as urgent. The military and political fighting occurring in the Mideast and in Eastern Europe should scare us all into voting action; yet, I suspect that only a small minority of registered voters will show up to cast their votes on Nov. 4.

Issues such as immigration, Social Security and Medicare reform, tax reform, and trimming back the excessive regulatory burden that has been hampering businesses in all industries of all sizes within the past few years require that we elect people capable of dealing with them. Can our current Congress deal with these issues? Certainly it has the power to do so, but it has not yet dealt with these issues. Can we elect a Congress that will deal with them? We can, but electing capable candidates does not guarantee action. We must insist, through our advocacy, that Congress address these issues.

We must stay ever vigilant to make sure that our senators and representatives do what we want them to do on our behalf. We must stay ever present, so that we know what threats are arising throughout the world that could impact our way of life. Freedom is not free. We pay the price with the blood of our men and women serving in the armed forces. We pay the price with the sweat and tears of American business owners and workers, toiling for a stronger economy. We must also pay the price with our time. We have to invest the time to stay abreast of the issues and to make sure our elected representatives deal with those issues appropriately.

Let us collectively determine that these winding-down days of summer mark a rebirth of our great nation. Let’s make it a rebirth of “we the people,” eager to participate in our own governance, rather than abdicate that responsibility to those who are elected by a fraction of eligible voters. This fall, let’s get out the vote to make it an election of the people, by the people and for the people.

- S. Joe DeHaven

State Bankers Associations: Committed to the Banking Industry

September 3, 2014

Last week I participated in a meeting in Portland, Oregon, of about 20 of my counterparts from throughout the country to discuss issues we face in leading small-staff state bankers associations (SBAs). The Indiana Bankers Association, with a staff of 15, was one of the largest associations represented at the meeting. As with any other business, leaders of SBAs deal with a thousand details to be accomplished daily. Many of us are blessed with talented and long-tenured staff – certainly the case at the IBA – which makes the task much easier.

Like some of our member bank leaders, several SBA executives will be retiring within the next five years. Some of our discussion centered on the preparedness of each association regarding succession planning. Within the past couple of years, there have been some retirements among SBA leaders, and I have been impressed with the successors who have been selected to advance the missions of these associations. IBA also has a succession plan in place, reviewed and updated regularly by our executive committee.

Whether having served long-term or for a brief time, each SBA executive is deeply committed to the betterment of the business of banking. We share our successes, both individually and as a group, so that we can each make the environment better for our members. We all appreciate and understand the significance of the business of banking to the entire economic, social, educational and governmental environments. Our bank members fund the financial might of the United States. Our members are leaders in their respective communities, and we who represent them are proud of their contributions. We take pride in knowing that we help each of these banks to fulfill their missions of improving the economic atmosphere of the communities they serve.

We also share industry-wide frustrations, particularly within the past few years, when the financial crisis changed our business forever. Some frustrations result from nefarious legislation, but most stem from poorly written regulations. As industry advocates, we work hard to navigate the maze-like legislative process to help promote sound laws. The regulations which result from those laws are intended to uphold legislative best intentions yet, all too often, misaligned regulations do more harm than good.

Regardless of how or why issues occur, it is always an honor to be on the side of those trying to better life for others. While the state bankers associations each seek the same results, at times we go about it very differently. The variation from state to state is surprising. Consequently, meetings like the one held in Oregon allow us to share collectively the ideas we generate individually within our organizations. That free sharing of ideas is at the root of the success that we enjoy on behalf of our members.

It was an honor to participate among such a dedicated and intelligent group of peers from throughout the country. I learned much from them and also shared a few ideas with them. As we return to our offices and put into place the ideas that were shared, we do so in anticipation of creating a stronger financial services industry for the benefit of the consumers and businesses that rely on its products and services.

- S. Joe DeHaven


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