A Wonderful Life of Banking Values

April 22, 2015

Frank Capra was an Italian-born American filmmaker who defined his craft throughout the 1930s and ’40s. His films earned dozens of Academy Award nominations and won multiple Oscars, including two for best picture and three for best director. You may recognize some of Capra’s signature works: “Mr. Deeds Goes to Town,” “Mr. Smith Goes to Washington,” “Meet John Doe” and “It’s a Wonderful Life.”

Capra infused his films with themes of hard work, patriotism and the American dream, mirroring his life’s path from poor immigrant son to towering success. Fiercely devoted to his adopted country, Capra enlisted in the Army twice, serving in both world wars. By the time of his second enlistment ‒ days after the bombing of Pearl Harbor ‒ Capra was in his 40s and considered one of the most successful directors in Hollywood history. Yet he turned his talents to the Army, for which he produced a series of inspiring documentaries, “Why We Fight.”

It was after World War II that Capra directed “It’s a Wonderful Life.” Though now a holiday classic, and a clear favorite of the banking community, the film was deemed a box office flop in 1946. Perhaps the project fell victim to a national shift away from the political principles and social mores that Capra so proudly espoused. Following that box office disappointment came several lackluster films and, by the 1960s, Capra was all but forgotten.

Change happens, and Capra seemed unable or unwilling to change and eschew all that he believed in. Is our country facing the same dilemma? Is the world facing the same dilemma? Governments and economic systems have changed. At one time we acted collectively in the same way that we act individually. An example is debt. Individuals use debt to purchase what they need and occasionally what they want. Prior to the financial crisis, individuals were using debt excessively to satisfy unrealistic wants. In recent years, collectively, the federal government has become a huge debtor, using debt to finance what people want, not necessarily what people really need.

If only this problem were confined to the United States, we could work to correct it, but it is spreading worldwide. Most of the nations of Europe, as best evidenced by Greece, for years have been spending well beyond their means, and today they cannot service their debt. Further East, China has been ambitiously building cities throughout the country, some designed for a million people, but so far there are no inhabitants. Does that sound like good fiscal management?

What will come from this worldwide change? Despite my concerns, I do believe the United States is in the best position to weather this storm of change. We have bountiful resources for food and water. We are nearly energy-independent and, at least for now, the dollar is the de facto world currency. We have the most diversified financial services industry in the world to provide the necessary capital that can undergird future business ventures.

We will, of course, need to adapt to changing times but, like Frank Capra, let us not compromise our basic tenets. I am hopeful that, in the long run, common sense will prevail. Our form of government is, admittedly, at times inefficient and messy, but it works better than any other form of government on earth.

Many thanks to the late Mr. Capra for his vision, patriotism and optimism. May we share his belief system in recognizing what is right, and be willing to stand up for it. And may we remember the message he brought home with his last major film: For the banker who helps build communities, it’s a wonderful life.

– S. Joe DeHaven

Ushering in a New Generation of Banking Leaders

April 15, 2015

Golf history was made last weekend, when 21-year-old Jordan Spieth won the 2015 Masters Tournament. The young phenom set numerous Masters records for this year’s event. His poise and composure far exceed the maturity expected of most his age. It certainly is refreshing to see such a mature young role model in the making.

I have written many columns bemoaning the fact that there is a leadership dearth among bankers, not just in Indiana, but throughout the country. There are many logical and compelling reasons that this situation had occurred. Recently, however, I have been encouraged, as many intelligent, mature young bankers are poised to take over the reins of banks throughout Indiana. These young professionals are rising through the ranks in both family-owned and non-family-owned institutions.

I am now confident that the Indiana community banking industry is well-situated for the next 30 years, though I would not have made this statement just a couple of years ago. Many of the young bankers I have met are becoming increasingly involved in Indiana Bankers Association committees and boards. They participate in IBA educational opportunities and aid our grassroots advocacy through government relations initiatives.

While most of these young people are in their 30s, as opposed to Mr. Spieth in his 20s, they are no less talented for their age in the business of banking. While banking has long been a bastion for the “pale, male and stale,” this scenario is rapidly changing. Banking, like other segments of the business community, is embracing diversity industry-wide, as reflected in upcoming leadership. It is a joy to me to witness, particularly since many of our financial institutions are far older than the 79-year-old Masters Tournament.

To keep pace with these positive changes, IBA has been refreshing the face of our Future Leadership Division (FLD) during the last year and a half. Membership has more than doubled, as programming has been expanded in quantity, quality and breadth. Many of our newest FLD members are in their 20s, eager and hungry to learn. Despite allegations that millennials want to run the company today, that is not what we are seeing. These young professionals understand that they have much to learn before they can lead a business. They are smart, hard-working and determined. They value personal time and success equally with career aspirations. And their comfort with technology is off the charts, because they grew up with it.

Much as Jordan Spieth is ushering in the next generation of golf greats, the young bankers that I have met in the past couple of years are ushering in a new generation of banking leaders. I am pleased that the IBA can play a part in their career development, and touched that these young people appreciate the value that IBA brings to their banks. IBA has its own stable of talented young people who will be working hand-in-hand with these young bankers over the next 30 years to keep our industry strong.

– S. Joe DeHaven

Sports-Level Fairness Needed in Data Breaches

April 8, 2015

The National Collegiate Athletic Association (NCAA) Men’s Basketball Championship came to a close Monday evening, with the Duke Blue Devils earning the title of 2015 champions. Along the way, many outstanding college basketball teams were eliminated. Probably the biggest upset took place on Saturday, when the Wisconsin Badgers defeated the previously unbeaten Kentucky Wildcats, only to lose to Duke in the final game. At any rate, it was an exciting tournament, full of talented teams and players from throughout the country.

Each participating team has to stand on its own. Each team is responsible, within its capabilities, for its own destiny. No team gets off easier because of its height, or the location of its school, or the quality of its academic programs. Though zealous fans may blame referees for a loss, most players understand that it is their ability and effort versus that of the opposing team that determines the outcome of the game.

Unfortunately, this cause and effect does not always exist outside of the sports arena. Some people seem to be successful despite themselves, while others, who work their craft diligently, fail. Life is not always fair.

Last week a court required Target Corp. to set aside $10 million for a fund to pay for harmed parties in the Target data breach from a couple of years ago. While this sum may seem excessive, it must be put in context. The banking industry, which issued most of the credit and debit cards, has spent over $100 million in reissuing cards to customers and covering the fraud losses that resulted from Target’s negligence, which resulted in this breach. Where is the money set aside by Target to cover the losses of these innocent businesses? Oh, there isn’t any. Target, like most of the big box stores and many other retailers, doesn’t think it should have to cover those losses on cards suffered by the banks, which provide the infrastructure by which Target makes over 90 percent of its sales.

Efforts are being made by both retailers and the banking industry to develop better standards to which retailers will need to adhere in order to combat the seemingly daily breach occurrences. The first step is set to take place Oct. 1, when retailers will be required to accept EMV cards, which provide a chip that deters breaches much more effectively than the existing PIN cards. Regretfully, while banks are spending millions of dollars preparing for this day, many retailers have made little or no progress toward upgrading to the necessary equipment required to utilize the EMV technology. I suspect that we are headed for another retailer/banker train wreck, or a postponement of the effective date.

Regardless of these divisive issues, both the retailers and the bankers continue to work with government to establish better rules and/or guidelines by which we can all combat the crooks who perpetrate these cybercrimes on businesses and their customers.

There will be many more tournaments where every team is judged on its own merits. Fairness and skill will separate the winners from the losers. Let us hope that the same kind of fairness begins to creep into the business world as it relates to data security issues.

– S. Joe DeHaven

Let’s Fix This System Before It’s Too Late

April 1, 2015

Thomas J. Donohue, president and chief executive officer of the U.S. Chamber of Commerce, last week disclosed the chamber’s “10 Truths about the Financial System.” As shown below, they are short and to-the-point:

  1. A well-regulated system lifts everyone up.
  2. Consumers must be protected ‒ but they must also be served.
  3. Capital markets are the key to commerce.
  4. Diversity in the system is a strength ‒ not a weakness.
  5. Overregulation stifles innovation.
  6. By regulating only for stability, we will sacrifice growth.
  7. Our economy is global ‒ the U.S. financial system must be, too.
  8. Efforts to reform the system have made it more complex and less coordinated.
  9. Business is not against regulation, we just want smart regulation.
  10. It’s not too late to fix the system.

The U.S. Chamber speaks on behalf of all sizes and locations of business, and the organizations it represents include the most important customers of the financial services industry. It is one thing for bankers to bemoan the overly restrictive environment that has been cast upon it, but quite another when banking’s customers are being so negatively affected that they are willing to speak out.

There are many principles embedded in these 10 truths. I will attempt to cover a few. First, regulation does play an important role in the financial services business. Consumers should be protected, and financial service companies should be subject to safety-and-soundness standards and examinations to ensure that compliance. I do not know of a single banker who would disagree with this principle.

Second, the financial services industry is integral to supplying capital, so that all other businesses can fund their products or services, employ people and contribute to the quality of life. Capital and financial services are among the few products and services that every consumer and business needs in order to function. Government should aim to encourage, not discourage, access to capital and financial services. Yet our government has been discouraging availability for the past several years, as evidenced by the fact that only one new bank in the entire nation has been started within the past five years. Within that same timeframe, countless others have been closed or have been merged with others. That does not sound like encouragement to me.

Third ‒ and I have written volumes about this over the years ‒ our diversified financial system of community banks, regional banks, national banks and international banks is a strength that is not duplicated anywhere else in the world. Surely it is not a coincidence that the United States has the most advanced and powerful economy ever to exist on earth, and enjoys the most diversified financial services industry. Why does our government seem intent on infringing on what may well be the most important economic differentiator that we have? Under the current anti-banking scenario, innovation and economic growth have practically come to a standstill. This cannot be to the public’s benefit.

It is past time for the regulatory pendulum to swing back to smart regulation that protects consumers and encourages organizations that provide capital that foster economic growth, rather than the current system that requires banks to prepare meaningless reports, shrouded in fear of civil money penalties for the most minor of violations.

Donohue’s last point indicates that it is not too late to fix the system. I agree, but the clock is ticking.

– S. Joe DeHaven

Government-Sponsored Entities in Competition Against Private Business

March 25, 2015

Last week the American Bankers Association Center for Agricultural and Rural Banking unveiled its annual Farm Bank Performance Report. The report showed that 2,036 banks qualify as farm banks, which are those banks whose ratio of domestic farm loans to total domestic loans is greater than or equal to the industry average. This represents nearly one-third of all banks in the United States! These banks showed a 13.6 percent increase in farm lending during 2014, extending $94.6 billion in farm loans, representing over half of the total borrowings of farmers and ranchers in the United States. Interestingly, small loans — mostly under $100,000 — made up over half of the loans extended by banks.

Those banks have enjoyed a decade of a bullish agricultural economy, and the data reflect how well banks have fared. Over 97 percent of farm banks were profitable in 2014, and 65 percent reported an increase in earnings for 2014. Equity capital, the highest form of capital, increased by 4.8 percent to $46.2 billion. Perhaps most telling is that noncurrent farm loans declined to a pre-recession level of 0.5 percent of total loans. Employment at farm banks increased by 2.8 percent, equaling about 2,300 new jobs, for a total farm bank employment level of 89,000 rural Americans.

Obviously, many banks would love to be more involved in this area of lending. So, what are the organizations making up the other nearly one-half of agricultural credit? While I do not have that specific information, it is easy to speculate that the largest competitors would likely be those entities affiliated with the Farm Credit Services, the Farm Credit Banks (FCBs). Those entities enjoy regulatory advantages, significant taxation advantages and the implied guarantee of the federal government. It is a wonder why the FCBs are permitted to maintain these advantages, while competing in the retail marketplace against tax-paying, privately owned banks.

Even above and beyond the big-name, big-dollar nonfarm loans that have been made to Verizon Wireless, AT&T, U.S. Cellular and Frontier Communications, I regularly hear from bankers dismayed about loan terms offered by Farm Credit Banks that cannot be matched in the for-profit marketplace. This is outrageous. Our federal government was not founded to be in competition with private business. Our forefathers would spin in their graves at the thought that a government-sponsored enterprise (GSE) is competing directly against private business. On the other hand, our forefathers might have seen the wisdom in having the federal government support the private marketplace through a GSE such as the Federal Home Loan Bank System (FHLB). The FHLB system works at the wholesale level to provide better purchasing power to lower the cost of bank-provided mortgages in the retail marketplace. Both private banks and mortgage borrowers benefit from this GSE support.

By contrast, the Farm Credit Bank system picks winners and losers. The winners are those large companies mentioned above which are able to borrow at below-market rates, plus those farmers, ranchers and many nonfarm-related businesses which are privileged to borrow on favorable terms. The farmers, ranchers and nonfarm businesses, which are not able to borrow at those favorable terms, are losers relative to not receiving tax-break subsidies … but ultimately they are winners when they choose the banking system and benefit from its quality offerings. All taxpayers are losers, in that they are forced to support a system that discriminates in the marketplace, while at the same time competing against for-profit private businesses. Banks, too, clearly are big losers, as they are cut out of many loans that represent their very lifeblood to survival. Most banks in this country are small businesses themselves, with an average of $200 million in assets, 45 employees, four branches and four ATMs. These are the banks which are primarily the farm banks.

The question becomes, why is our federal government policy in favor of a government-sponsored enterprise that competes against thousands of small businesses? It is perplexing to me.

– S. Joe DeHaven

Americans for Peace, Prosperity and Security: Seeking a Safer World

March 18, 2015

Last week I was invited to attend a luncheon to hear former Congressman Mike Rogers of Michigan speak. Rogers is a Republican who formerly chaired the House Intelligence Committee. He has spent more than 20 years in top security positions with the U.S. Army and the FBI. He has served two U.S. presidents and has worked worldwide with countless foreign leaders, diplomats and fellow intelligence professionals.

Mr. Rogers expressed concern about our place as a world leader at this historic juncture. He said he does not believe that we are doing the right things, taking the right positions or implementing the right strategies. He fears we are leaving our allies “out to hang,” and we are negotiating poorly with our enemies. While I am not more knowledgeable about international affairs than any other average citizen, I do know enough to be scared … and Rogers certainly paints a very scary picture.

To address this issue, Rogers has accepted the honorary chairmanship of the Americans for Peace, Prosperity and Security (APPS). The organization’s mission is simple, yet difficult, to implement. The foreign policy challenges facing the next president of the United States on Day One will be more complicated than ever before. Understanding the challenges and benefits of American leadership around the globe will be crucial for our next president. National security, international engagement and the U.S. defense posture will have to be dealt with in the first months of the next presidency. With no time for on-the-job-training, a fulsome debate must begin now.

Therefore, according to the APPS website, the organization seeks to do the following to shape the 2016 presidential race,

  1. Raise the level of debate on the most important issue facing the country and move candidates beyond just rhetoric and talking points.
  2. Enhance the knowledge base of citizens in the early states to help elect a President who supports American engagement and a strong foreign policy.

These goals lead to the APPS mission statement: “To educate citizens on the strong national security and foreign policies necessary to provide for American peace, prosperity, and security in this century.”

APPS will host forums and town-hall meetings in the designated states where educated volunteer activists will push candidates to fully outline their policies on major national security issues such as Iran, Russia, China, ISIS, space and cyber. APPS will be the only organization connecting top foreign policy and business leaders with the grassroots activists in early presidential contest states, driving the debate with the candidates. Whether Republican or Democrat, the goal is to prompt candidates to unveil to voters what they will do regarding these important issues.

We all know from news reports that the Middle East is a tinderbox that could explode at any moment. Russia is once again flexing its muscle trying to put the Soviet Union back together. China continues to grow its gigantic economy and is now turning its attention to more international issues. I believe that APPS and Mr. Rogers have the potential to move the upcoming presidential race away from well-rehearsed sound bites to an intelligent discussion of these truly important issues. We all should hope so!

– S. Joe DeHaven

Arbitration: A Fair and Worthy Alternative

March 11, 2015

When drafting legislation, nearly every interest tries to provide language that will allow for disputes to be settled outside of court. Though our system of laws — and courts to interpret those laws — works well for both for businesses and consumers, it is expensive to appear before a court. There are multiple moving parts in a courtroom … all of whom need to be paid.

An alternative to the court system to settle disputes is arbitration. Many contracts require arbitration, or at least provide for it as an alternative. Financial service providers, including banks, often include such clauses in their contracts. This week the Consumer Financial Protection Bureau (CFPB) released the results of a three-year study, mandated by the Dodd-Frank Act, that is critical of arbitration clauses. CFPB Director Richard Cordray stated: “Our study found that these arbitration clauses restrict consumer relief in disputes with financial companies by limiting class actions that provide millions of dollars in redress each year. We found that it is rare for a company to try to force an individual lawsuit into arbitration, but it is quite common for arbitration clauses to be invoked to block class actions.”

The CFPB study found that, of the more than 1,000 cases filed through the American Arbitration Association in 2010 and 2011, consumers obtained debt relief or forbearance of about $400,000 total, while companies had rulings awarding $2.8 million. On class action suits, however, CFPB estimates that 32 million consumers were eligible to share $2.7 billion, after attorneys took 18 percent.

Yet according to research conducted by Christopher R. Drahozal and Samantha Zyontz, “Creditor Claims in Arbitration and in Court,” arbitration provides similar or better monetary rewards to court trials. Furthermore, studies have found that consumers prevailed more often in arbitration than in court.

Another study, “Survey of Arbitration Participants,” conducted by Harris Interactive, concluded that the majority of consumers who had engaged in arbitration found it to be faster (74 percent), simpler (63 percent) and less expensive (51 percent) than legal proceedings. In fact 66 percent of consumers said they would likely use arbitration again.

According to the American Bankers Association, arbitration is a streamlined legal procedure that has been in use for hundreds of years to resolve legal disputes in a manner that is fair and less expensive than litigation. An arbitration hearing is administered and managed by an independent third party for two or more parties with a legal dispute. The parties present their arguments and evidence to an arbitrator, who then decides the case.

Arbitration is regulated by the Federal Arbitration Act and a variety of state laws. In 1995 the U.S. Supreme Court recognized arbitration’s benefits: It is less expensive than litigation; the rules are simpler; the process invokes less hostility; it does not disrupt dealings among the parties; and it is more flexible in scheduling. In 2011 the Supreme Court ruled that the Federal Arbitration Act preempts state laws that prohibit contracts from disallowing class-wide arbitration.

Director Cordray may have his work cut out for him if he tries to ban banks from using arbitration clauses, since the U.S. Supreme Court has already ruled on the issue. Case closed.

– S. Joe DeHaven


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