Good Timing to Be on the Hill

September 28, 2016

Guest blog by Amber R. Van Til, IBA President

Every year, rain or shine, in good times or bad, members and associate members of the Indiana Bankers Association trek to our nation’s capital for the IBA Annual Washington Trip. We go for several reasons – to meet with legislators, to hear firsthand from regulators, to renew our connections with the American Bankers Association and the Independent Community Bankers of America, and to network with each other. Our primary purpose, though, is to make ourselves known on Capitol Hill, so that the Indiana banking community has a voice.

This past week, the IBA is proud to have taken a contingent of nearly 70 people to Washington, DC, with some 40 bankers who took time from their schedules to join us. Like all of our DC trips, it was two solid days of tightly packed scheduling, with the goal of working in as much meeting, greeting, listening and speaking as possible. We were not disappointed. IBA members were warmly welcomed throughout the whirlwind schedule.

The timing of this year’s trip was especially pertinent, due to recent negative press surrounding industry cross-selling practices. Our bankers were able to share sentiments with policymakers and regulators that there is no place in the business of banking for fraudulent activities, and to encourage thoughtful regulatory reform. The keyword is “thoughtful,” however, as we must avoid a backlash of excessive regulatory rules that would further impede banks in their missions to serve their customers efficiently, effectively and profitably. That would be a terrible result from this unfortunate situation. The voice of banking professionals on the Hill, then, is critical in giving guidance to appropriate response.

Imagine if this year had been the first time our bankers met on the Hill with legislators and regulators. Would their voices have been heard? Thankfully it’s a moot point, because our bankers have been making this trip year after year, speaking on behalf of the industry and the professionals employed by Indiana’s taxpaying, depository financial institutions. This long-term relationship-building has made Indiana bankers well known and highly regarded in the nation’s capital. In the past couple of days, Indiana bankers have spoken, and their voices have been heard.

Thank you, to the IBA-member bankers and service providers who joined us on the 2016 IBA Annual Washington Trip. We appreciate your dedication to the industry and to the communities you serve.

A Compelling Case for Political Reform

September 21, 2016

Last week I felt somewhat redeemed for my belief that the largest impediment to a more robust economic recovery is a combination of inaction and inappropriate action by the federal political system. This includes our election system, the rules of Congress, administration, the acrimony between the two major political parties, and more. The feeling of redemption arrived from a new report issued by the Harvard Business School 2016 Surveys on U.S. Competitiveness, titled “Problems Unsolved and a Nation Divided, the State of U.S. Competitiveness 2016.” Authored by Michael E. Porter, Jan W. Rivkin, Mihir A. Desai, with Manjari Raman, the report concludes that the largest impediment to a more robust economy in the United States is the failure of government ‒ primarily the federal government.

The report cites an Eight-Point Plan, put forth in 2012 by the Harvard Business School:

  1. Simplify the corporate tax code, with lower statutory rates and no loopholes;
  2. Move to a territorial tax system, like all other leading nations;
  3. Ease the immigration of highly skilled individuals;
  4. Aggressively address distortions and abuses in the international trading system;
  5. Improve logistics, communications and energy infrastructure;
  6. Simplify and streamline regulation;
  7. Create a sustainable federal budget, including reform to entitlements;
  8. Responsibly develop America’s unconventional energy advantage.

The report identified two other weaknesses that are primarily controlled by state legislatures. Those are public education and health care.

The authors opined that the most important area to deal with to impact the economy positively is tax reform, both corporate and personal. Additionally the survey results indicate that ‒ whether Democrat, Republican or neither ‒ 95 percent of those surveyed were supportive of tax reform: specifically, reducing the corporate statutory rate by at least 10 percent, moving to a territorial tax regime, and limiting the tax-free treatment of pass-through entities for business income. There was no consensus on personal tax reform, beyond the need for discussing it.

The U.S. political system is in need of revamping. The polarization between the two major parties has now resulted in 42 percent of those surveyed stating that they are independents, more than those claiming to be Democrats or Republicans. The majority believe that the polarization is a root cause of the failure to build consensus to create an atmosphere where sensible economic policy can be reached.

There is strong support for political reform among both Harvard alumni and the general public, but no clear agreement on what that might entail. Many times over the past six years, this column has expressed these same frustrations. Whether from a Washington policy level or navigating through the personal mortgage process, there is an obvious disconnect as to what makes an economy run smoothly.

Perhaps this study can act as a catalyst to spur political cooperation and the type of leadership that we the people expect and deserve. Only with true leadership can we hope to regain the economic luster that we have historically enjoyed. Please take some time to read at least a summary of this survey, if not the full report, for a deeper understanding of the issues surrounding political reform.

– S. Joe DeHaven

Two Events Involving Federal Reserve Banks and the NCUA

September 14, 2016

Last week two significant events occurred that potentially could affect every bank in the country. First, there was a meeting of a subcommittee of the U.S. House Financial Services Committee to take testimony on the importance of having bankers serve on the boards of the 12 regional Federal Reserve Banks. This issue surfaced recently from Sen. Elizabeth Warren, who contends that having bankers serve on these boards is a conflict of interest. Testifying for the banking industry and the Federal Reserve Boards were Jeffrey Lacker, president and CEO of the Federal Reserve of Richmond, Virginia; Esther George, president and CEO of the Federal Reserve of Kansas City; and Indiana’s own Bob Jones, chairman and CEO of Old National Bank, Evansville. I have heard Lacker and George speak before, and both are very intelligent and thoughtful people. Jones, of course, is well known in Indiana as the outstanding leader of Old National Bank, the largest bank headquartered in Indiana. He also is a former director of the Federal Reserve Bank of St. Louis, serving from 2008 to 2013.

Mr. Jones’ testimony included the following: “As representatives of our region, we serve a limited yet crucial role which entails providing fine-grained input on local economic conditions and contributing to the business side of the bank, including management, strategic planning and audit, which summon up unique expertise of bankers. Not only do bankers support a diverse range of individuals in our role as community catalysts, we’re on the front lines every day helping our clients manage and grow their businesses. Over time, this relationship provides us with vital insights about how Main Street Americans truly view the economy. We have a moral obligation to make sure all of our communities are heard and as we sit on Fed boards, we talk to our communities to make sure those voices are heard. We’re one of the few industries that see everything.” Ms. George added: “Through the regional reserve banks, private citizens from diverse backgrounds and from the largest to the smallest communities, have input into national economic policy. Altering this public-private structure in favor of a fully public construct … risks putting more distance between Main Street and the nation’s central bank.”

Bravo for these individuals for speaking up about the importance of having bankers serve on these regional boards. It would be highly illogical to eliminate the very individuals ‒ bankers ‒ who bring the most local knowledge to these regional boards. We appreciate Mr. Jones, Ms. George and Mr. Lacker for their leadership on this issue on behalf of the banking industry and the economy at large.

The second significant event that occurred last week was the filing of a lawsuit by the Independent Community Bankers of America against the National Credit Union Administration, in an effort to block a recent regulatory change enlarging the amount of commercial loans that a credit union may make. The suit, filed in The U.S. District Court for the Eastern District of Virginia, alleges that the NCUA overhaul of its member business lending rules violates both The Credit Union Membership Access Act of 1998, which limits member business lending to 12.25 percent of total assets, and The Federal Credit Union Act. While the suit will take months, if not years, to wind its way through the court system, it is encouraging to see action taken that may harness some of the overreach frequently displayed by the NCUA. Thank you, ICBA leaders, for taking action on this important issue.

Bankers and banking advocates throughout the nation continue to promote practices that best serve the economic needs of individuals and communities. The Indiana Bankers Association appreciates these efforts and continues to do our part to fulfill our mission: to advocate for and sustain an environment in which banks can succeed.

– S. Joe DeHaven

The Election Countdown Begins

September 7, 2016

This great nation is now coming off of the Labor Day weekend, often thought of as the end of summer. Kids are back in school, summer road trips are a memory, and thoughts are turning to fall activities, including football season, leaf-raking and holiday planning. Those of us who operate in the political world know that, at least every four years, we can count on people turning their attention to upcoming elections ‒ particularly presidential, gubernatorial and U.S. congressional races. Election polls take on more meaning, since the general public is starting to pay closer attention.

Those of us who engage in the political world year-round begin to salivate at the thought that everyone is now interested in this arena, and the 2016 presidential election gives plenty to chew on. Republican nominee Donald Trump, despite efforts by his campaign staff, resists becoming more like a traditional candidate, and at times contradicts himself. Yet his nontraditional approach also appeals to the anti-establishment mood of the country.

Democrat Hillary Clinton, who by background and experience should be running away with this election, cannot seem to shake her past. Accusations of insider favors and questionable email activity have plagued her campaign virtually from the beginning. How else could Bernie Sanders, a self-proclaimed Socialist, have fared so well in the Democratic primary race against Clinton?

Those of us who have been following these campaigns closely for well over a year wonder how the general public will respond to these two candidates. Or instead, will a third-party candidate make inroads? Just within the past couple of weeks, there is more information out about Libertarian presidential candidate Gary Johnson and his running mate, William Weld. Will the message of these two former Republican governors resonate with the general public? It could happen, considering that both Trump and Clinton are viewed unfavorably by many voters.

Here in Indiana, this year we have a U.S. Senate race that has seen many surprises and now pits U.S. Rep. Todd Young against Evan Bayh, former governor and U.S. senator. Young had been heavily favored ‒ right up to the time that Bayh entered the picture. The latest poll shows Bayh with a 7 point lead over Young. Yet Indiana still leans Republican, so the race may tighten up. Polling data certainly will be watched carefully.

The race for Indiana governor also has taken some turns. The John Gregg versus Mike Pence rematch got derailed when Donald Trump tapped Pence as his vice presidential running mate. The Indiana State Republican Party Central Committee was then tasked with finding a replacement for Pence and placed Lt. Gov. Eric Holcomb on the ballot. Holcomb is not well known outside of inner political circles ‒ having only served as lieutenant governor since March ‒ and he has a short time to introduce himself to the public. Will it be long enough? Democrat Gregg appears to be running a much better campaign than he did four years ago. However, everything up until now has been like practice. The real contest begins following Labor Day.

Unlike the Indianapolis Colts, who can forget preseason losses once they start the official season next week, political candidates must build upon the foundations they have already laid. The difference is that more people will be following, and what happens from here until Election Day is what will matter the most. For those of us who are political junkies, it just doesn’t get any better!

– S. Joe DeHaven

FHLBS Developments

August 31, 2016

For the past 25 years, I have been a fan of the Federal Home Loan Bank System (FHLBS). Originally established exclusively for the savings and loan institutions to have a secondary market, the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) opened membership to commercial banks. Since that time, nearly every commercial bank in the country has joined all of the savings and loan institutions as members. Membership has also been extended to credit unions and insurance companies. Having this variety of organizations adds to the financial power of the FHLBS to obtain the lowest cost of funds available on behalf of its member institutions.

Today 11 banks make up the FHLBS, and we in Indiana are fortunate to have one of them headquartered in Indianapolis. Over the past 25 years, the FHLBS regulator, the Federal Housing Finance Agency (FHFA), has expanded the collateralization rules available on a bank-by-bank basis. Initially, first mortgages were the only collateral that the FHLBS could accept from its members to secure advances made to the members by the individual FHLB. Last week, however, the FHFA published for comment a rule that, among other provisions, would allow all of the FHLBS banks to accept additional classes of collateral without prior individual approval. There are checks and balances that would require an individual bank to discuss the acceptance of new forms of collateral ahead of that acceptance with the FHFA.

These forms of new collateral proposed include “other real estate collateral” and “community financial institution collateral.” Other real estate collateral includes commercial real estate loans, commercial mortgage-backed securities and home equity lines of credit. Community financial institution collateral includes small business loans, small farm loans and community development loans. The addition of these categories of loans to be utilized by community banks will help relieve some of the liquidity concerns of bankers. Additionally it will give the FHLBS even more flexibility than it displayed so successfully during the 2008 financial crisis.

I realize that FIRREA was an overreaction to the savings and loan crisis of the 1980s and added significant regulatory burden to all financial institutions. However, from the standpoint of opening up and thus strengthening the FHLBS, FIRREA was a good thing. In addition FIRREA established the affordable housing and community investment programs operated by all FHLBs. Many of the member financial institutions have used these programs to lift up their communities, while at the same time fulfilling Community Reinvestment Act goals.

The FHLBS is currently reviewing the full proposal, which includes aspects that I have not addressed here. As with any regulatory change, there will be good changes and bad changes ‒ and we hope the good outweighs the bad. This has the potential to be an important expansion of the service that the FHLBS can provide to individual members. Once the analysis of the proposal has been completed, it is likely that the Federal Home Loan Bank of Indianapolis will reach out to members asking for support of its position on this proposal. Certainly a strong response from Indiana would be appreciated.

– S. Joe DeHaven

Seventy-Five Days of Political Campaigns

August 24, 2016

With the Olympics wrapped up, and the Republican and Democratic national conventions behind us, prepare for the most aggressive political campaigns in history to begin saturating our every moment. Television, newspapers, the U.S. mail, the internet and even your cell phone will be deluged with political campaign messages. Why? First, there are lots of races of high importance to the future of our country, state and educational systems. Second, candidates’ getting their names out is the top priority in becoming elected. Third, the current rules for campaign finance assures an almost bottomless pit of money available on both sides of the aisle.

Throughout the country, all eyes will be on the presidential race. Never before have we had two candidates who are viewed by voters so negatively. Republican candidate Donald Trump and Democratic candidate Hillary Clinton, compared with previous elections, have relatively little support within their own parties. Will those non-supporters even show up to vote? What will independents do? Will those who backed Democratic candidate Bernie Sanders in the primaries now vote for Hillary, or will they switch to maverick Donald, or perhaps abstain? Will those staunch Republicans who openly oppose Donald Trump actually vote for a Democrat? If ever there was an opening for a third-party candidate, this seemed to be the year, yet no credible third-party candidate has emerged. The Libertarian party has a slate, but apparently it lacks funding and, thus far, does not have enough support to be invited to presidential debates.

Also at the national level, we have an important election in Indiana for the U.S. Senate, pitting current U.S. Rep. Todd Young against former Indiana Gov. and U.S. Sen. Evan Bayh. Both have access to unprecedented cash to fund their efforts. Both have bona fide credentials qualifying them for this office. Will Republican-leaning Indiana favor Todd Young, or will Indiana’s historic affection for Evan Bayh win the race for him?

Switching to the state races, the race for governor is underway between the relatively unknown Eric Holcomb on the Republican ticket and former Speaker of the Indiana House of Representatives and previous candidate for governor, Democrat John Gregg. At this writing the race appears to be a toss-up, and the debates between them could be the determining factor.

The last race I want to cover is for the office of the superintendent of public instruction. Incumbent Glenda Ritz has earned the Democratic nomination against challenger ‒ and newcomer to politics ‒ Jennifer McCormick, who was selected by Republicans. Ritz has been sparring with Gov. Mike Pence for the past four years over the direction and control of education in Indiana. This has made her loved by some and reviled by others. Either way, she has become a lightning rod within state government, and this election will be more of a referendum on Glenda Ritz ‒ much like four years ago, when she defeated incumbent Tony Bennett. While I believe that this should not be an elected office, but instead should be appointed by the governor, it nevertheless will be a race worth watching. Certainly the state representatives and senators are watching carefully, since education is the largest expense in the state budget.

For the next 75 days, we will all be subject to political campaign overload. Freedom isn’t free, and part of the price today is enduring the process. Yet I wouldn’t trade our system for any other on earth. I hope that Americans exercise their right to vote, and do so thoughtfully.

– S. Joe DeHaven

Illogical Conclusions From a Shoddy Report

August 17, 2016

On Aug. 10, the White House Council of Economic Advisors issued a report citing that the Dodd-Frank Act (DFA) has had no impact on community banks. Really? These guys should be stripped of their economist badges if they expect any of us to believe this self-serving administration whitewash. Read this report for yourself, as I will not do it justice. There are far too many “conclusions” reached with incomplete or poorly analyzed data.

The analysis suggests that new regulatory requirements are not causing the declining numbers of community banks because, since 2010 when DFA was signed, lending growth and geographic reach remain strong. These economists might have considered that the economy has been improving since that time; as the saying goes, a rising tide raises all ships. Assuredly the 1,708 community banks that have disappeared since July 2010 would beg to differ with this view that DFA had no bearing on their sale or failure. I talk with bankers regularly, and they tell me that DFA is having a terribly negative effect. Dodd-Frank has been the primary cause of hundreds, if not thousands, of decisions to sell banks. Not all of these sales decisions have yet been consummated, but most will be.

The report also cites the following as a reason for the decline in de novo banks: “macroeconomic conditions in recent years have also contributed to the lower rate of new entry by small banks.” Allegedly this situation also is a primary factor in the decline of banks under $100 million in assets. However, there is no supporting evidence to support this conclusion. More likely is that the drag of DFA on the economy is one of the causes of this macroeconomic condition.

The report goes on to tout all that the administration has done policy-wise to help community banks. Most of these efforts have been initiated by Congress at the pleading of the banking community. More definitive actions that would really help, beyond rolling back much of the unnecessary regulatory burden, are not even mentioned. These actions include putting banks on a level playing field with credit unions and the Farm Credit System, which could entice investors to start more de novo banks.

The report presents five facts “relevant to the debate” (their words, not mine):

  1. Lending by all but the smallest community banks has increased since 2010. The facts to support this ignore that an improving economy has created more loan demand.
  2. Access to bank offices at the county level remains robust. Banks are going to go where people and businesses are, so it will always remain robust.
  3. The average number of bank branches per community bank has increased. Not a brilliant observation. Larger community banks buying smaller community banks has to raise the number of branches per surviving bank, unless those acquiring banks close all of the offices of the acquired bank. Then what would be the purpose of the acquisition?
  4. Over the past two decades, the number and market share of the smallest community banks ‒ those with assets less than $100 million ‒ has been declining. Under this item, the authors cite that the biggest declines occurred before DFA was signed. Actually, there were nearly 20,000 banks and thrifts in 1984, and more than half of them had sold prior to the signing, so there were fewer banks under $100 million to be sold since 2010.
  5. Macroeconomic conditions likely explain a substantial portion of the drop in new bank entry in recent years. The report cites several possible reasons for this trend, but amazingly ignores that the regulatory burden on these potential new entrants might be driving them away.

I have only scratched the surface of this illogical report. I urge you to read it and draw your own conclusions.

– S. Joe DeHaven

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