GSB: Success Breeds Success in the Banking Community

February 25, 2015

One of the pleasures that I enjoy as a result of my position with the Indiana Bankers Association is a seat on the board of trustees of the Graduate School of Banking at the University of Wisconsin in Madison (GSB). This outstanding banking school was founded in 1945 by a group of bankers, and I am proud to have been a 1987 GSB graduate. Like every other graduate I have ever visited with, the school had a profound effect on my career and life. I am honored to have been elected chairman of the board of trustees for the 2014-15 board year, and more honored still that I am the first of 20,000 GSB alumni to serve as chairman in the school’s 69-year history.

GSB is unique among other graduate schools of banking, with much of the board made up of the state bank trade association executives from the states centrally located in the United States. It also is the only school of its type that has a full-time staff, which has led to the provision of many other educational services delivered in concert with those state bank trade associations. Another facet separates GSB from similar schools: the establishment of two groups which have been integral to its success. First is the Curriculum Advisory Committee (CAC), made up of the section leaders for each discipline taught at the school. This committee meets annually to review every aspect of the curricula and to review the performance ratings of each instructor. Every person who sits on this committee is interested purely in providing the best learning experience for the banking students who are the future leaders of the banking business for the next 30+ years. The candor of CAC members regarding what needs to be changed, and how, is thoughtful and thorough ‒ as it must be to attain the goal of providing the best learning experience for GSB students.

The other group that sets GSB apart is the Banker Advisory Board (BAB). This board is made up of one alumnus banker from each of the 17 states whose state bank trade association is a sponsor of the school. The charge of the BAB is to help with the marketing of the school to the banks and interested students in each state. This dedicated group of alumni work diligently year-round to discuss with other bankers the attributes that are unique to GSB. They encourage current students to complete assignments and to stay on course to graduate. The BAB met late last week and was kind enough to include me in its deliberations. The enthusiasm of these board members for GSB is contagious, and no doubt contributes to their success in helping students to succeed.

There are about six graduate schools of banking throughout the United States. All of them are dedicated to providing a broad management perspective to young bankers. All of them provide outstanding programming and instructors to deliver to students. It is very important that young bankers who aspire toward a lifelong career in banking attend one of these graduate schools to round out their preparation to become industry leaders. While I will admit to being biased toward GSB, what is important is that these opportunities exist, and that many talented individuals dedicate hours beyond count to ensure that the curricula remain relevant. These volunteer professionals also make the effort to reach out to potential students, so that the future of the banking business remains in good hands. Thank you to the GSB staff, CAC, BAB and my fellow trustees for their dedication and hard work to keeping GSB integral to the success of banking!

 – S. Joe DeHaven

Creativity Sparks Innovation

February 18, 2015

Last week I had the privilege of attending the American Bankers Association National Conference for Community Bankers. Over 1,300 bankers, spouses, exhibitors, friends and staff participated in this outstanding event. The theme, “Banking in a Brave New World,” focused on cybersecurity issues and on product and thought innovation. The cybersecurity discussions seemed particularly timely, given that one week prior, Anthem Inc., the second largest provider of health insurance products in the United States, had announced that it was the target of a massive security breach that could compromise the personal data of 80 million individuals. I have written before about cybersecurity concerns and the potential for serious, inestimable damage that may be wrought over the next several years, until government and business can collaborate to find solutions and bring the perpetrators of such crimes to justice.

What I have not spent much time writing about is banking innovation. Frankly, seeing this topic appear on a conference agenda was encouraging. We have expended so much energy in the past several years dealing with the financial crisis and inappropriate responses to it, that we have not been looking to the future. Giving innovation a prominent role in this national conference seems like a turning point for the community banking industry. It made the statement that we have survived the past, and now it is time to focus our attention on improving our performance for the future. It is truly a welcomed change.

There is no doubt that bankers must begin to think about what products they need to provide for the customer of the future. Much time and attention has been devoted to the emerging millennial generation, which this year will surpass the baby boomer generation in numbers. But what products and services will millennials need and want? Have competitors from technology companies swooped in during the past few years to capture much of this generation? If so, what can banks do to earn the business of these consumers in the future?

One speaker, Seth Godin, was particularly honed in on these issues, but not from a traditional business approach. Godin is a best-selling author and marketing provocateur, and has been dubbed “the ultimate entrepreneur for the Information Age” by Businessweek magazine. Urging attendees to think creatively, he shared examples of fresh thinking about product development and marketing. Godin suggested that community bankers must be creative in order to succeed in the future. Case in point: He told the story of a group of innovators who one day were discussing different ways to change up how things were being done. One person asked why socks were sold in sets of two, when socks are so easy to lose ‒ leaving behind a mismatch. The obvious answer, even for this group of innovators, was because we have two feet, and the idea was readily dismissed. Yet the questioner couldn’t let go of the topic, and he began to play with the idea of creating a package of three socks, intentionally mismatched. He conducted market research and found that “tween girls” ‒ ages eight to 13 years old ‒ actually enjoy wearing socks that do not match and would be likely to buy them, mismatched but coordinated, in sets of three. As a result, the appropriately named LittleMissMatched company was formed in 2004. Not only did the socks sell well, but product offerings have expanded into other mismatched inventory such as clothing, bedding and accessories. Crazy idea, huh?

As bankers, we are often closed to the very ideas that could set us apart. Much of the conference last week was about the need to set ourselves apart in order to rise above and prosper into the future. Well done, and thank you, ABA!

- S. Joe DeHaven

Addressing Debt Issues

February 11, 2015

Recently McKinsey & Company issued a report, “Debt and (Not Much) Deleveraging,” that states: “After the 2008 financial crisis … it was widely expected that the world’s economies would deleverage. It has not happened. Instead, debt continues to grow in nearly all countries, in both absolute terms and relative to GDP. This creates fresh risks in some countries and limits growth prospects in many.” The report continues, “Since 2007, global debt has grown by $57 trillion, or 17 percentage points of GDP … In advanced economies, government debt has soared and private-sector deleveraging has been limited.”

The report identifies three primary causes. First is government debt; next is household debt, particularly housing prices in Northern Europe and some Asian countries; and the third cause is the quadrupling of China’s debt within the past seven years, as led by real estate and shadow banking. Some of this debt increase has been desirable, as developing countries account for 75 percent of the corporate and household debt increases. In other words, citizens living in developing countries have seen some economic improvement, allowing households to assume more debt.

However, much of the new debt comes from governments, particularly those of Japan, the United States and most of Europe. Sadly, that trend is expected to continue. I have often written about my frustration for what my generation is leaving our children and grandchildren, namely the largest per-person government debt load ever recorded. With a per-person debt load of over $53,000 in the United States, contrasted to a load 50 years ago of $2,000, how will the next couple of generations ever pay it off?

I suppose we can take some solace in knowing that there are countries much worse off than the United States. Japan’s debt-to-GDP ratio is 400 percent. Ireland is at 390 percent. Spain has a 313 percent ratio. The United Kingdom’s is 252 percent, while the United States is at 233 percent. These debt ratios do not include unfunded liabilities, such as Social Security promises. But there are also countries in much better shape regarding this important measurement. China is at 217 percent and, per the quadrupling of its debt as mentioned above, is increasing rapidly. Mexico is at a scant 73 percent, and the lowest is Argentina at 33 percent. Some of the countries at the lower levels suffer from many other problems: Debt just doesn’t happen to be one of them.

Specifically to the United States, there is some hope. That hope comes from our energy independence due, in large part, to the advances that allow for inexpensive fracking operations. We also enjoy the most efficient and effective agricultural system that allows for inexpensive food, we have access to sizable fresh water resources, and our government is stable and supports a currency that is the de facto worldwide financial exchange. We have much to be thankful for, yet we still have issues to address, such as high poverty levels and the continually growing gap between those who are financially resourced and those who barely subsist.

I would highly recommend that reading through this excellent report would be time well spent. Both the full report and an executive summary are available at the McKinsey & Company website.

- S. Joe DeHaven

Monumental Moment for the CFPB

February 4, 2015

This past week was one of monumental precedence. The Consumer Financial Protection Bureau (CFPB) proposed several changes that will increase the number of banks that will be able to benefit from the CFPB rules defining small creditor and rural or underserved area exemptions related to its mortgage rules. Both the Independent Community Bankers of America and the American Bankers Association, as well as their respective state affiliates, had been meeting with the CFPB to explain the problems related to its current definitions.

Specifically, CFPB has put out for public comment through March 30 a proposed rule that covers the following areas:

  1. Expands the “small creditor” definition. From the current threshold of 500 first-lien mortgages per year, the definition increases to 2,000 first-lien mortgages per year, excluding mortgages held in portfolio. This is available to banks with less than $2 billion in assets.
  2. Expands exceptions for rural lenders. The proposal would change the definition of “rural” mortgage lenders to include any census tracts that are not in urban areas, as defined by the Census Bureau.
  3. Exempts more banks from escrow requirements. Changing the small creditor definition increases the number of banks that are exempt from mandatory escrowing requirements.
  4. Extends balloon-payment loans. With the change in the small creditor definition, the number of banks that can make balloon-payment loans as Qualified Mortgages increases substantially.

Bear in mind that these are proposed changes being released for public comment. Because some consumer advocacy groups may not want these exemptions to be increased, it will be very important that banks, particularly those that are affected by this proposal, provide the CFPB with comment letters. These letters should be specific as to the effect these proposals will have on customers, communities and banks’ ability to serve these constituencies. More will be forthcoming in the next few weeks regarding content of these letters.

This is a major breakthrough for the CFPB. Its charge is to protect consumers from financial abuse. This is one of the first times that banks and the CFPB have agreed on where the line between consumers and credit providers, in this case small banks, should be drawn. While it remains early in the process, it provides some optimism that the voice of bankers will be heard as issues unfold in the future.

- S. Joe DeHaven

State of Disunion

January 28, 2015

Last Tuesday, President Obama delivered his sixth State of the Union address, proclaiming our union to be in good shape. While there are arguments to be made in his favor, our current growing national debt and record-low percentage of available workforce with jobs seem to indicate otherwise. At least in this address, President Obama did not declare warfare on the banking industry, as he did in his 2009 Address to a Joint Session of Congress. That verbal assault back in February 2009 may have made him look like the everyman president that he has sought to be, but it also likely extended the Great Recession, due to the cover it provided Congress to pass the Dodd-Frank Act. Since its passage, DFA has cost the banking business billions of dollars in complying with the largest, most invasive banking legislation ever enacted. Even the changes following the Great Depression pale in comparison to the changes wrought by the Dodd-Frank Act. While much of post-Depression reform implemented in the 1930s brought about positive change – such as the creation of the Federal Deposit Insurance Corp. and expansion of the Federal Reserve System – I doubt the same will ever be said of Dodd-Frank.

I watched all of President Obama’s speech last week; overall, I was dismayed. The president announced that he would veto any bill that might be “unraveling the new rules of Wall Street,” referring to proposed fixes to the Dodd-Frank Act. The reality is that DFA was an act of legislative overreach committed during the height of the financial crisis, when Democrats were in the majority in both the Senate and House of Representatives, and Mr. Obama was sitting in the president’s chair. Consequently DFA received very little debate, and very little input from the banking industry. The resulting bill became a free-for-all for anyone with a grudge against banks, as evidenced by the Durbin Amendment that placed government controls on the pricing of transactions charged to retailers by banks to process debit card payments. Many provisions of the Dodd-Frank Act, if not most, unfairly punished community banks, which clearly had not created a financial crisis that threatened the world. How can President Obama now take a position that he will veto any bill that promises to change Dodd-Frank, when its rules have made community banks suffer massive harm from loss of revenue streams and the crushing burden of DFA compliance rules?

A major concern about this year’s State of the Union address is that it was delivered in the wake of a tax code fact sheet distributed three days earlier by the White House. The fact sheet laid out a chilling plan to demonize banks and bankers by imposing a tax on large banks – those with assets over $50 billion – essentially to punish them for the financial crisis. These banks already have paid their fair share in fines and interest, often for the actions of subsidiaries that they were forced to buy well after the financial crisis had occurred. Obama has proposed this tax in every budget he has submitted. This time, to make it more appealing to the citizenry, Obama is tying it to pay for community college educations for all students who maintain a certain grade point level. This proposed tax has never before gotten the attention of Congress, and it is highly unlikely that it will get any traction in this one.

On a brighter note, however, in the State of the Union address, President Obama did mention the need for more information-sharing to combat the common enemy of business and government, known as cybersecurity breaches. The banking industry welcomes the support of new cybersecurity rules that will bring all businesses up to the level required of banks, will place financial responsibility on the guilty party, and will create an environment in which we can partner to share information that allows all to find solutions.

By and large, last week’s State of the Union looks like more of the standoffs and gridlocks that we have come to expect from Washington, D.C. I certainly hope that I am wrong, though, and that the president and the Republican Congress will find common ground to deal with the many pressing issues that need to be addressed.

- S. Joe DeHaven

Poverty Awareness Week

January 21, 2015

Guest blog by Laura Wilson, IBA Vice President-Communications

Next week, Jan. 25-31, is Poverty Awareness Week in Morgan County, Indiana. Established by member organizations of the Morgan County Bridges Out of Poverty initiative, the week is set aside as a public relations campaign to raise awareness of the impact of poverty. Defined as “doing without things we need,” poverty will be the theme of daily messaging throughout Poverty Awareness Week about the struggles of those who lack food, shelter and other necessities. To further heighten awareness, wristbands imprinted with “Poverty Hurts!” are being given to all students of Morgan County schools, courtesy of Home Bank, Martinsville, a member of the Morgan County Bridges Out of Poverty initiative.

Poverty does hurt, indeed. It hurts not only those who are impacted directly, but it can have a devastating ripple effect on entire communities. The issue of abandoned housing serves as a stark example. The reality is that an abandoned home represents harm to the family that once lived there, plus it poses a safety threat to its neighborhood and sharply devalues properties within a wider geographic area. Abandoned housing is more than an outward sign of an inner problem; it worsens an existing level of poverty through a vicious cycle of economic consequences.

In Indiana, abandoned and vacant housing is of deep concern, due to a lengthy foreclosure process that stalls resolution. There is hope, however, through a large coalition of interested parties – varying from consumer advocates to area businesses to the banking community – eager to eliminate unnecessary delays from the tax sales process. In fact a current Senate bill, now awaiting a committee hearing, shows promise in helping to remove some of the impediments to the process. The goal is to more quickly rehabilitate abandoned properties, enabling these homes to return to viable ownership.

The Indiana Bankers Association applauds the efforts of Home Bank and other members of the Morgan County Bridges out of Poverty initiative, as well as the full Indiana banking community for banks’ continual outreach in addressing poverty issues. Poverty Awareness Week in Morgan County is a reminder of the harmful effects of poverty, yet it also brings attention to the benefit that comes when diverse members of the community unite for the common good.

Off to a Running Congressional Start

January 14, 2015

The past week ushered in a new Congress that hit the ground running. Already it has put a bill on the president’s desk for signing that shows some promise for the banking industry. The bill was the extension of the Terrorism Risk Insurance Act (TRIA), which originally was passed by Congress and signed by then-President George W. Bush following the brazen attacks of 9/11. The bill provides a backstop for the property insurance industry for acts of terrorism that result in losses above a set amount. Fortunately the backstop has never been tapped, but it has provided confidence to both the property and casualty insurance industry and to those who construct and own large buildings that could be terrorist targets. It is an important product, also, for the banking businesses which finance many of those potentially targeted buildings.

Perhaps of equal importance to bankers in the TRIA reauthorization bill are two unrelated provisions. The first is a clarification that end users of derivatives are not required to post margin for uncleared swaps. The other requires that at least one member of the Federal Reserve Board must have experience in community banking on a going-forward basis. In related news, last week President Obama nominated former Bank of Hawaii CEO Allan Landon to fill an open seat on the Federal Reserve Board. In the announcement, the president touted Mr. Landon’s experience in community banking, suggesting that he will fill that requirement. However the president has not signed the bill, so that requirement does not exist today. The question is whether Landon will meet the qualifications to be the representative for community banking, since Bank of Hawaii, at $14 billion in assets, is the 87th largest bank in the United States. It could get interesting, as there is one more open seat to fill. If the president signs TRIA before filling that last seat, will he have to appoint another community banker who better fits the requirements? There may be more discussion about this in the coming weeks but, as it now appears, all agree Mr. Landon meets the requirements.

In other news this week, Housing and Urban Department Secretary Julian Castro reduced the insurance premium for FHA-backed loans from 1.35 percent to 0.85 percent. This reduction is designed to allow more people to qualify for mortgage loans. Of course, it also will qualify those on the fringes, which is concerning, because this is exactly the kind of public policy decision that triggered our descent into the recent financial crisis. Ironically the American Bankers Association released its quarterly Consumer Credit Delinquency Report, which showed that delinquencies were reduced in seven of the 11 categories it tracks. However another report by the Wall Street Journal regarding auto loans showed that those individuals with credit scores under 620 were experiencing increases in delinquencies. That strikes me as a warning against the HUD reduction. Republicans in Congress are not happy about the reduction in the HUD rate. This, too, could get pretty interesting in the next couple of weeks.

It was an exciting week and a great start to 2015. Banking was able to gain some positive traction from the TRIA legislation. Congress showed that it can perform by passing a much-needed bill through both the House and the Senate in a week’s time. There also is cause for hope on other issues facing the banking industry that need help from Congress, but we will all need to work together with Congress to get those issues dealt with. It should be a fun year!

- S. Joe DeHaven


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