CBAI leadership calls ‘too big to fail’ industry’s top problem

Robin A. Loftus of Security Bank, Springfield, was graduating from college in 1974 when a group of bankers were incorporating the Community Bankers Association of Illinois. At the association's 35th annual convention in Schaumburg, Ill., Sept. 24-26, Loftus became the organization's first female chairman.. Loftus will be the association's flag bearer on "too big to fail," what she called "the single biggest unresolved regulatory issue." As community banks continue to feel the effects of a beleaguered economy, Loftus and other CBAI officials say now is the time to resolve this issue.. "Too big has failed and it has impacted all of us," she said. "I believe that proper resolution of this issue is essential to the survival of community banks and our nation. Unfortunately, the financial crisis magnifies the problem as regulators hastily arranged mega mergers that resulted in the four largest banks now controlling at least 46 percent of all U.S. banking assets, issuing half of all the mortgages and two-thirds of all the credit cards. . "The time has come to resolve too big to fail, once and for all, for the sake of our children and our children's children. We must do it now, and we must get it right because with our federal debt growing at $3 million per minute and unfunded liabilities now in excess of $100 trillion, our nation cannot afford another financial crisis of this magnitude.". Loftus said there is precedent for breaking up companies that are too big. "We need to break up the too-big-to-fail banks similar to the break-up of Standard Oil a century ago. U.S. Sen. Tim Johnson of South Dakota, a senior ranking member of the Senate Banking Committee agrees. He said we should dismantle gigantic troubled firms instead of bailing them out," Loftus said. . "There's a double standard in terms of treatment of banks," said Robert Wingert, CBAI's President and CEO for its entire 35-year history. "The very largest are being bailed out and saved when they have not only contributed to the financial crisis, they also were party to causing a ripple effect that has gotten a lot of our banks in trouble. And now they are saved while smaller banks are being summarily closed.". Wingert said he believes federal money should be used to help community bankers get through the recession. "Even though we are not fans of bailing out anybody, we are even less enamored with being on the short end of a double standard. We think there is still money available at the federal level that can go toward some of these smaller banks that are troubled, and stave off failure. They did it for the big banks, they ought to find a way to make the terms work for infusing capital or liquidity into these institutions, maybe relax or suspend mark-to-market accounting for others. And let's buy these banks time to get out of this challenging time period that they are in.. "The government needs to step up now and admit to the fact that there has been a double standard and this needs to stop," Wingert said.. Loftus also noted the need to suspend mark-to-market accounting rules, and direct federal aid to community banks.. "It makes no sense to require mark-to-market write-downs of receivables and income securities in a depressed market if the owner can and will hold the asset and collect its income until it pays in full or can be sold for an acceptable price," Loftus said.. "The Financial Accounting Standards Board has perversely destroyed bank capital well beyond economic losses, which has only worsened the financial crisis. Amazingly, FASB is now considering a proposal to apply mark-to-market rules to all financial institutions, and all financial instruments, including loans. Former FDIC Chairman Bill Isaacs reacted by saying that Congress is going to have to jump in and apply some adult supervision to FASB.. "I also believe that the remaining funds of the Troubled Asset Relief Program should be promptly made available to community banks that need them. Thus far, the government has doled out millions of dollars to large troubled banks, and stonewalled most community banks. That is grossly unfair. Here again, we need to ask congress to intervene.". Dennis Hesker, The First National Bank of Okawville, closed out his year as CBAI chairman at the convention. He used his time at the podium to share his frustration over the unequal treatment afforded banks of differing size in the industry.. "We steered clear of the credit default swaps," he said. "We didn't create structured investment vehicles to keep assets off of our balance sheets. We didn't make residential loans to people who couldn't afford them. And although we have adhered to banking fundamentals, virtually all community banks are now feeling the effects of the great recession, as personal and corporate bankruptcies rise and unemployment climbs. As a result, our loan portfolios are under increasing stress, especially loans backed by commercial real estate. To add insult to injury, too-big-to-fail banks are being saved from failure by taxpayer bailouts and government guarantees, often leaving management in place and stockholders intact, while struggling community banks are being summarily closed, locking out management and ownership alike.. "And in appreciation for our conservative management practices, many community banks have endured overly-aggressive and harsh examinations, as if we were the ones who caused the financial crisis," Hesker continued. "While I'll never make excuses for poor management, I do believe that many community banks have been victimized by the excesses of the too-big-to-fail institutions themselves, and that must end now."