Retrospective: 9/11, Great Recession marked first decade of 21st Century in banking

Editor's Note: This is the first in a two-part series chronicling Editor at Large Jackie Hilgert's retrospective of the past 25 years in banking in this month's BankBeat magazine. The second will be posted to BankNews.com Dec. 10. FROM THE AUTHOR: In the Dec. 4, 1999 edition of Northwestern Financial Review (this magazine’s predecessor), publisher Tom Bengtson listed the key events that marked the industry’s development across the 20th Century. His chronology began with the creation of the Federal Reserve, and covered societal upheaval (the Great Depression), structural changes (the Bank Holding Company Act) and emergent technology (the computer!). What was notable about his list was that as the century aged, the developments he noted skewed toward the regulatory, some tightening and some easing, all touted as “reform.” His review of the industry from 1900 to 1999 concluded with the passage of Gramm-Leach-Bliley. As I pursue a retrospective that covers the first 25 years of the 21st Century, I thought GLB was the right place to begin. .On Nov. 12, 1999, President Bill Clinton signed regulatory reform legislation under the moniker of the Gramm-Leach-Bliley Act. GLB repealed Glass-Steagall and opened the industry to new business opportunities. Here’s how this magazine recapped the bill at the time: For many banks, it increased access to Federal Home Loan Bank funding and reduced the frequency of their CRA examinations. For the largest banks, GLB provided the opportunity to buy insurance companies and securities firms. The bill, at the time of signing, was expected to reduce the number of banks, increase efficiencies, and benefit consumers. GLB was basically a modernization of the industry, allowing banks to extend their franchises into new business lines without sacrificing safety and soundness, and permitting them to create financial holding companies to engage in a variety of new activities. In the year 2000, attorney Karen Grandstrand of Fredrikson & Byron dubbed the opportunities opened for banks through GLB a “new frontier.” In March of that same year, Iowa Congressman James Leach, who served as chair of the House Banking Committee and whose name is forever linked with this particular modernization act, talked at length about the Act with Gary Stern, then president of the Federal Reserve Bank of Minneapolis. In that interview, Leach was clear that GLB was not a “merging” of banking and commerce, which was something he vehemently opposed. “I am for a healthy, vibrant, competitive model within finance, but not a system which would inevitably lead to an uncalled-for concentration of asset ownership in America,” Leach told Stern. His was a minority position, initially. Ultimately, those who opposed Leach’s stance on modernization came around to his way of thinking. Leach punctuated his comments with this take on the state of the industry at the outset of a new century: In terms of winners and losers in the financial landscape in the next generation, the primary reason one institution will do well or less well relative to another will relate to technology and customer service rather than changes in law. While the law has just been changed dramatically in relationship to prior law, the change in legal framework that has occurred is more modest in relationship to market practice. The markets got ahead of the law and Gramm-Leach-Bliley simply represents a partial catch-up. What it principally has added is legal certainty, competitive equality and a more flexible regulatory approach designed to adapt more pragmatically in the increasingly competitive global financial system..The end of innocenceIf you’re older than 30, you have a 9/11 story about where you were or how you heard. We were in the office when we got the news; we scrambled to CNN.com to learn more, but the internet was slow because the entire country was doing the same. How could an airplane hit the World Trade Center, we wondered? It had to have been a small aircraft, we surmised. Then the images loaded.First, the country declared war on Afghanistan. Then it passed The USA Patriot Act, which imposed a significant regulatory burden on the banking industry, which leaned disproportionately against smaller institutions, as reg burden typically does. While the Act stopped short of deputizing bankers in the national fight against terrorism, it did require banks to cooperate with law enforcement and other governmental agencies tasked with tracking money laundering activities. It asked banks to report cash transactions in excess of $10,000, or suspicious activity; it asked bankers to “know its customers” by verifying their identities when they opened accounts or made changes; and it required added due diligence on foreign transactions or foreign banks. The USA Patriot Act was one development that turned Americans’ expectation of privacy on its ear. Bringing the house downIn January 2007, bankers in Wisconsin heard an economist predict that housing was “no longer the engine of growth that it once was.” About 10 percent of U.S. mortgage debt, or $1 trillion, was expected to reprice upward that year. The reaction to this repricing would surely impact consumption, said John Tuccillo, formerly of the National Association of Realtors, to a gathering of bankers sponsored by the Wisconsin Bankers Association. Despite contraction in homebuilding expected through the first half of 2007, economists with the American Bankers Association predicted the economy would grow at 2.7 percent that year. By spring, we were reporting a rise of home mortgage foreclosures due to an over-extension of credit in the subprime market. With the benefit of time, we would learn that it wasn’t just that lenders were making loans to people whose credit didn’t warrant it, but that yield hungry investment bankers were structuring securities without regard to the quality of the credits in the package. “Rising foreclosures affirm the fact that you can’t restructure a C credit into an A credit,” opined Tom Bengtson in a column published in May of 2007..During June and July of 2007, foreclosure filings rose 9 percent, and had surged 93 percent over the same period in 2006. By August, the Federal Reserve reported that more than half of the banks it surveyed were tightening lending standards for borrowers with weak credit histories, and nearly half were tightening loan standards for nontraditional mortgages. No banks reported loosening standards.By the end of the third quarter, profits at banks fell to a four-year low as reserves set aside to cover losses from bad mortgages soared to a 20-year high. FDIC Chair Sheila Bair said delinquencies and loan losses were up in all loan categories, not just residential mortgage loans. Between September and December, the Fed cut rates three times. In January 2008, it cut its target rate two more times.Also in January, Fed Chair Ben Bernanke said “renewed turbulence in financial markets … has partially reversed the improvement” in the Fed’s outlook. One month later, Bernanke said he expected some small banks to fail as a result of the economy, but he did not expect any larger banks to fail. Overall, he said, the banking system was solid. One month later, Bear-Stearns teetered and the government facilitated its sale to JPMorgan Chase. Dr. Ernie Goss of Creighton University, meanwhile, said "volatility will be the rule more than the exception in 2008.” Others weighed in with their prognostications too, but Goss pretty much nailed it. The other eye-catching deal that spring was when Bank of America acquired Countrywide Financial to become the nation’s largest mortgage lender and loan servicer.Calling all the ‘good guys’Community bankers didn’t cause the subprime mortgage crisis, but they were in a good position to help out, regulators said in the spring of 2008. Remember, the subprime mortgage crisis that precipitated the housing collapse was fueled by loosened lending standards dating back to the Clinton Administration. When Bernanke urged bankers to “do more” to help troubled borrowers, his comments sent markets roiling. Community bankers looking for some respect wouldn't find it in 2008. At the end of the first quarter, Treasury Secretary Hank Paulson, a former CEO of Goldman Sachs, unveiled a “blueprint for reform,” a broadly unpopular proposal that devalued dual banking by seeking to federalize the entire financial system, plus eliminate the Office of Thrift Supervision. The plan was slammed by ICBA’s Cam Fine, who said it read like “amateur hour.”A smattering of banks failed in the summer of 2008, some small and some large (IndyMac) but it would be September before the foundation crumbled. That’s the month when Fannie and Freddie were taken over by the U.S. government, the same government that allowed Lehman Brothers to fail but assumed control over AIG. Also Washington Mutual was closed and sold to JPMorgan Chase.On October 3, 2008, President Bush signed the Emergency Economic Stabilization Act, creating the $700 billion Troubled Asset Relief Program, or TARP, which authorized the purchase of various "troubled assets," including mortgage-backed securities and other financial instruments, from banks, and provided capital to shore up bank balance sheets. Despite reactive legislation in the face of multiple crises, 25 banks failed in 2008. That number increased to 140 in 2009, and 157 in 2010.Dodd-Frank and a new era of reg burden After the financial crisis of 2007-08, which brought the economy to its knees, Congress tackled reg reform with the Wall Street Reform and Consumer Protection Act of 2010, affectionately known as Dodd-Frank. The law was signed July 21, 2010 by President Barack Obama, much to the chagrin of the American Bankers Association, whose president and CEO at the time, Ed Yingling, said, “While its core provision provided needed reform, it is overloaded with new rules and restrictions on traditional banks that did not cause the financial crisis.” Needed reform came through the Act’s Volcker Rule, which restricted banks from using deposits to engage in proprietary trading or to invest in hedge funds. Dodd-Frank created an “important” distinction between Wall Street “mega-banks” and Main Street community banks, noted Michigan banker James MacPhee, who was serving as chair of the Independent Community Bankers of America that year. The ICBA struck a neutral stance on the law as it developed. (See related article.)Passage of Dodd-Frank “preserves the importance of the dual-banking system,” noted Neil Milner, who had been CEO of the Conference of State Bank Supervisors in 2010. Also commenting on Dodd-Frank after its passage was former Comptroller of the Currency Eugene Ludwig, who by 2010 was heading up Promontory Interfinancial Network (now IntraFi), which he cofounded with Alan Blinder, Mark Jacobsen and Alfred Moses in the early aughts. “Although the impact on banks will undoubtedly be profound,” Ludwig said, “we won’t know how profound for some time.” In fact, the law did dictate that the industry’s largest institutions would pay higher FDIC insurance premiums and face tougher capital rules than their smaller counterparts. At the same time, it made permanent the increase in the deposit insurance limit, to $250,000 from $100,000, which had been raised temporarily in 2008.Large banks would also need to heed regulations coming from the newly created Consumer Financial Protection Bureau, a can-of-open-worms agency as has ever been devised by the federal government.To say the bill was unpopular is an understatement. Jonathan Kemper, chair and CEO of Commerce Bank, Kansas City, Mo., said Dodd-Frank reflected “political punishment.” Charlie Funk, president and CEO of MidWestOne Financial, said it “was a bad bill for our industry.” In 2014, U.S. Rep. Paul Ryan (R-WI) called Dodd-Frank “Obamacare for banks.”Fifteen years later, it’s evident in the numbers that community banks have struggled to staff the compliance obligations that resulted from Dodd-Frank, leading many to exit banking altogether. Since 2010, more than 2,500 bank charters have gone away.… about that new consumer agencyWith the emergence of a new bank regulator in 2010, the weight of a bank’s regulatory burden was expected to increase, although no one was quite sure by how much. The CFPB combined with a new Financial Stability Oversight Council certainly carried the potential of stripping innovation from the industry. BankBeat publisher Tom Bengtson pulled no punches, commenting in September of 2010: “These newest regulators are likely to turn our nation’s largest banks into institutions indistinguishable from waste water treatment plants … .” (To be clear, there have been many innovations in wastewater treatment in the last two decades, including anaerobic digestion, which extracts biogas from organic waste to generate heat and electricity, but I digress… ) In the years that followed Dodd-Frank, one can only imagine the synonyms for ovine waste that were dropped as one rule after another came out of the CFPB. There was that one rule that explicitly prohibited mandatory pre-dispute arbitration clauses for mortgage loans, that rule which required customers to opt in to ATM or debit card overdraft fees. And that beauty known as Section 1071, which mandated data collection on the race, sex and ethnicity of the principal owners of small business loan applicants. Ultimately, what one Administration gives, another takes away. Under the second Trump administration, through executive action, regulations on banks eased substantially in 2025 with the neutering of the CFPB. They even took the sign off of the building. …and the Durbin AmendmentA controversial part of the Dodd-Frank law was called the Durbin Amendment, enacted in 2011. Durbin limited the fees large banks could charge merchants for debit card transactions; it also required issuers to process transactions over at least two networks. The Federal Reserve was charged with rulemaking and oversight. In 2024, Ronald Bird of the Cato Institute offered a snapshot in time: When he introduced the amendment, Sen. Richard Durbin (D–Ill.) argued that the [debit card] fees were excessive and unfair, and they imposed a hidden tax on consumers and merchants. Implicit in his argument is the assumption that the debit card market is subject to market pricing power on the debit card supply side that raises interchange fees by constraining card supply. … The amendment instructs the Fed to ensure that the fees are ‘reasonable and proportional’ to the costs incurred by the issuers for processing the transactions.What Durbin didn’t consider was that fees needed to “more than cover” the costs of providing the transactions; the fees would also need to cover the cost of fraud prevention, which rises every single year. In 2013, ABA President and CEO Frank Keating said of Durbin: “The price controls enacted as a result of the Durbin amendment served one purpose — further lining the pockets of our nation’s big-box retailers at their own customers’ expense.”TIMELINEDecember 1999: There are 8,580 commercial banks in the United States, according to the FDIC; among them are 234 de novos formed that year. January 2000: Because $9 billion had been spent to update computer systems at the nation’s financial institutions in the three years prior to Jan. 1, 2000, otherwise known as Y2K, the much-feared transition to the new millennium was a non-event.October 2001: President George W. Bush signs The USA Patriot Act in response to the terrorist attacks on 9/11. The Act strengthens anti-money laundering laws to make it more difficult for terrorists to finance their operations through the U.S. financial system. Provisions require financial institutions to implement new ID, record-keeping and reporting procedures.July 2006: The FDIC places a moratorium on Industrial Loan Company applications from commercial firms, due to concerns about blending banking and commerce. The moratorium lasts until March 2020.February 2008: President George W. Bush signs the Economic Stimulus Act of 2008 to boost the U.S. economy by pumping $152 billion into it. Americans in 128 million households get tax rebate checks, and businesses receive incentives to make capital purchases and create jobs.October 2008: President Bush signs the Emergency Economic Stabilization Act, creating the $700 billion Troubled Asset Relief Program or TARP.December 2009: There are 6,829 commercial banks in the United States at year end. During the first decade of the new millennium, 1,271 de novo banks were formed. July 2010: The Wall Street Reform and Consumer Protection Act, colloquially known as Dodd-Frank, is signed into law by President Barack Obama. October 2011: The Durbin Amendment, enacted as part of Dodd-Frank, goes into effect, limiting the fees large banks can charge merchants for debit card transactions.