ICBA Convention Report: End Too-Big-To-Fail

The Independent Community Bankers of America has been railing against the government's too-big-to-fail policy since 1984 when Continental Illinois was rescued. For the most part, the ICBA's concerns went unacknowledged, let alone heralded.. Until now.. It was clear by mid-March that everyone had gotten the memo: too-big-to-fail has got to go. It was the message repeated by community bankers and regulators gathered in Orlando from across the country. Everyone at this year's ICBA convention was singing in unison: level the playing field, end too-big-to-fail, stop punishing community banks. .Regulators on board. "Job number one must be to level the playing field once and for all, and to put an end to the doctrine of too-big-to-fail," said FDIC Chair Sheila Bair. "Too often … we saw large, systemically important institutions exempted from the type of supervisory sanctions that community banks face every day … It is time to get serious about establishing a credible, pre-funded resolution authority for giant banks and non-bank financial institutions.". "Among the most serious and most insidious barriers to competition in financial services is the too-big-to-fail problem," said Federal Reserve Board Chairman Ben Bernanke. "It is unconscionable that the fate of the world economy should be so closely tied to the fortunes of a relatively small number of giant financial firms. If we achieve nothing else in the wake of this crisis, we must ensure that we never again face such a situation … We have to end-too-big-to-fail, once and for all.". "It is not acceptable for companies to be too big and too interconnected to fail," said John Bowman, acting director of the Office of Thrift Supervision. "The too-big-to-fail syndrome warps the system of proper risks, rewards and consequences that underpin our financial system and our economy. It is critical that this nation have an orderly process to wind down large, interconnected financial firms that are failing.". "I am encouraged by Sen. Dodd's bill when it comes to addressing too-big-to-fail," responded Comptroller John Dugan to a question. "I like the idea of a systemic risk regulator to be able to address situations like AIG." .Voice of the ICBA. And Cam Fine, the man behind the talking points memo for the ICBA, punctuated the message with the energy of a candidate running for office. "The community banking industry is a force to be reckoned with. Our song has shaken the very foundation of official Washington," said Fine, a former banker from Missouri who joined ICBA six years ago. "We have earned the respect of many trade associations aligned against us. Judging by some of their recent actions, I think they fear us a little, too.. "Financial policy making is no longer the exclusive domain of the mega Wall Street firms and their association allies in Washington … For decades now the mega Wall Street firms and their trade groups set the financial services agenda in the highest policy circles in Washington. They have called the shots for so long that they came to believe that they could do whatever they willed and nothing in the financial realm could stop them.. "The community banks of this nation sent a message to Wall Street and all America that this time is different … Decades of subservience to Wall Street are over for the community banking industry." .Solutions. Bair noted that community banks have earned the respect of the nation by doing their job. She pointed out that in 2009, while the largest banks tightened credit, community banks actually opened the credit allocation spigot further. "The smallest banks, those with assets of less than $100 million, actually increased their loans by more than half of one percent," Bair said. The largest banks, she said, "accounted for more than 90 percent of the total drop in bank lending" in the fourth quarter.. Community banks did their job in the face of government-sanctioned competitive disadvantage. "The average cost of interest-bearing domestic deposits for the largest banks (those with more than $100 billion in assets) was over 100 basis points less than average deposit costs at community banks," Bair said. During 2009's fourth quarter, "The 10 largest banks raised their share of total industry non-interest-bearing deposits from 51 percent to 55 percent, while the share for all other banks correspondingly fell. This shift has remained in place ever since." The difference, she said, "might have become even more pronounced had it not been for the TAG program, [which insured all deposits in non-interest-bearing transaction accounts]. These signs all point to a presumption in the marketplace that the largest banks are indeed too big to fail. They provide clear evidence that the regulatory structure, as it stands today, puts community banks at a sizable competitive disadvantage.". Bernanke gave the bankers a three-part solution for resolving the too-big-to-fail problem. First, he said, regulators need to develop tougher rules and oversight that will reduce the risks posed by large complex financial firms.. Second, he said, regulators must work to strengthen the resilience of the financial system. "For example, the Federal Reserve has been leading collaborative efforts to improve the clearing and settlement of credit default swaps and other derivatives, and to enhance the stability of markets for repurchase agreements," Bernanke explained.. Third, he said, market discipline is essential to combating too-big-to-fail. "To create real market discipline for the largest firms, market participants must be convinced that if one of these firms is unable to meet its obligations, its shareholders, creditors and counterparties will not be protected from losses by government action," Bernanke declared.. Bowman, heading an agency that would disappear under the House and Senate industry reform legislation, suggested that the four bank regulatory agencies be reconfigured into two – one for large banks and one for small. Regardless of the charter a community financial institution holds, Bowman argued "that institution should not be supervised by the same agency that oversees complex commercial banks. The one-size-fits-all regulator, by necessity, will pay the greatest attention to the complex commercial banks, because they pose the greatest potential risks to the financial system.. "It is ironic that none of the bills pending in Congress would provide community banks with their own dedicated regulator. Take a look at the practices that have caused problems during this crisis," Bowman said, citing weak loan underwriting, real estate lending outside the bank's market area, and lending based on collateral value rather than ability to repay. "Those are not the practices of traditional community banks," he said. .Dugan focused on CRE. Comptroller John Dugan – the one regulator who did not focus on too-big-to-fail in his speech – nonetheless spoke about the need for consistency in examinations. Although he talked about it as a remedy to the seemingly harsh exam environment, consistency would solve the too-big-to-fail problem. If all banks were treated the same, there wouldn't be a too-big-to-fail policy. But instead of seeking legislative solutions, Dugan confined his solutions to the regulatory realm and made it clear tough rules are coming for real estate lending.. Dugan made a detailed case against the current CRE lending rules, saying the robust economy of a few years ago masked unsound underwriting, and that conventional risk management controls don't work in the face of a rapid build-up of CRE loans.. "Given what we know, I think we need to revisit the issue of the appropriate regulatory response to CRE lending concentrations, especially for construction and development lending, and especially for concentrations supported by non-core funding," he said. .Back to TBTF. But Dugan's emphasis was an anomaly at the meeting, with everyone else talking about too-big-to-fail. James MacPhee, the chief executive officer of the Kalamazoo County State Bank in Schoolcraft, Mich., who became ICBA chairman at the meeting, pledged to work on the too-big-to-fail problem. "I pledge to promote the creation of a systemic-risk regulator, a separate systemic-risk premium and systemic-risk fund, so that the life insurance is in place before the patient dies," he said.. Bernanke used a similar end-of-life metaphor as he described options for winding down large, complex institutions that get into trouble. "An idea worth exploring is to require firms to develop and maintain a so-called living will, which will help firms and regulators identify ways to simplify and untangle the firm before a crisis occurs," he said. .Association spotlight. MacPhee identified other association priorities. "I also pledge to do whatever I can to carry your messages that regulatory overkill and forced write-downs on loans have had a negative effect on lending in our banks," MacPhee said.. "The events of 2008 and 2009 have changed our lives forever and altered the way government and the public will perceive our industry," noted Michael Menzies, the Maryland banker who concluded his year as association chairman. "I am grateful for the strength of our community banking reputation and the fact that we truly own Main Street in the eyes of the White House, Congress and the public.". Bowmen made a similar observation: "Community banks and community bankers have a great deal of credibility right now," he said. "Insiders and experts in the financial services industry, government and elsewhere recognize that community banks and thrifts did not cause this problem, and they know that community bankers could light the way toward reshaping the system for the future.". "ICBA's message has echoed into the speeches of President Obama, most notably in the state of the union address," Fine said emphatically, marching music from the musical Les Miserables playing in the background. "ICBA has gotten the message out that community banking does matter. It counts.. "We have seized the high ground in the financial reform debate and we are not letting go. ICBA and our state affiliates are now at the policy table on every major financial issue and we are having significant influences on financial policy both with the administration and in congress," Fine said, noting three visits with President Obama at the White House during the past year.. Fine claimed credit for ICBA on several industry developments, including the increase in deposit insurance to $250,000; total coverage for transaction accounts; tax breaks for GSE preferred stock holders; stopped mortgage cram-down; stopped Farm Credit's Horizon's project; expanded small business lending programs, and much more. .Looking ahead. While most of the convention rhetoric was hopeful about leveling the competitive playing field, Dugan attempted to keep the group grounded with his sobering assessment.. "Given the surge in losses, problem banks, failures and costs to the deposit insurance fund, costs that will have to be borne by healthy banks for a very long time, I don't think the status quo is acceptable. We need to take action…". Most bankers at the ICBA meeting would quickly agree with Dugan's conclusion, although they wouldn't apply it to lending rules – they would see it in light of needing to end too-big -to-fail.