Regulator agendas, competition make it tough for bankers

Do government officials have a plot to reduce the size of the banking industry? It is a question Timothy Koch asked during two presentations he made at the fall seminar of the Bank Holding Company Association, conducted Oct. 5-6 in Bloomington, Minn. Koch, a professor at the Moore School of Business at the University of South Carolina and president of the Graduate School of Banking at Colorado, said regulators are implementing policies which will decrease the size of the industry.. "What a great environment to shrink the industry," he said. "If you raise capital levels to 10 percent, the industry will self-select." Koch said. While banks used to be able to operate comfortably with 8 percent capital, Koch said most banks will need 10 percent or more from now on. "This lowers your profit potential," he said.. Because of the uncertain future of the industry as regulations change, Koch said many bankers are finding it difficult to raise additional capital from existing owners or new investors.. Koch said he heard a senior regulatory official say 500 banks will fail, and that another 1,700 banks have excessive loan concentrations and could also fail.. Furthermore, Koch said, the FDIC is generally downgrading individual CAMELS ratings. He cited one bank that saw its rating decline simply because it was located in Florida. He suggested that the FDIC has incentive to lower the ratings. "As ratings decline, premiums go up," he said, noting the need to recapitalize the Deposit Insurance Fund.. Touching on a wide range of topics, Koch noted unfair competition from banks that are largely owned by the government, and rules that make it harder than necessary to tap brokered and wholesale funds.. Ally Bank is the rebranded name of the bank owned by automaker General Motors. The bank has ramped up deposits by 46 percent in the last 12 months to more than $22 billion. It offers 1.7 percent interest on an on-line savings account. Linked to a customer's checking account, it has no minimum balance nor monthly fees. Ally Bank offers attractive certificate of deposit rates, including a 1.85 percent rate on a nine-month CD featuring no fee for early withdrawal.. Ally Bank reported a first-quarter loss of $133 million. Koch noted the federal government owns 35.4 percent of GM and GMAC.. Traditional banks have trouble competing with Ally Bank and others like it, and are growing increasingly reliant on non-deposit funding sources. "While the FDIC does not like borrowing and brokered deposit levels to exceed 20 percent of total assets, institutions are seeing an increasing need for alternative funding sources," Koch said.. And there are problems associated with such funding, he said. The FDIC, for example, has been criticizing banks that rely heavily on advances from the Federal Home Loan Bank, he said. The FDIC has a bias against the advances, he said, because in a failed bank scenario, the Federal Home Loan Bank gets claims on the bank's assets before the FDIC.. "Wholesale funding will be increasingly difficult to obtain; its use will be punished by the FDIC," Koch stated in material he handed out to the meeting's participants.. Koch also said an old definition of brokered deposits is making it harder than necessary for banks to record sufficient levels of core deposits. Certificates of deposit can generally be considered core funding, unless the amount exceeds $100,000 Koch explained. The cap is related to the FDIC insurance coverage amount. The core funding definitions have not been changes since the FDIC coverage limits increased to $250,000. Koch said the definition should be changed immediately.. Koch offered a hypothetical situation to consider: a director at your bank has consistently maintained a $2 million CD at your bank. Do regulators consider that a core or non-core liability? Because it exceeds the $100,000 amount, it is considered a non-core liability, Koch said. He added that the bank could break the deposit into twenty-five $80,000 CDs and all the money would be counted as core deposits.. He added that money placed through the Certificate of Deposit Account Registry Service is considered a brokered deposit because an intermediary is involved. However, money obtained through Qwickrate is not considered brokered because it is a listing service only, which requires the banker to contact the other institution to obtain the deposit.. Koch encouraged banks to shore up their capital plans and he said banks should conduct their own stress tests. He suggested estimating your own CAMELS rating. Strategic planning is important, he said, although in the rapidly changing environment, plans needn't go out very far. "Two- and three-year plans aren't very useful," he said.