Fed intervenes: 0% interest; $700 billion quantitative easing

Governors at the U.S. Federal Reserve announced today that the central bank will slash its benchmark interest rate to 0 percent from a range of 1 to 1.25 percent last week.

The Fed, led by chairman Jerome H. Powell, also announched it will purhcase more than $700 billion in bonds and other securities — a quantitative easing — designed to keep private rates low.

The central bank also said it would encourage banks to make use of the liquidity to make loans to small businesses and families likely to be harmed by the decline in U.S. equities prices and the likelihood of a severe economic decline in 2020.

In combination, the moves continue an easing that began early in 2020 but has accelerated with the economic fallout from the global coronavirus pandemic.

Small business loan approval rises —
community banks lead the way

MORE GOOD NEWS from the Biz2Credit Small Business Lending Index:

Small business loans were approved at an overall rate of about 38 percent (from banks of all size). This was the post-recession high for loan approval by banks as a whole.

Community banks continue to lead the way — approving more than 50 percent of loans. Larger banks approved loans at a higher rate in January than they did a month before, but the approval rate of 28.3 percent pales against that of smaller lenders:

“If you have an idea for a new small business or if you want to buy an existing business, you will probably think of talking to your commercial bank about a small business loan first,” writes rosemary Carlson for The Balance Small Business.

But “the approval rates for small business loans are low from [large] commercial banks. In 2004, before the Great Recession, loan approval rates for small business loans from commercial banks were twice what they were in 2017.”

As we noted in “Happy Days are Here Again,” however, there may be a robust small-bank alternative close to home.

The de novo comeback…
McWilliams and the new FDIC paradigm

Thanks in large part to regulatory reform and legislative action, 2018 was a banner year for application approvals by the Federal Deposit Insurance Corporation — with 14 new institutions making it over the bar.

2019 has shaped up as the potential start of a “de novo comeback,” as at least 12 of those banks began operation, and another 17 banks received FDIC approval in 2019 — some are already operating, and some hope to in 2020.

(Between January 2012 and January 2017, by contrast, a total of five new banks received FDIC approval — an average of one per year.)

Several of the new banks that began operating this year are based on distinctive business models, such as Washington, DC’s MOXY Bank, which plans to rely heavily on technology and financial literacy programs for low- and moderate-income customers. Joining MOXY were Nevada’s Lexicon Bank, New York’s Generations Commercial Bank, and Virginia’s Trustar Bank.

As we’ve noted before, regulators, including FDIC Chairman Jelena McWilliams, appear to have undergone a paradigm shift when it comes to regulatory approaches to new banks.

“I do not profess to know what the right number of banks in the U.S. is, but I recognize that, like many competitive industries, a dynamic banking sector needs new startups entering the marketplace,” McWilliams wrote for American Banker a year ago.

Happy days are here again:
A post-Dodd-Frank small bank growth strategy

As small and community banks struggle to rebuild their business analyst David Smith offers an eminently intuitive solution: focus on small businesses in their community.

Historically, this is what community banks did. (And still do, as a recent SBA report points out.)

Then came the out-of-control monetary policy by the Fed in the early 2000s; the housing bubble and crash; and the Dodd-Frank “cure” (read: worse than the disease).

Thanks to policy changes, small banks need no longer be hampered from exercising their greatest strength: personal relationships with clients.

According to most surveys, “personal relationship” and “chance of being funded” are the two strongest reasons business borrowers select a particular lender. In both categories, small banks out-perform large ones in customer satisfaction. And, of course, the categories reinforce one another.

Small knows small:
A community bank comeback strategy

   A FACT-SHEET STUDY by the Small Business Administration suggests an up-from-here strategy for community banks — what you might call a “small on small” strategy.

   Small businesses, the SBA notes, generate most of the new jobs in the U.S. economy — critical engines of growth. Yet they’re often strapped for capital.

Small banks, on the other hand, are, well, small — and local. They also provide much higher rates of borrower satisfaction on loans compared to other lenders, as the table above shows.

The obvious answer for both parties is to marry supply with demand.

For 20 years, the decline of community banks has made this arrangement ever more tenuous. But with the passage of the Crapo Act, followed by a year of generally intelligent regulatory re-write by Randal Quarles at the Fed, the ” supply” side of this equation may be improving.

Banks and the Volcker Rule — a “small” victory

One year after the Federal Reserve and its sister regulators deep-sixed the Volcker Rule, the banking barons who benefited from federal bailouts and a decade of Dodd-Frank regulations that crushed their smaller competitors are wondering how they missed out on the gravy train.

“Wall Street spent years” fighting the rule, writes Francine McKenna in MarketWatch, “but small banks win the most relief in Trump regulatory rewrite.”

The irony is rich. The purpose of the rule was to protect against system risk — not allocate burdens. But in fact, the Volcker Rule, like almost any regulation, imposed a greater burden — as a share of total costs — on small community banks than it did on the too-big-to-fail brigades.

This was truly perverse, especially in light of the fact that the best scholarship on the subject indicates that it’s larger institutions that pose greater system risk in the event of failure. The primary result of Dodd-Frank, a measure designed to punish banks “too big to fail,” was to drive nearly half the small community banks out of business, while profits, stock shares, and capitalization of the big banks soared.

Then again, the term “Volcker Rule” itself, and its substance, has a smokey, bitterly nostalgic aroma. The Volcker Rule was a response by Volcker and other regulators to the financial crisis that reflected monetary chaos they helped bring about in the early 2000s. In this, it resembles the Smithsonian Accords that blew up the Bretton-Woods monetary order; the G-7 monetary coordination effort that was a response to exchange rate chaos; and other start-a-fire-and-then-try-to-put-it-out solutions of the last 50 years.

The Volcker Rule was a second-best part of a first-worse solution to monetary chaos in the early 2000s. It won’t be missed, especially if policy-makers replace rule-writing fiat with a national and global monetary rule.

In the words of George Shultz — one of Volcker’s collaborators in the wanton monetary destruction of the 1970s and beyond — “If they’re too big to fail… make them smaller.”


Here comes the sun:
New banks in DC, Georgia, Florida, Virginia…

   GEORGIA’s NEW TANDEM BANK received FDIC approval back in May.

   When it opens, it will join Virginia’s Trustar Bank (pictured nearby), American Bank & Trust in North Carolina and others as the first community banks to appear in their states in at least a decade.

Regulator attitudes seem to be shifting as well, as we’ve noted in “Paragdim change… at the FDIC?,” and “Fed’s Gaffney on regulatory reform.”

Indded, FDIC Chairman Jelena McWilliams elaborated on the importance of new banks in American Banker, “We can do better on de novos.”

Fed implementation of Crapo reforms — Atlanta weighs in

The Federal Reserve of Atlanta recently became the latest Fed branch to weigh in on the implementation of the Crapo Act, or “ERRCPA” —

joining the Minneapolis, San Francisco, New York, and Dallas Feds as well, in analyzing the work still to be done implementing bank regulatory reform and plowing ahead to build the intellectual framework for a more rational financial order.

After another year of decline…
Turning point for community banks?

“The industry has been shrinking for more than a decade and many community banks have gradually disappeared,” writes Bankrate.com.

“But conditions are ripe for a comeback. Though challenges lie ahead, the newest entrants believe there’s a place for them and customers to serve who aren’t getting their needs for loans, checking or savings accounts met elsewhere.”

Sensible observers always knew a sector recovery would take some time — regulations to be written, capital to be organized. (See our May, 2018 piece, “…Fed: you’re up next.”)

Still, with US economy entering its 10th year of recovery, the continued decline of local banking and financial institutions is worrisome.

A hand for Quarles:
Improved thinking, regulation at the Fed

   LAST FALL, WE URGED the Federal Reserve’s Vice Chair for Supervision, Randal K. Quarles, to “call your office” in impelementing the provisions of 2018’s regulatory-reform-minded Crapo bill, especially as applied to small and community banks.

   In particular, we encouraged hmi to take note of the growing mountain of evidence — much of it at the Fed, the Federal Deposit Insurance Corporation, and the Comptroller of the Currency — that large financial institutions should be the primary focus of regulation… whereas, the health of smaller banks, if relieved of some of the regulatory burden, would actually contribute not only to competive diversity, but financial stability.

Judging from his May 15 testimony before the Senate Committe on Banking, Housing, and Urban development, Quarles made that call.

The Fed, Quarles explained, approached the Crapo Act (a.k.a. “ERRCPA”) as a call on regulators to “to focus our energy and attention on both the institutions that pose the greatest risks to financial stability and the activities that are most likely to challenge safety and soundness.”

In addition to noting the Fed’s effort to relieve small institutions from most of the burdens of the Volcker rule — which happend last summer — Quarles reviewed the main tiers of Crapo Act implementation:

“We also have been providing targeted regulatory relief, especially for community banks and other less complex organizations.

• “We proposed a new interagency Community Bank Leverage Ratio to give community banking organizations a more straightforward approach to satisfying their capital requirements. State bank supervisors and others have provided thoughtful comments on our work, which we are taking into account.

• “We expanded community banking organizations’ eligibility for both longer examination cycles and exemptions from holding company capital requirements, and we have proposed more limited regulatory reporting requirements for community banks.

• “We provided smaller regional bank holding companies immediate relief from annual holding company assessments and fees, stress testing requirements, and other prudential measures designed for larger institutions.”

The shift in conceptual approach that appears to be in progress is heartening — even if better regulation, compared to monetary reform, as a second-best solution. The breadth of paradigm shift is event in the detailed Federal Reserve Supervision and Regulation Report of May 14.

More on that report to come. In the meantime, we’re offering polite applause for the prudent “regulatory hand” to Mr. Quarles.