Category Archives: Federal Reserve

Good news (big banks) and bad news (community banks) from U.S. tax reform & CECL changes

“While there has been much written about the impact of the recent tax reform law on banks’ bottom lines,” the ABA Banking Journal writes, “less has been said about what it means for financial institutions in the capital markets. Specifically, if bank capital is a form of currency, how is tax reform shaping the deal-making environment for community banks to midsize and regionals?”

Brian Nixon provides some answers in “Tax Reform and table-setting,” in the recent ABA Journal.

Sadly, the bottom line is, the U.S. tax reform recently passed may help community banks in a very indirect way — by making access to certain types of capital more readily available — the same rule changes, and other regulatory changes scheduled for 2018-2019, will help large institutions much more. But the direct impact, when combined with 2018-2019 changes in capital classification requirements by the Federal Reserve, will have a much stronger, and more direct, impact.

community banks - Federal Reserve - CECL Implementation Roadmap 1For example, a 2017 analysis by Stonecastle concludes that when one combines tax reform with new tier-2 financing requirements. community banks “will see an “increased need for capital (so that banks can maintain their well-capitalized status). Even further, he expects that Tier 2 suborbinated debt “is likely the most cost-efficient form for this additional capital.” (Right-click image for larger view.)

Smaller banks “should fully appreciate” what the coming change essentially means: “as much, if not greater, [obstacles] for bank regulatory capital compliance.” More than 1,000 U.S. banks (heavily concentrated in small and community banks, “will struggle to maintain their capitalized status” when new standards for CECL (Current Expected Credit Loss) accounting are implemented.

Community banks “may have no alternative but to raise expensive equity to meet regulatory compliance.”

An inter-related plight:
Minority banking and community banks

“I’m very self-conscious about it,” said B. Doyle Mitchell Jr., African-American president of the $390 million-asset Industrial Bank. “When you have 1,500 people in the room and three blacks, you know you’re one of only three.”

Describing his presence at a recent banking conference, Mitchell spoke to a larger issue: The continued plight of minority-owned and -operated banks, and — arguably, related — the squeeze on community banks that began nearly a decade ago.

decline in black banks, 2001-2014. source: FDIC. photo credit: Washington PostThis is paradoxical on many levels.

For one, the United States, as most recognize, is rapidly becoming a “minority nation.” It’s estimated that whites will be less than 50 percent of the population in a little more than a decade — sometime early in the 2030s.

By contract, non-minority-owned banks hold 99 percent of all US banking assets. And the Federal Deposit Insurance Corporation recognizes just 157 minority-owned community banks in the U.S. — out of 5,870 total. That’s about 3 percent.

The number of black-owned banks has declined to 20 (not a typo) in 2017, from 48 in 2001. (See table nearby. Source: FDIC.)

Regulation vs. Growth strategies

Another paradox is this: the lack of diversity in banking and financial services continues despite long-standing effort to regulate greater minority participation — in both ownership and management — into existence.

As Ellen Ryan notes in an article for Independent Banker, “The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 says regulated financial institutions are ‘strongly encouraged’ to disclose their diversity policies and practices online and submit self-assessments to their primary regulator. Each agency has developed standards for assessing these policies and practices.”

Would a strategy of attending to the growth and health of the community bank sector have softened this trend — or reverse it in the future?

It’s difficult to say; the United States hasn’t tried it.

Make *real* banking reform work for communities

Freedman's Bank Texas bank US bank reforms Charles Cooper

Texas bank regulator Charles Cooper discusses the plight of community banks and small-business lending in a cogent article for the Express-News, reprinted by permission.

AS A STATE REGUATOR, [I've found] nothing is more evident than how community banks impact Main Street America — in Texas and across the country. They are deeply invested in the community where their customers live and work, helping local businesses and residents, and generating economic growth from the bottom up.

Collectively these banks are responsible for almost half of all small business lending and three-quarters of all agricultural lending in the United States. At a time when the big banks offer cookie-cutter solutions and some are pulling back on their local presence, it is good to know that our citizens can rely on the local community bank that better understands their needs.

But in recent years, community banks have been hampered by regulations defined at the federal level. After the U.S. financial crisis nearly a decade ago, federal policymakers focused on how regulation could head off future crises. And so, a large number of new regulations and procedures were adopted.

Texas banking regulation Charles Cooper US bank reform Dodd-FrankThere was just one problem: Many new rules addressing too-big-to-fail institutions also applied to community banks that posed no systemic risk to taxpayers.

Due to this increased complexity, compliance costs have increased for community banks. A recent study by the St. Louis Federal Reserve Bank estimates community banks spend about $4.6 billion every year in regulatory compliance. These higher costs have been a contributing factor to a decline in the number of banks, in turn limiting access to credit and banking services for consumers.

IN TEXEAS, WE HAVE gone from 644 banks in 2009 to 464 today.

Fortunately, there is an opportunity to solve this problem. In the U.S. House of Representatives, the Financial Services Committee chairman is Texas’ own Jeb Hensarling, who has jump-started congressional efforts to right-size regulation for a post-crisis environment.

As Texans, we should be proud one of our own is playing such a critical role at the federal level.

In addition, similar reform efforts are underway in the Senate. Combined, these developments offer hope that regulatory reforms just might make their way into law.

Perhaps the best place to start is where there is bipartisan support. In my recent visit to Washington, D.C., I met with members of the Texas delegation and others in Congress. The one unifying topic — regulatory right-sizing for community banks.

WHAT COULD REFORM look like?

The Conference of State Bank Supervisors, whose members regulate 78 percent of all U.S. banks, supports creating a common definition for a community bank, and then exempting all those that qualify from federal rules aimed at bigger and more complex banks.

Such a definition — based on a combination of factors such as assets, local ownership and lending in the community — would enable legislators and regulators alike to create a regulatory regime tailored for community banks.

This idea of a community bank definition, and the accompanying right-sized regulation, is not a novel one.

US bank failures by state FDIC mapThe Federal Deposit Insurance Corp. uses a common definition to perform its community bank research.

Governors at the Federal Reserve Board support applying different rules for big and small banks.

In an executive order, President Donald Trump recently directed his administration to make sure that regulation is “effective, efficient and appropriately tailored” for financial institutions.

When folks head in the same direction, you tend to get results. With the political winds in Washington favoring community banks, I am optimistic we can achieve common-sense regulation that permits community banks to do what they do best — serve their communities.

Charles G. Cooper is commissioner of the Texas Department of Banking and chairman of the Conference of State Bank Supervisors.

Casualty rates slow, but casualties mount (an update)

US banking failures Freedman's Bank Bankrate.com

The good news is, big banks have been bailed out (cc: US Taxpayer, $700 billion), and small bank failure rates slowed in 2016 and so far in 2017….

the bad news is, U.S. policy drove nearly half such banks out of business from 2009 to 2016, and there appears to be no relief in sight for the institutions that supply most of the capital to small businesses.

Click here for Bankrate.com’s list
of the banking casualties since 2009

.

Freedman’s “still retains assets”

Freedman's Bank ClevelandElizabeth McIntyre from Crain’s Cleveland Business filed a notable piece on the legacy of Freedman’s Bank recently, as the 150th anniversary works its way across the midwest. A brief excerpt:

“The Freedman’s Bank became one of the first multi-state banks in the nation, comprising 37 branches in 17 states and the District of Columbia. Tens of thousands of former slaves deposited more than $57 million, most in small amounts. The bank fell victim to mismanagement, fraud and the “Panic of 1873.” It closed. Most lost their savings. More than $3 million in deposits, uninsured, were gone. And historians say it may have been the genesis of a deep distrust of banks by African-Americans.

“The Freedman’s Bank still retains valuable assets more than 150 years later: the records of depositors. At the time, former slaves provided details about their addresses and a record of spouses, children, siblings and parents. The records from 29 branches still exist at the National Archives and they’re a treasure trove for 10 million African-Americans today whose ancestors were depositors. The database also is accessible online for free at FamilySearch.org.”

Read the full article at Crain’s Cleveland Business

Fed celebrates Freedman’s at 150

Don’t miss the rich history of Freedman’s Bank, now on display at the Federal Reserve….

including original artwork and passbooks, from some of the bank’s original $57 million in deposits.

Although the bank failed through poor government regulatory policy and mismanagement leading into the Panic of 1873, its mission was a noble one, and still timely given economic conditions today.

The exhibit, marking the 150th anniversary of Freedmans, will also travel to Atlanta and Cleveland later this year.

Too big to be the cause….
3 1/2 cheers for Peter Wallison

For nearly seven years, analysts have run circles around the bailout of large banks, automakers, and other firms deemed too big to fail during the 2008 financial crisis.

And while no one denies the economic importance of these institutions, it may be that when it comes to understanding the U.S. economic malaise in the years since, these actors are, in a sense, “too big to be the cause” as well.

That’s the conclusion we’re coming to based on the work of economist Peter Wallison in his persuasive book, Hidden in Plain Sight. (Reviewed here by The Wall Street Journal.)

A more likely culprit is the fate of small- and medium- sized banks over the same time period, under the disproportionately large burden imposed on them by the 2010 Dodd-Frank Act.

It’s a classic truism that smaller institutions have higher average costs dealing with regulation. They must meet the fixed cost of dealing with all those rules and bureaucrats just like any large bank. But they may not spread the overall cost efficiently over a balance sheet in the billions or trillions…

Furthermore, small businesses still (at least up until this recovery) account for an estimated 80-90 percent of new jobs.

And, because they come nowhere close to meeting the capital requirements for listing on a stock exchange or even for most private offerings, small businesses are almost completely reliant on banks for their financing needs.

Hence the squeeze placed on smaller financial institutions is especially painful to growth and opportunity, a double whammy.

It’s an important topic, one we keep coming back to because it’s so near and dear to the Freedman’s Mission.

Dodd-Frank’s continuing Legacy

It is now five years since President Obama signed the Dodd-Frank Act, continuing the work begun by the bank bailouts of 2008-2009 –

which critics argue includes putting the squeeze on small banks and the small- and medium-sized firms that used to rely on them.

“Dodd-Frank’s backers in Congress and other members of the left touted the regulation as a means of helping Main Street over Wall Street,” writes Carrie Sheffield in Forbes
“Yet the number of community banks fell by 40 percent since 1994, and their share of U.S. banking assets fell by more than half – from 41 percent to 18 percent.

“In contrast, the biggest banks saw their share of assets rise from 18 percent to 46 percent. And while the number of community banks already declined before the crisis, since the second quarter of 2010 – Dodd-Frank’s passage – community banks have lost market share at a rate double what they did between Q2 2006 and Q2 2010: 12 percent vs. 6 percent.”

Dodd-Frank’s regulatory burdens, another critic argues, “are driving consolidation, and could result in lending markets less able to serve core economic demands.” Particularly troubling, according to lead author Marshall Lux, a senior fellow at HKS’s Mossavar-Rahmani Center for Business and Government and senior advisor at The Boston Consulting Group, “is community banks’ declining market share in several key lending markets, their decline in small business lending volume, and the disproportionate losses being realized by particularly small community banks.”