Some Banks More Equal Than Others

I read the other day that the six largest U.S. bank holding companies have paid more than $150 billion in fines since 2009. Yet, at the same time, not a single senior executive or director of these banks has been identified as culpable for their banks’ egregious legal and regulatory violations, much less pursued by the Justice Department or the financial regulatory agencies.

Meanwhile, scores of community bank officers have been and are being sued by their regulators or pursued by the DOJ or local prosecutors for violations that are often much less serious than those perpetrated by executives at the nation’s largest financial firms.

I mean, certainly some human being somewhere within these megabanks had to have violated financial laws or regulations, or why would their institutions write billions of dollars in checks to cover their wrongdoing? In cases such as HSBC, management even admitted that it knowingly violated laws and regulations, but did so anyway because the profit was so good.

This is what is so insidious about too-big-to-fail institutions: the managements and boards begin to believe they are above the law. Unfortunately, recent history has proved them right—even to the point where Attorney General Holder, in open testimony before the U.S. Senate, hedged when asked if executives at certain too-big-to-fail banks were immune from prosecution.

In sworn testimony before the Senate Judiciary Committee, Holder said law-enforcement officials have hesitated to pursue financial wrongdoing at the largest banks because of the potential economic impact. Seriously? Is the law not the law? Are we not a country of laws that in our American tradition are to be equally applied to one and all no matter a person’s circumstance or station?

This Orwellian reality of money and power taking precedent over equal justice under the law gives us a modern take on the old Animal Farm commandment: some banks are just more equal than others.

While Main Street community bankers and their boards are personally prosecuted and pursued by government agencies for restitution, Wall Street and global bankers can rest easy and just write another check. After all, the checks are funded from the ill-gotten gains of their violations, and there is plenty more where that came from.

Doing the Right Thing is in the Community Bank DNA

Happy 2015. I am humbled and grateful for the opportunity to kick off another year representing the nation’s community banks, an industry that has made its mark through honest dealing, community involvement and personalized customer service.

Over the holidays, I read an article that reminded me just how good all of us have it who work in our community-minded industry. According to this report, the Dutch Banking Association is requiring its 90,000 members to recite an oath pledging to act honorably and lawfully. Those who fail to live up to the oath could face fines, blacklisting or suspensions.

While I appreciate the Dutch Banking Association’s commitment to principle, requiring members to pledge to do the right thing is completely alien to ICBA and community banks. And the reason for that is simple: community banks don’t have to take an oath to do what’s right. They live the oath every day. As a community banker myself for 20 years, I can tell you that honesty, integrity and good conduct are part of the job—the DNA—of community banking.

It’s simple. Community bankers have to do right by their customers because they answer to them every day inside and outside the bank—at Little League games, PTA meetings and church breakfasts. As members of their local communities, community bankers are in the business of putting their customers first, of doing the right thing.

There’s an old saying: “There’s no right way to do the wrong thing.” Community bankers know the difference between right and wrong because doing the right thing is part of what makes them community bankers. In the community banking industry, your word is your bond.

So happy New Year, community bankers. Thank you for continuing to maintain our industry’s high standards and for allowing me to continue working for the good guys. It’s going to be another tough and busy year in Washington, but ICBA will continue doing everything it can to support this great industry. That is my pledge to you.

Big Banks’ Swaps Push-Out Repeal Is a Pyrrhic Victory

The following post first appeared on American Banker’s BankThink blog. It is reprinted below with American Banker’s permission.

By Cornelius Hurley
Dec. 18, 2014

In his impactful book Don’t Think of an Elephant, cognitive scientist George Lakoff illustrates how framing a discussion from the beginning is key to winning the argument. No one has learned this lesson better than the country’s too big to fail banks. Since the beginning of the financial crisis, they have framed the debate over financial reform as being about everything but the subsidy that TBTFs receive because of their elite status.

Millions of lobbying dollars and thousands of pages of regulations are devoted to capital ratios, liquidity requirements, resolution regimes and an endless stream of regulatory complexity that numbs the mind. The net effect of this ceaseless patter is to divert our attention from the one key issue at the heart of the TBTF debate.

Now, in a moment of supreme hubris, the masters of debate framing have overplayed their hand. Big banks succeeded in repealing the swaps push-out rule enacted under the Dodd-Frank Act by holding the government funding resolution hostage. But in so doing, they inadvertently thrust the issue of taxpayer subsidies back into the spotlight — where it belonged from the beginning.

The swaps push-out provision of Dodd-Frank would have required the five big banks that account for 95% of swaps activity to move a portion of that business out of their taxpayer-supported banks and lodge it in their nonbank, uninsured affiliates. It is widely understood that removing the safety net of Federal Deposit Insurance Corp. coverage would have increased the cost of this activity and reduced its profitability for the five banks.

The big banks claimed that without FDIC insurance, they would be forced to pass the increased cost on to innocent end users like farmers, airlines and oil distributors. The implication of this risible threat was that the big banks were in the habit of sharing the entire financial benefit they received from this free insurance with their customers.

Even the most casual observer of our financial system can smell a subsidy as pungent as this. It was only a matter of time before progressive icon Sen. Elizabeth Warren pounced on this issue, warning of the prospect of a “#Citigroup Shutdown.”

One would have thought that the big banks that benefit in so many ways from their size would be more subdued when dealing with their government subsidy, lest they reframe the TBTF debate.

Last summer, after all, a credulous General Accountability Office came forward with a report claiming that the subsidy flowing to the TBTF banks is negligible and may even be negative. The GAO made no mention of the subsidy the banks receive for conducting swaps activities in their insured banks. Perhaps the researchers ignored this significant part of the TBTF subsidy because they knew, by law, it was about to be pushed out of the depository institutions.

Naturally, the GAO report was received by a skeptical Senate Banking Committee, several of whose members questioned the validity of the findings. Their questions were, it turns out, warranted. After all, despite all the complex machinations built into Dodd-Frank, most observers are well aware that the TBTF banks are larger, more complex and more subsidized than they were before the crisis.

Now that the TBTFs have taken the latest of their many victory laps, what comes next? The legislation will force the FDIC and others to recalculate the subsidy big banks receive from taxpayers. This could well make the banks wish they’d never unleashed their lobbyists to gut this important part of Dodd-Frank.

Since FDIC deposit insurance now has exposure to a potentially massive amount of new risk, it must recalibrate. The agency should immediately undertake a risk assessment analysis to determine how its deposit insurance fund, currently valued at over $51 billion, will be impacted by the new exposure that has been thrust upon it by the big banks successful campaign.

To assist in this process, the FDIC should solicit bids from the private insurance industry for reinsuring against the risk that the Deposit Insurance Fund may have to make payouts in the event that previously-banned swaps are part of the estate of a failed TBTF bank.

Lastly, the Congressional Budget Office should study the financial impact that amending Section 716 of Dodd-Frank will have on the federal coffers. Had the TBTF lobbyists not chosen to take the federal government hostage in this process, such a study might have been conducted beforehand.

These responses will reframe the entire debate over TBTFs, shifting the argument away from capital requirements and the like and back toward the subsidy and how we make it go away.

If you happen to be one of the five banks that benefit from last week’s disgraceful lobbying effort, you can file this under “be careful what you lobby for.” If you’re a taxpayer frustrated that six years after the financial crisis we still have TBTF banks corrupting our financial system and the body politic, you can file these proposed changes under, “Reframing the TBTF debate.”

Professor Cornelius Hurley is the director of the Boston University Center for Finance, Law & Policy. Follow him on Twitter at @ckhurley.

Antonio Weiss Not Right for Treasury Post

Reasonable people can disagree. I’ve always firmly believed that individuals can look at the same set of facts and come to differing conclusions without necessarily holding any lingering animosity or disrespect.

So when ICBA announced its strong concerns with the nomination of Antonio Weiss for a leading role at the Treasury Department, we did so because we have legitimate concerns with his experience and because of the need for community bank representation at Treasury. This isn’t personal.

Treasury’s undersecretary for domestic finance plays a leading role in developing policies that affect financial institutions across the U.S. financial spectrum. Whereas Mr. Weiss has a relatively narrow professional background as a Wall Street executive specializing in international mergers and acquisitions, the Treasury position requires someone with a broad background in financial services, not just Wall Street.

As MIT professor Simon Johnson noted in a recent blog post, the Office of Domestic Finance oversees domestic finance, banking and other related economic matters. It also develops policies and guidance for financial institutions, financial regulation and capital markets in addition to its role in managing federal debt.

In other words, this is a position that requires an extensive understanding of our financial system and how it functions at all levels—including the local level. And it is one that is essential to reforming how the nation’s largest and riskiest financial firms are regulated to prevent another Wall Street crisis and taxpayer-funded bailout.

ICBA has long advocated the creation of an assistant secretary for community financial institutions position at Treasury to ensure Main Street’s perspective is represented at the department. Community banks need protections against excessive regulation, which poses a threat to local banking and economic growth. Our industry also opposes excessive concentration in the banking industry, which has put the financial system at greater risk.

Without such representation at Treasury, we believe the undersecretary for domestic finance should have a strong understanding of local community banking. The facts are clear—Mr. Weiss has no such qualifications. He is simply not the right person for this position. And as the representative of our nation’s community banks, ICBA cannot endorse his nomination.