A Matter of Responsibility

A hallmark of community banking is accountability. Community bankers are held accountable to their customers because they live and work in the same neighborhoods. As locally based institutions with a stake in the prosperity of their communities, community bankers simply can’t afford to take advantage of their customers.

So Wells Fargo’s failure to take responsibility for fraudulently opening 2 million unwanted consumer bank accounts has been particularly disturbing for the community banking industry.

The megabank’s leadership has repeatedly blamed the widespread fraud on the 5,300 employees it fired as its $185 million settlement was announced—a fine that is nothing more than a rounding error for the $2 trillion-asset institution. Chairman and CEO John Stumpf refuses to concede that the scandal stemmed from failed leadership and a poisoned corporate culture. And even fellow banking industry representatives have responded by merely condemning dishonest or unethical behavior at “any bank, anywhere, any time.”

Any bank? Suddenly this massive breach of trust isn’t about Wells Fargo, but the banking industry in its entirety? Absolutely Not! No! This isn’t about “any” bank or all banks. This isn’t about universal condemnations of wrongdoing. And this certainly isn’t about community banks, who remain, as always, accountable for their actions.

What this whole sordid mess is about, however, is the massive negative consequences not just on American consumers, but the local banks that had nothing to do with it. Community bankers have seen time and time again how the consequences of megabank misdeeds rain down hardest not on the perpetrators, but on us!

Again and again, Washington responds to the largest banks’ bad behavior by rolling out new regulations that fall disproportionately hard on the smallest banks. While we fight and scrap and claw for exemptions and carve-outs, the truth is that community banks always get roped in to new regulatory burdens that take our attention away from our customers and toward red tape. Meanwhile, the large banks that incited the response have the resources to hire teams of lawyers to manage their compliance.

No, no, no—not again. We WILL NOT get dragged into this mess! Community banks are NOT Wells Fargo!

ICBA is doing its utmost to ensure Washington and the American public make a clear distinction between community banks and systemically risky institutions. We take responsibility for exclusively representing community banks, not the megabanks that make our members’ lives more difficult. Therefore, we will be with you—the community banker—every step of the way, ensuring that your name is not tarnished by this scandal. Because #WeAreNotWells!

As we’ve told Congress again and again, we need a system of tiered and proportional regulation based on size and risk, which will ensure appropriate standards on the largest banks while allowing local banks to continue serving their communities. In doing so, we can fix what’s wrong with our banking system by strengthening what’s right with it—community banks.

Record-Setting Fines Still Megabank Pocket Change

The recent guilty pleas and fines against five of the world’s largest financial institutions demonstrate not that regulators are finally cracking down on megabank crime, but that it’s still business as usual on Wall Street.

Five global banks pled guilty to conspiring to manipulate interest rates and foreign currency exchange markets and have to pay nearly $6 billion in fines. But compared with the fines and lawsuits awaiting individual community bankers who exercise poor judgment in running their institutions, these megabank penalties are small potatoes.

While JPMorgan Chase, Citigroup and others pled guilty to market manipulation, no single individual from these institutions was called to account. A lengthy digital trail of chat room conversations from traders who called themselves “The Cartel” shows that plenty of individuals knowingly broke the law to line their pockets. Yet, not one of these individuals was held legally responsible for their illegal, anticompetitive and costly activities. Meanwhile, the institutions themselves have been granted waivers from regulators that allow them to continue operating and engaging in securities activities despite their violations.

For community bankers, this just doesn’t compute. In our neck of the financial industry, no one is above the law. Even boards of directors not directly involved in the daily operation of community banks can be hauled into court, publicly humiliated and held liable for poor judgment at their institutions. As I wrote in a recent letter to banking regulators, violations of this magnitude at a community bank would have promulgated the resignations of senior management and possibly the outright closure of the bank.

It’s incomprehensible to this former community banker that not a single Wall Street senior executive or director has been held culpable for violations that brought on the greatest financial crisis since the Great Depression. But Wall Street executives can break the law and suffer no personal consequences at all.

Even the nearly $6 billion in fines don’t register much of a blip on the balance sheets of institutions with a combined $7.9 trillion in assets. The fines represent just 7.3 basis points for these five banks. As Warwick Business School Dean Mark Taylor recently wrote, the $545 million fine on UBS would represent a whopping 15 percent ding on the megabank’s annual bonuses. Oh, the humanity! In fact, the financial markets reacted so positively to news of the fines that the share prices for several of the penalized banks increased. Like I said: just another day on Wall Street.

When you crunch the numbers, it’s obvious that even headline-grabbing guilty pleas and billon-dollar settlements don’t eliminate banking industry inequities. The United States has always held steadfastly to the ancient principle that all are equal before the law. And while that long-held value has applied even to U.S. presidents, it apparently does not apply to Wall Street executives.

If we truly want to rein in market manipulation, policymakers must adopt a fair and consistent enforcement policy that treats community banks and megabanks alike. There should not be one set of enforcement procedures for the largest institutions and another for everyone else.

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.

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.