Commentary And Speeches

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11September, 2013

Op-ed: Lehman Brothers, Five Years Later

September 11th, 2013|Tags: |

By Rob Nichols, President and CEO, Financial Services Forum

Featured in Yahoo! Finance’s Exchange Blog

Five years ago this week, investment bank Lehman Brothers filed for bankruptcy in the midst of a systemic financial tsunami that impacted thousands of financial institutions – big and small –across the country and around the world. In Washington, we’re still having a healthy debate over the source of the 2008 crisis. To some, it was government policy run amok, with mortgage groups Fannie Mae and Freddie Mac fueling an artificial government-backed bubble for more than 25 million shaky mortgages. To others, the blame for the crisis lay with regulations failing to keep pace with financial innovation, particularly in the area of credit derivatives.

While the crisis-era investigations and research continues, the industry has also been working vigorously to rebuild itself and the American economy from the rubble of 2008. As a result, credit – the lifeblood that keeps our economy working – is once again flowing, supporting American businesses and jobs. Large banks approved more small-business loans in July than they have in any month since before the recession. Equity markets are showing signs of strength, and American businesses have been able to rely on American financial institutions when they look to access global credit markets.

A healthier, more stable banking system

Large financial institutions have also been working alongside regulators to make themselves and the financial system stronger, more transparent, more resilient and more accountable. Specifically, capital, which protects banks from unexpected losses, has doubled since 2009. Liquidity, holdings of cash and liquid securities, has also doubled since 2009. Leverage has been reduced, in some cases cut in half. Asset quality is far stronger, with problem loans and loan losses falling to their lowest levels since early 2008. Risk management, internal controls, and governance procedures have been significantly enhanced. And compensation structures at most banks have been reformed to closely align the personal incentives of bank employees with the long-term performance and safety and soundness of the employing institution. Together with near record levels of capital, such improvements make for a far healthier and more stable banking system.

Additionally, large financial institutions are subject to annual stress tests by the Federal Reserve and have also submitted “living wills” to regulators to detailing how companies could be dismantled without significant market disruption or taxpayer intervention in the event of a future failure. It has been reported that America’s biggest financial institutions could now withstand a crisis worse than the one suffered in 2008.

Managing risk

Despite these improvements, risk is ever-present – in every single mortgage, every business loan, every hedge and every investment – including U.S. treasuries. It is also essential. We need financial institutions to take risks if they are going to provide the capital and liquidity that keeps the American economic engine running. We need to make sure they have the tools to hedge those risks, and we need to make sure that our system is strong enough so that if the worst happens, large firms can fail safely without cost to the taxpayers.

Along those same lines of preventing taxpayer exposure, thoughtful work is now underway in Congress to rewire our system of mortgage finance. While forging an agreement on reforming and unwinding Fannie Mae and Freddie Mac will be difficult, in this new push, both Republicans and Democrats are starting with the same intentions. Both are very focused on ensuring that homeownership remains within reach for American middle class families. At the same time, both parties are keenly aware of the need to protect taxpayers from unwanted exposure to the inevitable ups and downs of the real estate market.

Five years after the worst financial crisis since the Great Depression, our future is bright. America has the energy, the brainpower, the creativity, and yes, the financial resources, to make an even stronger comeback. To achieve this goal, we need to make sure that our financial services sector is in a strong position to help America’s citizens and businesses access the capital they will need to thrive in a complex and interconnected global economy. While some would like to see our largest firms shrink or be broken up, an ecosystem as large and diverse as the U.S. economy needs financial institutions of all sizes, charter types, and business models if we are going to continue to lead as an economic engine of the world.

Rob Nichols is President and CEO of the Financial Services Forum

6June, 2013

Politico Op-ed: When community banks prosper, gains are widespread

June 6th, 2013|Tags: , |

By Rob Nichols, President and CEO, Financial Services Forum

Featured in Politico

The U.S. economy is the largest and most diverse economy on Earth, made up of businesses of all types, shapes and sizes. To support the financial needs of large multinational corporations as well as small businesses and family farms, the United States needs financial institutions of all kinds to meet a wide variety of financial needs. Each charter type, business model and institution size helps to best serve the unique financial needs of particular businesses, households, consumers, savers and investors — from loan underwriting and international payment systems to commercial lending.

As president of the Financial Services Forum, I spend most of my time focused on the policy priorities and unique economic value provided by large diversified financial institutions. But I also am increasingly concerned about the condition and policy challenges of smaller institutions — particularly community banks, an equally indispensable element of our financial system.

In a speech in March 2011, Federal Reserve Board Chairman Ben Bernanke stated: “Community bankers live and work where they do business, and their institutions have deep roots, sometimes established over several generations … local communities, ranging from small towns to urban neighborhoods, are the foundation of the U.S. economy and communities need community banks to help them grow and prosper.”

Community banks represent 95 percent of all U.S. banking organizations and account for nearly half of all small loans to businesses and farms. A recent FDIC study found that in 629 counties across the nation — nearly a fifth of all counties — community banks are the only banking presence. Without community banks, many small towns, rural areas and urban neighborhoods would have little or no access to banks and the credit and services they provide.

Too often, the needs and priorities of small and large banks are portrayed as distinct and even opposed. The truth is that financial institutions of all sizes are part of a diverse and interdependent financial ecosystem that both supports and depends on a thriving U.S. economy. In addition to serving the largest corporations at home and abroad, large financial institutions provide nationwide convenience to retail customers and support companies of all sizes, including the growing number of middle-market companies that operate globally. Larger banks also support community banks in many ways, including correspondent banking services such as depository, payment and clearing, liquidity management, wire transfer and short-term borrowing services. In turn, community banks and the support they provide to towns and neighborhoods are essential to economic growth and job creation — and, therefore, to large financial institutions.

Unfortunately for the economy as a whole, the 2008 financial crisis and its aftermath have hit community banks particularly hard. According to the FDIC, between January 2008 and March of this year, 469 banks failed — 87 percent of which were banks with total assets less than $1 billion. It should be emphasized that the cost of these failures is born by the banking industry as a whole through more than $10 billion in premiums paid each year by banks to the FDIC — not a penny from the U.S. taxpayer.

These failures are part of a longer-term trend of banking industry consolidation. The number of federally insured banks and thrifts has fallen nearly 60 percent since 1984, with more than 10,500 institutions — most of them small — disappearing. New bank formation is at its lowest point in 75 years, and no new banks were opened in 2011 or 2012 — the first time the U.S. economy has gone without a single startup lender.

A number of challenges currently confront community banks. First, the weak and fragile economic recovery has undermined business prospects for all financial institutions. Second, more than four years of near-zero interest rates, together with weak loan demand — both symptoms of a still-struggling economy — have squeezed net interest margins, which generate most of community banks’ profits. Third, and most significantly, community banks are struggling under the burden of what Federal Reserve Board Governor Elizabeth Duke recently called “a tsunami of new regulations.” The Dodd-Frank Act, along with new international capital regulations known as Basel III, has dramatically increased regulatory compliance costs to community banks at a time when every dollar of profitability matters.

The impact of regulation is a critical point. Smaller banks lack the resources and scale of larger firms to absorb and amortize the costs of compliance and, therefore, are disproportionately impacted by regulation. Former FDIC Chairman Bill Isaac predicted last year that the burden of new regulations could eventually shutter half of remaining community banks.

It is critical that policymakers act to improve the circumstances for community banks. Supporting businesses of all sizes in communities across the country requires that all aspects of the financial system thrive and work effectively. Low interest rates are a policy response to the weak economy and will most likely remain in place for the near future. But policymakers can and should improve the prospects for community banks now by providing common-sense regulatory relief. For example, community banks should be exempt from the most onerous and costly aspects of Dodd-Frank. In considering capital standards such as Basel III, regulators should formulate a simplified framework that adjusts requirement and compliance details to the smaller scale and more straightforward activities and operations of community banks.

In addition, a recent review by the FDIC’s inspector general determined that supervisory standards and enforcement action policies still differ substantially across the banking regulators. The agencies should redouble their efforts toward harmonizing supervisory standards with the aim of eliminating the cost associated with regulatory inconsistency and duplication, especially for smaller banks.

Community banks are an essential aspect of our financial system. The prospects for economic growth and job creation are inextricably linked to the prospects of community banks, along with the health of the broader financial system. By improving the circumstances for community banks by way of substantial regulatory relief, we will not only ensure a more equitable playing field but also give our still-struggling economy a much-needed boost.

Rob Nichols is president and CEO of the Financial Services Forum.

24April, 2013

CNBC: Nichols On Brown-Vitter Bill

April 24th, 2013|Tags: |

Forum President and CEO Rob Nichols discusses the Brown-Vitter bill, improvements to the financial safety and soundness since the crisis, and the international dimension in this debate on CNBC’s “Closing Bell.”

“We have a similar goal that no institution should be too big to fail and taxpayer money should never be used in the case of an institutional failure, ever. That’s a goal we share, but, I guess, a couple of observations come to mind. One is the economic impact of this proposal, Maria. There have been a number of analysts that have already tried to quantify the amount of lending that would be impacted and the credit availability that would be sucked out of the economy if something like this were to occur. We’re seeing numbers that are really quite staggering. We’re seeing maybe perhaps as much as $3 trillion or even $4 trillion of less lending and credit availability, at a time, Maria, when there’s a fair amount of economic fragility. We have a very slow recovery that’s been evidenced by the jobs numbers and the GDP numbers. So I think that’s one area of caution that policymakers should take into account.”

“I’d also observe that these institutions have gone a long way since 2008 to improve the conditions, to make them more safe, more sound, more secure, more stable. You look at capital, you touched on, very elegantly on liquidity. That’s important. In terms of passing stress tests and living wills, they’ve deleveraged, the balance sheets are more solid. So a lot of progress has been made.”

“One piece that you didn’t get to cover in your interview with the Senator [Referring to Vitter] is the international aspect of this. One of the provisions in this draft bill that they unveiled today would be to abandon the Basel process and I think, you know, many think that probably, we need more international cooperation, given how global the capital markets are, particularly on resolution on some of these other issues. And to abandon, to turn our back on some of our international partners, I think many think is probably not the right thing for the United States to be doing right now.”

24April, 2013

Highlights: Forum President Discusses the role banks of all sizes play in the economy on CNBC’s ‘Closing Bell’

April 24th, 2013|Tags: |

Forum President and CEO Rob Nichols on CNBC’s “Closing Bell”

April 24, 2013

Link to video >

 

“We have a similar goal that no institution should be too big to fail and taxpayer money should never be used in the case of an institutional failure, ever. That’s a goal we share, but, I guess, a couple of observations come to mind. One is the economic impact of this proposal, Maria. There have been a number of analysts that have already tried to quantify the amount of lending that would be impacted and the credit availability that would be sucked out of the economy if something like this were to occur. We’re seeing numbers that are really quite staggering. We’re seeing maybe perhaps as much as $3 trillion or even $4 trillion of less lending and credit availability, at a time, Maria, when there’s a fair amount of economic fragility. We have a very slow recovery that’s been evidenced by the jobs numbers and the GDP numbers. So I think that’s one area of caution that policymakers should take into account.”

 “I’d also observe that these institutions have gone a long way since 2008 to improve the conditions, to make them more safe, more sound, more secure, more stable. You look at capital, you touched on, very elegantly on liquidity. That’s important. In terms of passing stress tests and living wills, they’ve deleveraged, the balance sheets are more solid. So a lot of progress has been made.”

One piece that you didn’t get to cover in your interview with the Senator [Referring to Vitter] is the international aspect of this. One of the provisions in this draft bill that they unveiled today would be to abandon the Basel process and I think, you know, many think that probably, we need more international cooperation, given how global the capital markets are, particularly on resolution on some of these other issues. And to abandon, to turn our back on some of our international partners, I think many think is probably not the right thing for the United States to be doing right now.”

22April, 2013

Op-ed: Rob Nichols: U.S. can’t afford to break up big banks

April 22nd, 2013|Tags: |

Featured in the Dallas Morning News

By Rob Nichols, President and CEO, Financial Services Forum

Recently, Dallas Federal Reserve President Richard Fisher gave a speech in which he asserted that large banking companies are still protected from failure and market discipline and, therefore, must be broken up. Fisher and other breakup proponents overlook major provisions of the Dodd-Frank Wall Street Reform Act that effectively end the problem of “too big to fail,” as well significant action taken by large banks that has dramatically strengthened the U.S. financial system. He also ignores the economic consequences associated with breaking up large banking companies.

The Dodd-Frank Act, signed by President Barack Obama in 2010, tackles “too big to fail” head on. First, it significantly reduces the likelihood of bank failures by imposing much stronger supervisory requirements on large institutions, including much higher levels of capital and liquidity. Additionally, large banks must now submit to regulators “living wills” — detailed blueprints for how they can be broken apart without damaging the economy or involving taxpayers.

Second, the law gives regulators the authority and legal framework, which did not exist during the recent crisis, to close failing institutions in an orderly way. Thus, large institutions are no longer immune from failure, and U.S. taxpayers are no longer on the hook for banks’ mistakes.

Even before Dodd-Frank, large banks began taking major steps to reduce risk. For example, capital — which serves as a cushion against unexpected losses — has doubled to near-record levels. Holdings of cash and liquid securities have also doubled, better positioning banks to respond swiftly to crises. Asset quality is far stronger, with problem loans declining to their lowest levels since 2008. Risk management tools and internal controls have been strengthened. Pay practices now closely align the personal incentives of bank employees with the long-term performance and health of the bank. The net result is a far stronger, less risky banking system — one in which depositors, customers and taxpayers can be confident.

Despite these changes, Fisher insists that large banks are still somehow protected from market discipline. This assertion is demonstrably false. During the 2008 crisis, before Dodd-Frank, the stock prices of large banks plummeted, as panicked shareholders frantically sold. Similarly, counterparties — other financial institutions doing business with large banks — fearing large losses, stopped lending to many large banks. In the Dodd-Frank era, even banks’ creditors have been put on notice by the FDIC that they, too, are subject to losses.

It is also important to keep in mind that large banking institutions provide unique and significant value that smaller banks simply cannot provide — in the sheer size of credits they can deliver, the wide array of products and services they offer, and in their geographic reach. These capabilities are particularly important to globally active corporations, which employ about 20 percent of U.S. workers. Breaking up large banking companies would only send the business of corporations like AT&T, Texas Instruments and Southwest Airlines overseas.

Large, globally active institutions also help make foreign markets more modern, liquid and efficient, expanding trade flows and opening new markets to U.S.-produced goods and services — all of which supports economic growth and job creation here at home.

An economy of the size, complexity and diversity of ours needs financial institutions of all sizes, business models and market strategies — from community banks like Veritex Community Bank and Grand Bank of Texas, to asset managers like Westwood Holdings Group and Smith Asset Management Group, to large diversified banks like Goldman Sachs and Bank of America. To be sure, large institutions haven’t always been perfect and aren’t without risk. But congressional, regulatory and industry-initiated action since 2009 has dramatically strengthened the financial system and created a credible framework that ends “too big to fail.”

America should build on this progress by allowing financial institutions of all sizes to do what they do best — provide the capital and financial products and services that American businesses of all sizes and variety need to grow, create wealth and create jobs.

That’s a goal Richard Fisher should welcome.

Rob Nichols is president and CEO of the Financial Services Forum. His email address isRob.Nichols@financialservicesforum.org.

29November, 2012

Op-ed: Despite Basel III, Higher Bank Capital Is No Silver Bullet

November 29th, 2012|Tags: , |

By John R. Dearie, Executive Vice President for Policy, Financial Services Forum

Yahoo Finance – The Exchange

Today the House Financial Services Committee is holding a hearing on the economic impact of new international bank capital rules, known as Basel III. Today’s hearing comes as capital has emerged as a singular focus for many policymakers hoping to enhance the safety and soundness of the nation’s banks and avoid a repeat of the 2008 crisis.

 

A bank’s capital is the simple difference between the value of its assets and the value of its liabilities — the bank’s net worth. Typically comprised of investor equity, retained earnings, and various types of debt obligations, capital serves the important economic purpose of providing a buffer or cushion against which unexpected losses can be absorbed without jeopardizing the bank’s viability.

A heightened focus on capital is entirely appropriate. Sufficient loss-absorbing capital is a critical aspect of any bank’s health and stability. And it is certainly true that many banks held too little capital before the recent financial crisis.

But it is also true that higher capital is not a silver bullet solution to the challenge of ensuring financial stability. In fact, unnecessarily high levels of capital can become problematic and even counterproductive.

Banks Are Healthy Again

Since the financial crisis, the capital position of U.S. banks has dramatically improved. In March, the Federal Reserve announced the results of the latest Comprehensive Capital Analysis and Review, better known as the “stress-test,” which subjected the 19 largest banks to a severe crisis scenario.

The stress-test showed that since 2009 banks have nearly doubled their levels of Tier 1 common equity capital — the highest loss-absorbing form of capital. Overall, banking industry capital is at or near record levels.[1] Moreover, under the terms of the Basel III framework, the eight largest U.S. banks will be required to hold a surcharge of equity capital of between 1 and 2.5 percent of risk-weighted assets by 2019.

Commenting on the stress-test, Fed Chairman Ben Bernanke stated: “Under this highly adverse scenario … 15 of the 19 bank holding companies were projected to maintain capital ratios above all four of the regulatory minimum levels.”

Strength Across the Board

This dramatic improvement in capitalization has been achieved even as banks have made other improvements that have significantly reduced their overall risk.

For example, liquidity has dramatically improved, with large banks more than doubling their holdings of cash and liquid securities.

Leverage has been reduced, in some cases cut in half.

Asset quality is far stronger, with problem loans declining for nine consecutive quarters to their lowest levels since early 2008.[2]

Risk management, internal controls, and governance procedures have been significantly enhanced.

And compensation structures at most banks have been reformed to closely align the personal incentives of bank employees with the long-term performance and safety and soundness of the employing institution.

Misguided Reforms

This progress notwithstanding, some members of Congress and other observers contend that banks should hold much more capital. Since capital protects banks from losses, the thinking goes, more and more capital will make banks safer and safer, and bank failures — and potential bailouts — less likely.

Such calls for ever-higher capital overlook the fact that additional capital is not without costs or consequences, and can become counterproductive or even dangerous.

For example, too much capital can obstruct banks’ ability to perform their critical role in the economy by limiting their lending capacity. An underperforming economy due to scarce credit ultimately undermines banks’ safety and soundness by impairing asset quality and earnings.

An overreliance on capital can also distract policymakers from other equally relevant aspects of safety and soundness, such as the nature and strength of a bank’s assets, the rigor of its risk management framework, the soundness of its internal controls and governance procedures, the quality and diversity of its earnings, and the reliability of its liquidity position. Considered in isolation, outside the context of these other essential aspects of safety and soundness, a particular capital level has limited meaning or supervisory value.

Excessive capital can also become perverse — potentially incentivizing greater risk-taking by banks. Higher and higher levels of capital erode banks’ return on equity (ROE), a key measure of profitability. As ROE declines, banks’ ability to attract the additional capital that regulators are requiring becomes more and more difficult. At some point, generating the returns necessary to attract additional capital from investors may require taking greater risk.

Capital is a critically important aspect of banks’ safety and soundness. But as is the case in other contexts, sometimes there can be too much of a good thing. Rather than indulging in capital overkill to the detriment of economic growth and job creation, let’s build on the progress achieved to date by allowing banks to do what they’re intended to do — propel economic growth and job creation by supplying the credit that American businesses, homeowners, and consumers need.

John R. Dearie, Executive Vice President at the Financial Services Forum, is a former officer of the Federal Reserve Bank of New York. The views expressed are his own.

[1] FDIC, Quarterly Banking Profile, First Quarter 2012

[2] FDIC, Quarterly Banking Report, Second Quarter 2012