Washington, D.C. -- (SBWIRE) -- 07/03/2014 -- Nationally Syndicated Financial Myth Busting Radio Show with Host Dawn Bennett, CEO of Bennett Group Financial Services, LLC, on June 29, 2014, interviewed Frank Keating, President and CEO of the American Bankers Association, 135-year-old group representing banks of all sizes and charters.
Keating became ABA's president and CEO on January 1, 2011 following seven years of service as the president and CEO of the American Council of Life Insurers and after serving two terms as Oklahoma's 25th governor. On June 20, 2014, Mr. Keating was interviewed by Bloomberg where he stated that excessive regulation is strangling U.S. community banks, which have closed at the rate of about one per business day since 2008, the financial crisis, and that community banks spend about 15 percent of revenue on compliance even though they weren't responsible for the credit crisis.
Here is the interview with Frank Keating
Q: Are local banks on the endangered species list?
A: The number of local banks that we've lost would suggest that something is very seriously wrong, and it's the bankers' view that it's excessive regulation. For example, Dodd-Frank, 7,000 pages of proposed and final rules, wasn't supposed to apply to the smaller institutions, but it does.
Basel III, which is a European construct requiring certain capital levels for certain types of assets, was not supposed to apply to the community banks at all, only the big international banks, but all of that applies to community banks. So15 percent of operating income is going to compliance, that's fewer people for marketing, fewer people for provision of loans. The average community bank has 37 employees, so imagine if the restaurant that you go to needed 15 percent of its operating income to make sure that they are in full compliance with the City of D.C. health inspectors. Plus they're in there all the time inspecting. So 15 percent of your people have to currying to them and not to your customers. It'd be pretty grim.
Q: Why are the Dodd-Frank regulations treating the small community banks and credit unions as the same as their large, multimillion dollar revenue Wall Street counterparts?
A: I think because the regulators queue off the Fed, the Federal Reserve Board, and they're the 800-pound gorilla. And the regulators queue off of Congress, and there view was, "Gee, I guess that we have to be hard down on everybody, not just the largest institutions." The number of young people today, one out of three are living with their parents, people under 30 years of age. When I was 27, I bought my first house. Today, our estimate is it'll be anywhere from 37 to 40 before someone can buy a house. Can you imagine that?
Because there's a rule that's part of the Consumer Financial Protection Bureau, which was created under Dodd-Frank, that you have to meet these very strict guidelines in order to get a mortgage. No more character loans, so that chills lending, so where does the money go? For compliance and not lending, and that's just tough, because you can't get an economy going if you don't have the people who make the loans in a position to make the loans.
Q: Dodd-Frank seems to be an expensive program to implement, but our economy is continuing to get weaker. For the bigger banks, I'm not saying the cost doesn't affect them, but it does seem to roll off their backs. The smaller community banks, however, it just seems to be harder to absorb. Do you have any solutions for these smaller banks?
A: We have all the large and regional institutions as well, but we're trying to partner together to have the larger institutions, in the cyber security space for example, share their ideas and technology suggestions with the smaller institutions, but it's a perfect storm. We talk to the regulators frequently. They assure us that they have small bank, community bank programs. They're looking at this. They're trying to address it, but for the first time ever, I hear community bankers whose banks have been in their families for two and three generations saying, "This is just too hard. We're getting out." That's not good because small communities blow away if there is not a community institution in that community. You want to have access to credit from as many different and varied institutions as possible. For the first time the number of community banks in this country are less than they were in 1890.
Q: Can you remind us all why a small, local bank is so valuable to the community?
A: Because the larger institutions in many cases don't serve a small community, and even if they do, frequently, loan decisions are made by people far away.
So, if you and I had a flower shop in a small town in Iowa or a small town in Maryland or we had a car wash, for example, somebody in Atlanta or somebody in Dallas would say, "We don't do car washes, those are a terrible investment. Florist? I don't know anything about that town." So, the underwriting has to be done in the community.
My grandfather owned a small community bank, a national bank, in southern Illinois. My twin brother's been a community bank CEO in Tulsa, Oklahoma forever. They know their market. They know their community. They make loans to their market and their community, and they're just a partner to the town, and I think that it's really important to understand the big banks weren't in the smaller towns and cities, let's say, 20, 30 years ago. It's wonderful to have them there, those that do go, but absent them, it's very difficult to find lending opportunities when you have a small community that does not have its own institution.
So, my personal money, my corporate money, all is with the community bank. It's with a small bank because that's how I started. They were the first ones that actually gave me a loan. The big guys wouldn't do it.
That's an example. They probably thought, the big guys, "Well, that's fine. I'm sure you have good idea," but character loans, like the loans that my brother and my grandfather made, in other words, I know you. You know me. They say "I remember you threw my paper." In those days they had paper routes, and, "Yeah. You were a really conscientious young person. I'm going to give you a break. That's fine."
That happened to me when I bought my first house. I flunked the credit analysis because I hadn't been working long enough, and the banker said, "Well, you have the owner collateralize the first x number of dollars, and I trust you. I think you do a really good job. You'll try to pay us back, and I'm going to make a deal with you. Well, the owner did collateralize the first $5,000.
Today, that's not a qualified mortgage loan. Having dad or mom cosign or having the owner, seller collateralize or cosign, that's not a QM loan, so it wouldn't be made. I just think it's really unfortunate that this next generation of young Americans saddled by student loan debt, artificially onerous qualified mortgage rules, by soft economy, they're all being frozen out of what for you and me and for others is the first step on the capitalist, free enterprise American dream, and that's home ownership.
Q: So to get things back on track, what suggestion do you have or what suggestion does the ABA have?
A: We are for amending the Dodd-Frank Act. In the House of Representatives, they're willing to do that. In the U.S. Senate, not so. They're afraid i f they open it up to a few amendments, it'll be a landslide of amendments. I saw Barney Frank several years ago, before he left the Congress. He said, "Well, give me some examples of stuff that needs to be changed," and I said, " To register us in the municipal adviser if you have a relationship with a municipality in your bank. My twin brother's chairman of the utility board in Tulsa. He's serving at no compensation. If he leaves, it'll be somebody with less financial acumen on that board, and in his case, and he has to take a course and he has to be registered by the SEC as a municipal adviser. He won't do it." He'll just drop off the community. And Frank, to his credit, said, "That's a good point, write that down," and had one of his guys write it down.
This isn't the New Testament. There are a lot of pieces to Dodd-Frank that ought to be amended, but Congress just doesn't have the intention, maybe it's the way, to do it right now. Like Basel III, why in the world do banks other than those in the international banking marketplace have anything to do with something that comes out of Brussels?
Every small bank from sea to shining sea, is getting out of the mortgage servicing business, to take care of us as mortgage-owners, make sure our payments are applied appropriately. They're getting out of that business because they have to have all these new capital levels required by Basel III. It really makes no sense. We need some common sense regulation, and we need common sense from the Congress to have hearings.
Q: So four years into Dodd-Frank, more than a dozen Washington-area banks, we'll just talk this area, and credit unions have merged with one another. Of course, they're citing the heightened regulation as a factor. Do you think this type of regulation has created a confusing situation for the entire industry, or just for the small banks and the unions?
A: I think the regulatory burden as hard as it is on the large institutions, they can handle it, but the institutions with 37 employees? How do you read 7,000 pages of proposed and final Dodd-Frank rules? In the mortgage space, there have been 4,000 pages already written by the Consumer Financial Protection Bureau. We have another 2,000 pages coming. Well, who can do that? We at the ABA provide courses to help people, but after a while, you just say, "This is oppressive. This is nuts." I mean, how many Danielle Steel or Dostoyevsky novels is that stacked one upon the other, that number of pages? It's just completely suffocating.
Q: Now, this past week, you wrote a piece in The Hill about credit unions, and you described how professional athletes and other high net worth individuals are actually now taking advantage of credit unions. I'm just wondering, are the loosening regulations on the banks going to affect the credit unions, or is it going to be the other way around?
A: The National Credit Union Administration is their own federal regulator, but what we in the banking industry object to is the regulator and the regulated, they're locked arm-in-arm. In the case of the National Credit Union Administration, recently they agreed tentatively, that is through preliminary approval, to a credit union focused on serving pro athletes. The credit unions were established in 1934 with the purpose to provide bank access, lending access to people of small means. That's the exact language of the statute, “People of modest means, low-income people.” What does LeBron James have to do with people of small means? The average NBA person this year made $4.5 million; the average baseball player $3.9 million; football $2 million; hockey $2.4 million. What the Credit Union Administration is doing is saying, "You can have a credit union subsidized by federal taxpayers." Credit unions pay no federal income tax.
You and I pay more federal income tax than credit unions do, and yet their charter demands that they deal with people of small means. They do it very rarely, and they have huge lending operations for boats and office buildings. That is not the purpose of the credit unions, when they were created in 1934. If they want to get into the big leagues and make big league loans like banks do, then pay taxes like banks do. It's just not fair.
Q: Sadly, this week we saw first quarter GDP number get revised down even further south, all the way down to a negative 2.9 percent. Are you seeing anything in the banking sector that could explain the slow down? Are people taking out loans? Are new projects being started?
A: The number of start ups is very worrisome. It's very low. I think part of it is a soft economy, regulation by banks, but also what small business is facing in terms of their health care cost and tax increase potential.
People always avoid pain before they embrace pleasure. So, it's understood that there will be a softening of interest, if not a softening of demand. Obviously, the weather had an impact, but just think how man y months you have to have significant growth to make up for a 2.9 percent contraction in the first quarter. That's just terrible.
I worked for President Reagan and I have a different view of the economy. I think if you really want to get the animal spirits going, you need to encourage a marketplace of assets, liabilities, purchases, and sales that encourages capitalism and free markets, a reasonable regulatory system and low tax rates to encourage people to invest and save. We're not seeing that. I think there is a lot of concern at the present time about how the economy's healing. Certainly we're healing, and thank goodness, but I think part of that is in spite of the government. Part of it is just America is, by nature, a capitalist free market, free enterprise society. We just need to unloosen the tethers and get the economy moving. We're not doing that.
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About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included Rock Legend Ted Nugent, as well as Steve Forbes and Grover Norquist. The show is a great complement to Dawn’s monthly investing seminars that take place at Tysons Corner in McLean, VA, where she discusses investing.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett or firstname.lastname@example.org