Guest Post: The Growth of the U.S. Banking System

Walk down any Main Street, and you’re likely to see a wide range of shops, from local boutique shops, to regional businesses, to large national and international chains. They exist because people choose to shop there. Many started out small, and now have grown bigger over the years.

You’ve probably noticed the same thing when it comes to banking. Individuals have a choice of whether to place deposits with their local credit union or community bank, all the way up to a national or international bank. Maybe they enjoy the intimacy and good feeling of “shopping local” with a smaller bank; or perhaps they prefer a larger bank, one that can provide a variety of services and accessibility that goes beyond the capabilities of a smaller one. Either way, many of these larger banks started out small and have grown over time.

Now imagine what it would be like to be a financial officer of a large U.S.-based nonbank company. You do business all over the country and in many major economic hubs throughout the world. Could your needs be financed by your local credit union? No – that small institution simply could not handle your global and diverse needs. But just because you need a bank that’s bigger than your town’s credit union, doesn’t mean you can’t still shop local. In this case, “shopping local” means that the bank you do choose is based in the U.S. You also have the choice of doing business with a bank based outside the U.S. but have a U.S. branch presence. Which one do you choose? Well, that’s up to you; it probably depends on the unique financial needs of your firm, where in the world you conduct most of your business, or simply, your preference.

This is the state of banking today, and that’s what we looked at in our most recent HPS Insight report entitled “Banking on Our Future: The Value of Big Banks in a Global Economy.” Here in the U.S., we have a competitive financial sector with banks of all sizes and specialties, based on the needs and preferences of those who live and do business here.

What we found was that the growth of the sector correlates closely with the growth of the economy at large, and the diversity of the sector reflects the diversity of its customers.

Below is an excerpt and chart, but you can read the whole thing by clicking the link above.

“Critics have painted the picture of an out of control, large banking sector that must be reined in. Yet, the data shows that the U.S. banking sector has actually grown proportionately with the rest of the economy (Exhibit 1). U.S. exports and the S&P 500 have both grown at the same rate as the assets of U.S. banks over the past two decades.”

Patrick Sims is a Director at Hamilton Place Strategies, a policy and communications consulting firm based in Washington. Prior to joining HPS, Patrick acted as the lead research analyst in the financial institutions’ group at SNL Financial and worked for the CFA Institute.

Posted in U.S. Economy | Comments Off

Failures in an Orderly Fashion

Discussion in Washington around the concept of large financial firms being “too big to fail” (TBTF) has reached new heights. Recent editorials, studies, and commentators have debated whether financial services firms are too large to serve the greater good of the economy, and if their magnitude will have adverse effects on consumers should another financial crisis occur.

Congressman Barney Frank, one-part of the namesake “Dodd-Frank Act” recently responded to the House Financial Services Committee analysis on the status of large financial institutions as “too big to fail”. In short, he summarized, “The Wall Street Reform and Consumer Protection Act clearly establishes a framework that allows large financial firms to fail while preventing catastrophic harm to the broader economy.”

While we don’t always agree with Congressman Frank, on this issue, there is consensus.

Financial services firms are safer and stronger today to serve the economy and American consumers, and there are a multitude of reasons why.

Consider these facts:

  • Large financial services firms today have more capital—the largest have the most Tier 1 capital than at any other point in history. They have over 12% Tier 1 capital ratios, on average.
  • Financial services companies have ended the riskier practices. There is stronger underwriting for new mortgages, and executive compensation plans has been aligned with long-term performance.
  • There is more liquidity in the financial system.

Systemic oversight is in place for the first time in history.  The Financial Stability Oversight Council was created to monitor risks across the financial services system.  For the first time ever, all banking regulators are sitting around the same table with the sole purpose of improving about the safety of the financial system at large. Additionally, there is more information available about the industry from the newly established Office of Financial Research.

Furthermore, regulatory improvements have resulted in:

  • Living Wills: a map of how to effectively wind-down a failing company that does not hurt the greater economy, or financial system. These extensive plans are submitted annually to the FDIC and Federal Reserve.
    • Orderly Liquidation Authority: the power for regulators to enact the above plan if a financial firm fails.
    • Enhanced Prudential Standards: Banks now submit to regular stress tests and other enhanced prudential standards such as increased capital and liquidity via Section 165/166 of DFA.
    • No Taxpayer Dollars:  assessments will be used to pay for failures, not taxpayer dollars, re: Section 214 of the Dodd-Frank Act. It reads, “Taxpayers shall bear no losses from the exercise of any authority under this title.” “No taxpayer funds shall be used to prevent the liquidation of any financial company under this title.”

In fact, Federal Reserve Board Chairman, Ben Bernanke, was recently quoted as saying “Risk indicators present a picture of the banking system that has become healthier and more resilient.”

No one can guarantee that another economic contraction will not occur. Indeed, it is almost certain that it will.  Luckily, legislative, regulatory and market changes, as a result of the 2008 crisis, have strengthened the financial sector.

Too big to fail is over. Moving forward the industry, not taxpayers, will be on the hook.

Posted in U.S. Economy | Comments Off

Recent Cyber-Attacks: What to Know and How to React

1)       Banks have been targeted in the past month by cyber-attacks.

  • Called “a distributed denial of service (DDoS) attack”, it works by blocking legitimate customers trying to use the bank’s website, often resulting in slower than normal online interactions.

2)       Your information is secure.

  • The attacks do NOT involve a data breach or hacking.

3)       We want you to feel safe online.

  • Bank employees are working hard to ensure you have access to normal, safe and consistent online financial services.

4)       Bank systems are secure.

  • Although you might encounter a slow connection, the banks systems are still secure.

5)       Security is a layered system.

  • Banks use sophisticated online security strategies to protect customer accounts.

6)       Collaboration is key.

  • Banks are collaboratively with other institutions to share information
  • Government officials are collaborating with the financial services industry to find proactive solutions.

7)       You can still bank!

  • While the online functionality may be temporarily limited, customers can still process transactions through a bank’s call center, or by visiting a branch.

8)       Make sure you are protected.

  • You can help stave off cyber threats by ensuring that your virus protection is up-to-date.
  • Check your Password Strength and make sure that your online passwords are strong.

9)       Share the news.

  • By sharing the above information with your friends and family, you can help mitigate these service outages, and make your online experience even safer.
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Reforming the Reform

Reforming the Reform

Two years after the passage of the Dodd-Frank Act, both sides of the aisle can agree that the law is in need of some vast improvements.

On July 21, the Dodd-Frank Act (DFA) will pass the two year mark. Today, annual compliance costs of Dodd-Frank are expected to exceed $7 billion—even though only 119 (29.9%) of the 398 total required rulemakings have been finalized. The projected number of new personnel required to comply with Dodd-Frank is over 26,000, and that’s only for the regulations that have been issued.  Not to beat a dead horse—but this is a massive law.

On the two year anniversary, here’s a checklist of some good things that came out of DFA, and some measures which have imposed serious economic consequences:

Some Worthy Developments:

  1. Reporting of Derivatives Data: New rules that create centralized data repositories to store derivatives information will be helpful to the overall system.
  2. Orderly Liquidation Authority (OLA): Since the economic collapse, the county’s largest financial institutions have created “living wills” which will guide regulators during a liquidation process if a financial firm fails. Today, the FDIC has authority over banks to use OLA. Read: no bailouts.
  3. The Federal Insurance Office (FIO): While the FIO has yet to produce a report, this new office will help modernize insurance regulation and streamline the patchwork of state-based insurance regulations that currently exist.
  4. Consumer Protection: Although the structure of the CFPB suffers from some fundamental governance problems, the mission of protecting consumers is one that we respect.

From Bad to Worse:

  1. Durbin Amendment: A last-minute add on, interchange rules have cost the financial industry about $12.2 billion annually, translating into 20% higher fees for consumers, according to a Javelin study from February 2012. As a result of these price controls, traditional conveniences such as free checking have all but disappeared.
  2. Volcker Rule: By limiting practices deemed “too risky”, which were not causal to the financial crisis—the Volcker Rule will cost American businesses up to $315 billion through the total result of lost liquidity, increase direct borrowing costs by up to $43 billion per year, and dramatically reduce liquidity according to a January 2012 Oliver Wyman Study.
  3. Fiduciary Duty: Shortly after the Dodd-Frank Act was signed into law, the Department of Labor sought to regulate broker-dealers and investment advisers in a manner that conflicts with the SEC’s efforts at uniform fiduciary standards, and worse, would eliminate approximately 7 million existing retirement accounts.
  4. CFPB: The current governance model of the CFPB has neither budget nor regulatory accountability to Congress nor to an oversight Board. A more normal governance structure is a 5-7 member bi-partisan Board, rather than a sole Director with unilateral regulatory authority.
  5. Cumulative Weight: It is an understatement to say that the industry is drowning in regulation. According to the American Action Forum, the regulations issued so far under DFA will impose 52.7 million hours of paperwork alone. These compliance costs take away from every new loan, product or service to the American consumer. U.S GDP is projected to be 2.7% lower than it would otherwise be by 2015 as the result of regulatory reform (according to the Institute for International Finance Report.)

What does this mean? We’re not trying to repeal Dodd-Frank as a whole, but the law can be and should be improved.

Are financial services firms safer today? Yes. Are we stronger than pre-crisis levels? Without a doubt.

But in its current state, the regulatory regime stifles competitiveness, curtails economic growth, limits availability of credit, and results in higher costs.

What to do?

Here’s a start: Repeal Durbin. Rewrite Volcker. Restructure the CFPB.

Then conduct a full Congressional review of the entire 2300 pages, hear all sides, and listen to experts. Adopt legislative improvements that hold fast to safety and soundness, and enhance economic growth.

In short, reform the reform.

To view the DODD-FRANK 2-YEAR ANNIVERSARY REPORT, please click here.

Posted in News Center, Public Policy: Legislation, Public Policy: Regulation, U.S. Economy | Comments Off

6 Ways to Spot Financial Abuse of the Elderly

Financial abuse of the elderly is a serious issue. In fact, family members are the culprits for 75% of the victims of financial elder abuse, and women are twice as likely as men to become victims. Today, people over the age of 50 control over 70% of the nation’s wealth. Whether you work in a financial institution or are just a concerned neighbor, keeping an elderly person’s financial future safe is something that we all can help with.

Look for these signs of elder abuse

  1. Unpaid bills
  2. Change in banks/attorneys
  3. Changes in spending
  4. Missing property
  5. Unfamiliar signature
  6. Lack of personal amenities
Posted in Financial Literacy | Comments Off

Our Financial Services Industry: Safer and Stronger

Posted in U.S. Economy | Comments Off

Protecting Financial Services in an Evolving Internet

The Internet Corporation for Assigned Names and Numbers (ICANN) is reporting that nearly 2000 applications were filed for new generic Top Level Domains (gTLDs) at the close of the application period on May 30. gTLDS are the letters to the right of the dot in Internet addresses, so think .com, .net and .org.

With 63 million people conducting financial activities online, Internet security is essential to the health of our economy. New financial domains that don’t meet the industry’s standards for security could harm consumers and damage trust in financial services.

On May 24, a coalition of financial services companies and associations, led by The Financial Services Roundtable and American Bankers Association (ABA), applied for .bank and .insurance on behalf of the industry. The domains will be small, exclusive spaces, providing heightened security, validating financial institution registrants are chartered by their home country financial regulators, and vetting other financial entities to ensure compliance with strict registration requirements.

The limited number of registrants (all validated), heightened security, and proactive threat monitoring, will raise online security and strengthen safeguards against imposter websites, thereby reducing malicious behavior and fraud.

The American Bankers Insurance Association, Australian Bankers’ Association, British Bankers’ Association, European Banking Federation, Financial Services – Information Sharing and Analysis Center, Independent Community Bankers of America, International Banking Federation and numerous financial services institutions have endorsed the initiative.

ICANN will announce all gTLD applicants on June 13 and new domains could be active as early as 2013. While the influx of new domain names could create a more complex environment, financial services remains committed to evolving the online environment in a safe and secure way for consumers.

Posted in U.S. Economy | Comments Off

Small Businesses Can Find a Good Partner in Large Financial Services Companies

The SBA’s Small Business Week program, currently taking place, brings to the forefront the myriad ways in which financial services partners with government and other non-lending leaders to help make small business dreams a reality.

Large financial institutions are willing lenders to small businesses—but many times applications are without the two critical “Cs”: Cash Flow and Collateral.

Obtaining the criteria might seem tricky, but there is a plentiful amount of free information readily available for the interested entrepreneur—from online resources to networking opportunities.

Two quick examples:

• MasterCard provides great webinars online which include improving credit scores, enhancing your marketing communications, and 401ks, among others.

• Wells Fargo’s resource center houses numerous videos and articles which cover tax benefits, the issue of cash flow and collateral, and even how to plan a company succession plan.

Lending is a competitive business, and large financial institutions are looking to make every good loan possible. In fact, according to the FDIC, approximately $600 billion of small business loans are outstanding, and the largest 1% of banks manage over 40% of these loans.  Moreover, the largest banks have pledged $100 billion of additional lending over the next three years.

Small business owners should shop around for the best loans and resources possible, understanding that the right partner could be a big financial services company.

Posted in U.S. Economy | Comments Off

April Brought Together Events, Advocacy and Camaraderie for Financial Literacy Month

April was a bustling month for financial literacy activities at the Roundtable. Our Financial Literacy Calendar boosted a total of 141 events in 29 states with the participation of 27 Roundtable member companies.

In Washington, the Roundtable sponsored an annual favorite, the Jump$tart Coalition Dinner, honoring strides in financial literacy and some remarkable students who are putting their financial future first. On April 17, the Roundtable joined many other companies, and members of Congress in Financial Literacy Day on the Hill—a showcase of free resources which highlights the collective wealth of material for public consumption.

Outside of Washington, the Roundtable was a sponsor of the Annual Conference on Financial Education  in Orlando, FL.

A frequent attendee of the President’s Advisory Council on Financial Capability, Roundtable staff attended an April 9th meeting that featured a panel discussion “Financial Capability and Empowering Communities to Succeed in the Economy of the Future.”

A hearing before the Senate Homeland Security and Governmental Affairs Committee, Subcommittee on Oversight of Government Management, the Federal Workforce, and the District of Columbia, entitled “Financial Literacy: Empowering Americans to Prevent the Next Financial Crisis” prompted the Roundtable to submit a statement for the record. The statement highlighted the Roundtable’s 2012 goals for promoting financial literacy, including:

  • Urging the GAO to conduct an annual study of every state’s efforts to educate their students (K-12) in financial literacy;
  • Offering financial education to every student before they accept a student loan;
  • Offering financial education to prospective homebuyers; and
  • Permitting parents to start saving for their child’s retirement at birth.

April is not the end of support for financial literacy though. As a core priority of the Roundtable’s legislative agenda, staff will continue their outreach through the rest of the year by advocating for a comprehensive financial literacy bill that covers the entire lifespan of an American.

To read more about the Roundtable’s efforts in financial literacy, visit our Financial Literacy Corner.

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Roundtable’s Chapa speaks to Terry Savage on Financial Literacy

Judy Chapa, Roundtable Vice President of Community Services and Financial Literacy, recently spoke to renowned financial literacy expert, Terry Savage on the importance of financial literacy on Capitol Hill.

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