Late last month, in an unusual show of solidarity, Camden Fine, President & CEO of the Independent Community Banks of America (ICBA) and Jim Nussle, President & CEO of the Credit Union National Association (NCUA), wrote a joint letter to the House of Representatives urging them to pass Senate bill S.2155 (JRN 35:13).
Cam Fine, who will be retiring this month, sat down for an interview with the American Banker to explain why. These were the three major takeaways from the interview:
1) Under the Qualified Mortgage Provision in S.2155, most mortgage loans originated and retained by same institution would be exempt from provisions designed to prevent toxic loans from being issued, rolled into exotic mortgage backed securities and then sold.
2) The Capital Simplification portion of S.2155 would essentially roll-back Basel requirements for community banks from Basel III to Basel I. The impetus for the Basel III accord, if you recall, was the failure of Lehman Brothers and was intended to prevent the failure of another “systemically important bank”. It created the new common equity Tier 1 (CET1) ratio and required a new minimum liquidity ratio.
3) It took four years to get a Bill this far and while it may not be perfect, he believes it is good. The bill passed the Senate with strong bi-partisan support and, if it does not pass the House in essentially the same format, Fine believes it will be destined to die with no alternative in sight.
The letter to the House highlighted additional regulatory relief elements for community banks and credit unions that it said would allow them to better serve agricultural and Main Street customers. It also served to stroke their collective ego a bit by telling them that H.10, the Financial CHOICE Act was the inspiration for S.2155 and many of the provisions of that bill are included in S.2155.
The fault Bauer found with S.2155 was that it would raise the threshold for enhanced prudential standards (AKA Stress Tests) from $50 billion to $250 billion, which we did not want to get behind. We do, however, support regulatory relief for smaller institutions, as long as it doesn’t make us susceptible to another crisis, so let’s take a closer look at the Cam Fine interview take-aways.
During the recession we wrote a lot about “skin in the game” or lack thereof. If the same institution that makes a loan will have to live with the results, whether they are underwritten well or poorly, that’s skin in the game. That is the needed incentive to make sure they are done right. We can support that.
We can also get on board with removing the Basel III requirements for community banks. These were specifically designed to end Too Big To Fail. The mantra that it has made some banks too small to survive rings true. At the end of 2008 there were 3,131 U.S. banks with assets less than $100 million; they accounted for 37.7% of the industry. Today that number is down to 1,407 or just 24.8% of the industry. As a whole, these banks are solid performers with capital ratios far better than the national average. But having to comply with large complex banks is forcing them to merge (JRN 35:13).
As for voting for something that is good and not perfect, well, that is the lost art of compromise. Let’s see if it can reintroduce itself to Washington.
For their part, the NCUA has approved new Stress Test requirements for credit unions. The rules are tiered by assets size.
Credit Unions w/ year-end Total Assets of:
at least $10 billion & less than $15 billion
Not required to submit stress tests to the NCUA, but it will be part of the NCUA’s supervisory oversight.
at least $15 billion & less than $20 billion
There is only one of these currently. It’s required to incorporate stress test scenarios into its capital plan by May 31st.
$20 billion or more
There are currently three of these. They are required to incorporate stress test scenarios into their capital plan by May 31st and must meet a minimum stress test ratio of 5%.
The 50 largest federally insured credit unions are listed on page 7. Most are well below the Stress Test target size, but like banks, the smaller CUs are disappearing. At the end of 2008 there were 6,653 CUs (83.5%) with less than $100 million in assets. Today that number is down to 4,093, just 72%.