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The HQ Conundrum
PETERSON: On the commercial side, I agree there’s a finite pool of good clients. And because we all want them, the rates are ridiculous that these clients are getting.
Lower than inflation.
PETERSON: You can’t make money long term on these kinds of rates. The spreads are way too small. But the alternative is Fed funds. So I think we are being a little bit short-sighted in trying to invest all the capital and cash and deposits that we have at lower spreads because we want to deploy that.
And there’s a limited pool of people that qualify, too, for that. The due diligence that we self-imposed, as well as regulatorily imposed, is much more intense than it has been. No one wants to make a mistake. But you weigh that with being very aggressive in trying to deploy your capital. So we have had a pretty good year as far as loan growth on the commercial side. It’s somewhat tougher on the small business side. But on the medium to large size business, we are having a pretty good year.
On the short end, most banks can raise money at well under 1 percent—so you can borrow really cheaply and you can have a very healthy spread. Are banks running a higher interest rate now than they were? What are you seeing?
LEARY: I feel somewhat like we did before we went into the downturn. The potential for the interest rate risk and sensitivity to it is there. My evaluation is thus far the banks have it managed. But I would have said the same about the real estate portfolios in ‘05, ‘06 and into ‘07. So it’s a two-edged sword, but the potential for that interest rate sensitivity to go sky high is there, yes.
BEARD: That’s a good segue back to community banks, because if you’re a large bank and you have sophisticated derivatives subject to the Volcker Rule, you have some way of trying to hedge against that kind of interest rate risk.
If you’re a small community bank, there are some programs out there that you can tie into. But we don’t have near the tools, the sophistication, to hedge interest rate risk. It is a potential problem, and it again exacerbates the problem of the smaller banks driving those kinds of loans to the bigger banks that are willing to lock in for a 10-year period, which is almost suicidal if you don’t have some way to try to hedge that risk.
We have heard a lot about the problems the smaller community banks are having. But if you read the national press, it’s the large banks that pose systemic risks that are getting all the attention and are right in the gun sights of a whole lot of regulators.
WINEGARDNER: The “large” and “small” walls have been torn down over the last several years because we finally have common ground. We have a battle to fight, and it’s no different for us than them. We are facing the regulatory burden, and the advantage we have is that we have the resources. I couldn’t tell you how many people we have that just work compliance in our organization.
On the other hand, because we are one of the big four and we account for about 10 percent of the total deposits in the country, we are held to the letter of the law. We get zero tolerance when it comes to appraisals or anything else.
Explain what the Consumer Financial Protection Bureau will do and how is it affecting you.
WINEGARDNER: I don’t think any of us really know the scope of what the impact will be. We probably are treading on thin ice until we understand completely what their mission is. We are willing to live within whatever the regulations are. We are good citizens. And we are going to figure it out as we go.
But there’s a lot of uncertainty as to what that is going to look like. They have come into our locations and visited some of our branches. They have watched us go through the process of opening accounts with customers to make sure that we are not selling products that people don’t need or want. Their mission is to protect the consumer and my view, at this point, is that they are willing to do that at whatever cost to the financial world.
HOLLOWAY: Sadly, the consumer that is going to be hurt the most is the middle-income consumers who don’t have other options. Higher-income individuals, they have other ways to get a mortgage loan and other ways to work through the system. The trickle-down effect of those regulations, while well-intentioned, removes the availability of credit, removes the choice of financial institutions, and continues to drop back the market for the people who really have no other options.
Industrial loan corporations have been a growing segment until a few years ago. What are you seeing now? How is regulation impacting what you do with the industrial loan corporations?