January 15, 2014

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Banking and Finance

January 15, 2014

Ed, from a regulatory standpoint, what’s your view of what’s going on?

LEARY: I would still classify it as an “Age of Uncertainty.” Everybody across the economic spectrum is very concerned about the underlying fundamentals behind everything. The economy’s growing a little bit. It could be doing much, much better. And surprisingly, our area here is doing fairly well compared to most other parts of the country. As I listen to the economists, Utah clearly is doing much better than a number of other areas across the West. And the banking environment in Utah is doing well, recovering. We’re all still recovering from a very long, protracted downturn.

The capital stress test and bank stress tests in general have been increasing in terms of intensity. Does that mean the regulators are more afraid of a severe downturn than the rest of us?

LEARY: I would characterize that stress testing as being on the largest institutions. The majority of the community institutions, they are not going to see that level of stress testing. They’re seeing a lot of changes. I want to be clear on that—they are seeing a lot of changes coming at them. So there’s a lot of change going on in the regulatory environment. I would absolutely acknowledge that. But my original point was that’s what leads to the uncertainty. All these moving parts are creating uncertainty across the spectrum.

SORENSEN: The regulations have a significant impact on small community banks. In the last 10 years, 83 percent of all of the banks that were $100 million or less are gone. And today, where we stand with the “too big to fail” concept, if you take all of the banks that are $1 billion or less, it totals 9 percent of the total assets. There are less than 600 banks that control 91 percent of all of the assets.

Prior to 2008, those numbers were significantly different. What I’m saying is it appears to be a “one size fits all” approach to banking regulation. What ends up happening is small banks have significantly higher operating costs because of the regulations, and significantly higher interest costs. So there will continue to be consolidation.

Right now there’s about 6,900 banks in the United States. When I got into the business and obtained FDIC insurance in the ‘80s, there were 24,000. There’s a consolidation of banks to the tune of about 200 to 300 banks per year, and I don’t see that stopping. So small businessmen are precluded from capital markets that were able to obtain capital prior to the crisis.

What is the reason they’re not able to get capital today?

SORENSEN: Because the regulations have changed—good and bad. I’ll give you an example. Prior to 2008, there were a lot of stated income loans that were being done. You didn’t check the income. You could say, “We’ll give you a loan on a stated basis. And if you have enough money and your credit’s good, you can get that. You can buy that warehouse that you need for your carpet business.”

Today, those individuals are precluded from obtaining financing because they cannot demonstrate capacity to service the debt. And institutions are precluded from making those loans. Community banks in the past served the purpose of lending to those individuals, and that is now taken away from them.

In addition to that, the CFPB came out with a proposal for first mortgages, and their proposal was that no first mortgage can be made if the debt ratio is greater than 43 percent. Now, I agree with that concept in regards to a secondary market for selling those markets, because what happens, on a secondary market, they need structure. But they impose that rule across the board, to all institutions.

What ended up happening is there was a tremendous amount of lobbying that took place to point out that the community banks make loans to these individuals, and you’re going to preclude people from getting home ownership that may be at 44 percent or 50 percent, but still can qualify for those loans. Because of the lobbying power, they basically said banks that are under a billion dollars can be excluded from that. That just happened this year. If that had not changed, our institution, which makes one- to four-family dwelling loans, was out of that business.

Prior to 2008, there were, truly, loans that were done that should not have been done, and there were abuses that were made. But what’s happened now is the pendulum has swung too far the one way. And I don’t see it coming back.

BOWEN: John has been fairly negative for community banks.

SORENSEN: Well, let me just say this: I do think there is a place for community banks. For banks, there’s going to be three types of banks that will survive. There will be large banks. There will be niche banks, which will include ILCs or boutique banks. And I do see there is a need for community banks in rural areas that serve underserved communities. That’s what I see as the future for banks.

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