Former Minnesota Gov. Tim Pawlenty and Federal Reserve Bank of Minneapolis President Neel Kashkari addressed bankers gathered Aug. 10-12 at the J.W. Marriott Hotel in Bloomington for the 55th annual convention of the Independent Community Bankers of Minnesota. Both relayed similar messages about a consensus on the necessity for reg relief but skepticism about the likelihood of it coming any time soon.
“There is a consensus in Washington,” said Pawlenty, CEO of the Financial Services Roundtable. “They can’t always act on it, but at least they have a sentiment that community bankers, first of all, are very valuable, and second of all, need relief in terms of regulation,” he said. “The details of that and what form that takes is still a work in progress, but there is certainly political across-the-aisle consensus around it.
“That should foreshadow good things in the coming months and years for the industry, hopefully not too late, because the cake has already been baked to some extent.”
It was the timetable, more than the form, of reform about which Pawlenty seemed most skeptical. If Congress cannot work through the Republican Party’s primary focus of healthcare reform, then moving on to aiding community banks may take longer than bankers want to wait, he said. In the interim, the regulatory sector may make some revisions to ease the burden.
Even there, though, finding someone to make the changes can be difficult. Pawlenty used the current wait for a permanent Comptroller of the Currency as his example. If and when Joseph Otting is sworn in to the position, he will need time to work any deputies and other employees through a vetting process. It may be well into the fall before the office is fully staffed. And that’s only the beginning.
“It’s going to take another year or year-and-a-half before we’re going to see most of the effects of any rule changes that are going to impact your industry beneficially,” he said.
Also optimistic about Congress’ general stance on helping community bankers, Kashkari was equally doubtful of imminent effects.
“Republicans and Democrats, not entirely but almost unanimously, agree with two points,” he said. “We need to do something about too big to fail, and we need to relax and rationalize regulation on community banks. There is strong bipartisan support on both of those.”
The intertwining nature of any bank reform, tying to either or both of those issues, slows the progress, Kashkari said. Adjusting the requirements for the biggest banks could further limit community banks. Similarly, relaxing regulations on community banks could loosen the restrictions on their counterparts. Finding a way to balance the two agendas could be key.
“I actually think if you did both at the same time, you could make everybody happy,” he said. “You could say, we’re willing to address the too big to fail risk, and we’re willing to rationalize regulation on community banks. I’ve been pleasantly surprised how much everybody agrees with those two points.
“Coming to our political system, just because everybody agrees with something does not mean it’s going to happen.”
The difficulty of placing a community banker on the Fed Board, despite a spot being reserved for just such a selection, is a prime example of both agreement and inability to fill a position, said Independent Community Bankers of America Chairman Scott Heitkamp.
The ICBA has offered names for consideration, but the pool of possibilities is slim considering some of the legal restraints and political preferences. “There are stipulations I hear all the time going back-and-forth,” Heitkamp said. “They want a female. You can’t have any ownership in your bank, and your family can’t have any ownership in your bank. How does this all fit?
“We’re not getting a lot of traction with that because no one wants to give up their franchise.”
More than any developments, or lack thereof, in Washington, D.C., Pawlenty told attendees to worry about technology’s influence on the financial services industry. While any changes in regulation may be welcome and readily-understood, the effects from technology may be far greater in scope.
“I would worry less about what is going on with some obscure thing in Washington and spend a lot of time thinking about technology changing the business model in the next 10 years,” Pawlenty said. “There are jaw-dropping, mind-numbing, gee-whiz-slash-scary developments taking place that are going to radically transform this industry over the next 10 to 15 years.”
Certainly, bitcoin plays a role in Pawlenty’s foreshadowing, but Kashkari was measured with his thoughts on the virtual currency’s future. Asked how the Fed will respond to further influence of another monetary supply, Kashkari delved into history.
Before the United States developed its nationwide central bank, each state had its own currency. Pennsylvania may have avoided inflation, but if New York, New Jersey and Virginia all experienced inflation, then Pennsylvania would to some extent, as well.
Even though bitcoin has a set ceiling for its total inventory — the biggest part of its initial appeal, Kashkari said — it is not hard to create other virtual currency systems.
“I have not seen a solution yet to the very low barriers to entry for people creating alt-coins,” he said. “That to me is a fundamental weakness.”
Kashkari confirmed the Fed still intends to unwind its balance sheet by allowing both treasury bonds and mortgage-backed securities to roll off as they mature, but he does not expect the balance sheet to return to the levels of a decade ago.
Kashkari said the Fed expects the unwinding to lead to higher long-term interest rates, which should also steepen the yield curve, presumably to bankers’ approval. Then again, none of these things can be predicted with great certainty.
“Sometimes these things behave in unpredictable ways,” he said. “The Fed has been raising short-term rates, and we haven’t seen the long-term rates move as much as we would have thought.
“There’s also this concept of a global savings fund. Investors from around the world are looking for safe places to invest their money. Maybe the long-term rates aren’t going to move the way we expect them to.”