More than 1,000 people gathered in San Antonio May 17-19 for the 138th annual convention of the Texas Bankers Association. Industry regulators and association officials shared insights into current conditions. TBA President Chris Furlow described two lawsuits the association has filed against regulators, and two officials from the Federal Reserve urged bankers to put liquidity contingency plans in place.
TBA has recently filed lawsuits against the Consumer Financial Protection Bureau over its final rule on the Dodd-Frank Act’s Section 1071 and its guidance on Unfair, Deceptive, Abusive Acts and Practices. Furlow called both pronouncements “overreach.” Section 1071 requires most lenders to collect information – unrelated to credit quality – on potential borrowers. The requirement applies to applications from women-owned and minority-owned businesses.
Furlow said the CFPB failed to follow the Administrative Procedures Act on its UDAAP guidance, and he said that the agency went far beyond Congressional intent on Section 1071. He said the Dodd-Frank Act describes Section 1071 in three pages, but the CFPB needed almost 800 pages to describe its implementing rules.
“We don’t want to sue,” Furlow said. “But there is no other recourse we can take. We are challenging an agency that wants to hold everyone accountable except itself.”
Rob Nichols, president of the American Bankers Association, announced the ABA would join with the TBA as a co-plaintiff in the section 1071 suit.
Nichols shared thoughts on other areas where the ABA believes changes could improve the industry environment. For example, he said the association is urging the Securities and Exchange Commission to take steps to eliminate “predatory shorting and market manipulation,” which is ravaging bank stock prices. He said the ABA also is in conversation with the Federal Home Loan Banks and the Fed about improving access to liquidity.
Nichols also said he believes the deposit insurance system could be improved. He announced ABA is forming a deposit insurance modernization committee to consider options and contribute ideas as the industry discussion on this topic unfolds. Congressional action ultimately would be necessary to change the deposit insurance rules, which means changes are many months away, Nichols cautioned.
“We need a utopian deposit insurance system that works for the overall economy, that works for depositors, for all the banks,” Nichols said. “And the first principle needs to be that any American can walk into any bank and not feel that their deposits are safer at this bank versus that bank.” Nichols said the current public perception is that deposits are safer in some banks than others.
Lorie Logan, president of the Federal Reserve Bank of Dallas, shared her thoughts in a speech to the group, followed by comments in a one-to-one conversation with Furlow on the convention stage. Furlow asked about the need for deposit insurance reform.
“The issue is twofold,” Logan said. “One is, implications for small businesses, the other is the unlevel playing field in the banking sector.” She said small business owners can easily have operational needs that require the maintenance of more than $250,000 in a local bank. Furthermore, she suggested it is unrealistic to expect business owners to conduct in-depth analysis on the safety of individual banks. “When they see stresses in the banking system or headlines they don’t understand, they’re not in the best position to do bank analysis,” Logan said. “We need to make sure they can stay focused on their business.”
Logan said under the current system, the largest banks have an advantage over community banks. “The stresses regarding the unlevel playing field have really widened, because [business managers] think ‘maybe I should keep that operational deposit in a larger bank.’ That has real issues for the economy,” Logan commented.
Banks of all sizes, Logan stressed, need to put extra emphasis on liquidity risk management. She said the Federal Reserve can help banks prepare for abnormal stresses on liquidity but that banks have to take steps in advance. “I think it is important that we have our operational readiness in place and that you have access to the discount window, and that you have it set up, that you’ve tested it. It is for healthy banks; the information is private; we don’t release information for two years, and you can use a broad range of collateral,” she explained.
Federal Reserve Board Governor Michelle Bowman also stressed the importance of readiness on the part of community banks. “In a time of potential stress, we need to be forward focused on bank preparedness so that banks are positioned to address issues of concern. These include being prepared to address contingency funding needs, with a plan in place that has been tested and is ready to be executed,” Bowman said. “One of the preliminary lessons learned from the recent bank failures is that bank management, and their boards of directors, should be prepared to test the banks’ ability to manage liquidity needs during times of stress.”
Elaborating on the three recent bank failures – Signature Valley Bank, Signature Bank, and First Republic Bank – Bowman said she draws three conclusions. First, she said, the Fed should hire an independent third party to review the SVB failure so that policymakers can gain a better understanding of exactly what happened. She said the review should cover a broad time frame and consider the numerous factors that affected the bank’s operations.
Second, she said, bank examiners and bank staff need to do a better job identifying and quickly remediating serious issues, such as risks associated with concentrations, liquidity and interest rates.
“Finally, we should consider whether there are necessary—and targeted—adjustments we should make to banking regulation,” Bowman concluded. “This will likely include a broad range of topics, including taking a close look at deposit insurance reform, the treatment of uninsured deposits, and a reconsideration of current deposit insurance limits. We should avoid using these bank failures as a pretext to push for other, unrelated changes to banking regulation. Our focus should be on remediating known, identified issues with bank supervision and issues that emerge from the public autopsy of these events.”