Takeaways from the FDIC Speech

By Thomas P. Rideout

FDIC Vice Chairman Thomas Hoenig’s address to the North Carolina Bankers Association Convention offers several opportunities for community banks.

While community banks have traditionally been able to position themselves among their legislators and regulators as institutions that deliver a special personalized brand of financial services – and thereby deserving of special treatment—the banking crisis of 2007 and 2008 has changed the regulatory pendulum, perhaps forever. It is doubtful that we will see again another era of benign regulation.

In the process of passing the Dodd-Frank Act, banking associations worked hard to achieve a variety of carve-outs for community banks that would either exempt them or, at the least, minimize their regulatory burden. The hope was this would assure sufficient manpower and resources to focus on enterprise survival and sustainability.

Unfortunately, while well-intentioned, Dodd-Frank did not solve issues such as “too big to fail” and the inability to control financial market segments and businesses that shifted to the shadow banking system. Now FDIC Vice-chairman Hoenig is saying that all banks are going to be treated in an even-handed way, with no more exemptions going forward.

Two lessons can be drawn from this important address: one of a public affairs nature and the other dealing with management and leadership.

First, community bankers will be tempted to ask their trade associations to reaffirm the Dodd-Frank carve-outs and even extend them. This is likely to fall on deaf ears in Congress and would be a waste of lobbying clout.

“Regional concerns and the apparent lack of understanding of regulatory initiatives have failed to reinforce to the political establishment the primary reason requiring the “special treatment” of community banks,” Invictus Consulting Group Chairman Kamal Mustafa says. “Community banks are a creature of their limited and unique geographical footprint. Their loan portfolios and deposit composition are entirely dependent on the characteristics of the community within their footprint. These unique characteristics meet the needs of the community in a manner that is impossible for larger institutions.”

Community banks are special-purpose commercial banks vital to the health of the U.S. economy, Mustafa notes. “This message to the political establishment seems to have been lost in translation. In this context, it is important to recognize that the regulators are the cops enforcing political actions and directives.”

Hoenig issued a clarion call when he said community banks “should insist on discipline across the entire banking industry” and seek to create “one industry” by demanding that large bank subsidies, reduced capital and leverage requirements and less robust supervision, be removed as both an unfair competitive advantage and one that balkanizes market segments. It is time for community banks to seriously consider this message. There is little prospect that this regulatory climate will change any time soon.

Second, this upheaval in the assumptions about the operating climate will demand the very best of bank CEOs and their top management teams as they adjust to a new regulatory landscape. A premium will be placed on the ability of individual bank leaders to understand their market opportunities and to adjust their commercial and consumer banking service and lending profiles to the “new normal.” Planning for 2015 will not go well if it merely replicates a traditional budgeting exercise. Regulators will look favorably on banking leaders who understand their markets and opportunities and the detailed data analytic consequences of their strategic financial plans and franchise options.

Smart bank leaders may look to strategic business partners to help management deal with the details of their current business profiles and explore, both broadly and through in-depth analytics, their strategic business options in the future. Bank management needs to rethink budgeting, capital and strategic planning in light of new regulatory requirements and take an analytical approach in loan targeting, marketplace assessments, interest rate risk positioning and capital assessments.

Bank regulation now requires forward-thinking analytics and planning. Bankers that rely on historical performances and projections will be left in the dust.  

Thomas P. Rideout, a former bank CEO, is an Invictus Executive Director. He is also a former volunteer president of the American Bankers Association. Rideout’s 40-year banking career includes stints as a VP at Wachovia, President & CEO of Savannah (GA) Bank & Trust Company, and  Vice Chairman of First Union National Bank of North Carolina.