Posts Tagged ‘Stress Test’

We live in a Parallel Universe…

Monday, May 11th, 2009

The Stress Tests are over, and now it is time to get back to business…

For the “Too Big to Fail”, the world has been a place where excessive risk taking mistakes are rewarded, or at least not punished, where regulators only suggest, and where the rules are changed so no one gets hurt.

As we move past the recently released Stress Tests, let’s understand that although the world has sighed a breath of relief that the system is not going to fail, we must insist that this uncompetitive, government supported network of “Too Big to Fail” institutions must somehow be made accountable for their actions, pay a price for the intervention, and be forced to conform to a system where the rules apply to all.

There are many changes that need to occur in this post – Stress Test world… Certainly a tiered FDIC fee structure, and a tiered capital structure based on the risk taking of an institution, a closer look at the separation between banks and commercial entities, more responsibility for all phases of mortgage products, and the ability for the FDIC to regulate all institutions regardless of size.

It is also important to understand that it is the Community Banks, who operate every day by working within the framework of the regulators that regulate them, have understood that prudent risk taking is rewarded, and excessive risk taking is punished, have not been treated fairly in these strained times. 

Community Banks have not needed a dollar of taxpayer money, have maintained proper capital ratios, and have continued to lend throughout this crises. In fact, they are the only group in the banking sector that has increased lending, and have been there to protect the “little guy” on Main Street.

Any relief given to Community Banks will certainly find its way to the communities in which they serve, and not into the excessive pay packages that have been all too common at the “Too Big to Fail.”

There are a number of regulatory and accounting improvements that could be made to support the Community Banking system. These include, Tiered Regulation, Gov’t Assisted Insurance Program for classified assets, SBA enhancements, and differentiating the Community Banks when regulators perform their examinations.

Let’s not allow those with the enormous lobbying efforts to dictate the framework of this new environment…

We need to be heard…

Too Big To Regulate???

Sunday, April 26th, 2009

Interesting how convoluted and frustrating the release of the Stress Test results has become… So now supposedly, the “Too big to fail or manage” have received word on whether or not they have sufficient capital, in other words, are solvent.  It appears that by some miracle, we are all supposed to feel better about the system.  The reality is that this dance was designed to obfuscate the fact that these banks have gotten larger than any of our regulators can understand or resolve. The regulatory process has been unable to keep pace with the growth of these institutions, and have in fact allowed for the creation of institutions that pose a risk to our capitalist system and to our financial health. The FDIC simply does not have the ability to oversee, and regulate these multi-directional behemoths that no longer resemble traditional banks. There is much talk today of a super regulator to fill in the void… It is my opinion that this would be a colossal mistake, and would pit the unwieldy, super powerful, giants against the rest of the more traditional banks that have for the most part, played by the rules.

It is these traditional banks, the local community banks like ours, and many others across the nation that continue to play a significant role in the support of the vast majority of businesses today. In fact, the only increase in lending is occurring at the community bank level. While there is certainly a place for national bank players, they must adhere to the same regulatory process as it relates to risk, and if they are going to be afforded FDIC insurance coverage, must be forced to pay higher premiums as they elevate their risk profile. In turn, no bank should be allowed to grow larger than the FDIC’s ability to determine insolvency, and the ability to prosecute an orderly wind down of a failed institution. That is all but impossible today…

There are only 19 banks today with assets over $100 Billion… Almost 100% of the problems we are facing reside at those banks… For them, the Stress Tests so far have proven that it is acceptable to take outsize risk, become “too big to fail”, and then win whether your risk pays off, or seek government intervention if you failed.

On May 4th, let’s be done with the stress tests, and begin to look for a permanent solution that will benefit not only the visible 2% of banks in this country, but instead will support the transparent, vitally important 98% who are being penalized from this crisis…

Why we should be Stressed over the Stress Tests…

Sunday, April 19th, 2009

With all the talk of the Government Stress Tests lately, I thought some rational explanation was warranted..

First, banks have been required to stress test their balance sheets since their original formation, including any denovo institution. All banks undergo regular regulatory exams which include stress testing of their balance sheets under various, interest rate, credit risk and capital scenarios.

Second, the nineteen banks that are part of the “Stress Test” being discussed could not be in a more varied set of businesses… On one hand we have the largest deposit gathering bank in the country, and on the other, a bank with virtually no deposits or branches, and every other type of business that a bank holding company might have, including investment advice, mortgages, real estate, hedge funds, derivative products, insurance, etc… How is it possible that one test will identify the strong from the weak in this set of banks?

The Stress Test although well intentioned, has added a political side to appease the populist voice being heard by our leaders…

It is clear to me that none of these nineteen “too big to fail” banks can, or will fail the stress test… Instead we will hear about how our banking system is safe from catastrophe, and that some of these institutions may need some additional capital to weather an impending storm. If the institutions are unable to raise the additional capital in the private sector, then they will be able to use a new TARP II funding program.  That’s when the fun will really begin.

Congress is not ready to appropriate more money to this cause; the banks will not like the terms of any new TARP II program…

And once again, we find ourselves concentrating on those that have created this mess, and looking for the best way to bail out banks that should be broken up instead. All this while the solvent, strong and functioning community banks receive no help, and worse, are being forced to pay a FDIC assessment which will substantially reduce not only their ability to lend, but will exacerbate the downward spiral of lower earning, lower share price, and difficulty in raising new capital.

Instead let’s look to support our community bank system and the economy by:

  • Eliminating the FDIC additional assessment altogether
  • Create a tiered FDIC fee arrangement that rewards traditional banks with a lower fee structure, and charges more for the bigger risk takers; peg fees to assets, not deposits
  • Reducing the Regulatory and Tax Burden on Community Banks
  • Incent more lending by allowing 1 & 2 Rated banks to lower their capital ratios; and/or provide a low cost TALF alternative geared toward community banks
  • Support the Federal Home Loan Banks, allowing community banks to better participate with first time home buyers, and those seeking to refinance


Our leaders need to understand that it is the community banks that are currently expanding, lending, hiring, and growing profitably which is providing the fuel that economy so desperately needs. Let’s get on with the Stress Tests, and then take a step back, and look to support those that know how to get the job done (our community banks)  and then onto how to re-sculpt the financial landscape so that we never have a systemic risk again…