With sweeping reforms proposed for the nation’s financial system, Louisiana’s Main Street bankers have been keeping vigil on Congress, trying to keep its regulatory aim on Wall Street bankers.
Ever since the financial crisis sent the nation into a recession, Congress and taxpayers have blamed the economic downturn on the entire banking system. When Washington pushed the Troubled Asset Relief Program and its stock purchase program to stabilize banks, an infuriated public lashed out at the collective banking system.
And now, with President Barack Obama shifting the role of federal government from facilitator back to regulator, finance reform is fueling a showdown between Main Street banks and their Wall Street counterparts—leaving area bankers to determine if Capitol Hill will punish them for big bank’s problems.
“Everybody’s nervous about what they might do in Washington,” says Larry Denison, BancorpSouth’s Baton Rouge president. “Why stick this on everybody if it’s not applicable to everybody? The clear message is the people on Capitol Hill are clearly PO’d at banks. But they’re lumping everybody together, which is absurd.”
So far, the news is mixed for Main Street.
BancorpSouth Chairman/CEO Aubrey Patterson, who recently testified before the U.S. Senate Banking and Finance Committee, says Congress appears to be leaning toward blanket legislation. A heavy regulatory hit could increase compliance costs, and customers could ultimately pay the price with higher service fees and less flexibility on services.
Some reforms, like consolidating regulatory agencies, would be welcome, Denison says. But others, like capping executive compensation, would interfere with free-market enterprise.
Although Tupelo, Miss.-based BancorpSouth could end up dealing with the same tougher regulation as larger banks that accepted billions in TARP stock purchases with the U.S. Treasury Department, the irony is BancorpSouth passed on that same opportunity to avoid the stigma.
Many Louisiana banks, which are more financially sound because of their less risky lending practices as well as the state’s economy, didn’t need a bailout. Of those that took it, most used TARP’s stock purchase funds to grow loans and buffer reserves against the recession. In February, Lafayette-based IberiaBank even bailed out of the bailout as the first financial institution in the nation to pay off its $90 million.
Bob Taylor, CEO of the Louisiana Bankers Association, doesn’t expect the public to sort out banks, but he believes lawmakers might be getting there. Taylor came away from his recent meetings with Congressional members encouraged that better policies and transparency are possible.
“They were all pretty much saying the same thing: Main Street banks didn’t cause the problem,” he says. “What got lost in the finger-pointing was the non-banks caused the problem, not the banking system.”
Ninety-nine percent of the nation’s banks did not cause the problem and are still lending, Taylor says. But 70% of all lending is done by nonbanks like mortgage lenders, venture capital firms and big institutional players like Fannie Mae and Freddie Mac—and that’s where lending has dried up.
“If FDIC institutions had made all the home loans, we wouldn’t be in the mess we’re in,” he says.
The problem is the nation’s bigger banks have more clout, says Joseph Mason Jr., Hermann Moyse Jr./Louisiana Bankers Association Endowed Chair of Banking at LSU.
Washington can’t get past its fears that certain banks are too big to fail, which means smaller bankers also will be punished, Mason says. The recapitalization recipe book on how to address crises calls for divesting insolvent institutions and reallocating those assets to stronger banks, but that hasn’t happened with the nation’s larger banks.
“We can’t bring ourselves to do the hard part,” Mason says. “Economically, it had to be done, but politically it’s difficult because these large banks have lobbyists and contribute to campaigns.”
MidSouth Bank CEO Rusty Cloutier not only agrees with Mason, but called for the break up of “systemic risk institutions” over a five-year period in his March testimony on too-big-to-fail banks to the House Judiciary Subcommittee on Courts and Competition Policy.
The four largest banking companies—JPMorgan Chase & Co., Citigroup Inc., Bank of America Corporation and Wells Fargo & Company—control more than 40% of the nation’s deposits and more than 50% of assets held by U.S. banks.
“Our nation is going through an agonizing series of bankruptcies, failures and forced buyouts or mergers of some of the nation’s largest banking and investment houses that is costing American taxpayers hundreds of billions of dollars and destabilizing our economy,” Cloutier testified. “The doctrine of too big—or too interconnected—to fail, has finally come home to roost to the detriment of American taxpayers.”
Now he says the real crisis is Capitol Hill has realized banks that are too big to fail are really running the country.
“They’re realizing if they close them, they’ll shut down the country,” Cloutier says. “The regulatory measures may take longer than expected as the government realizes it can’t overcome these giants as easily as it thought it could.”
The nation’s 19 largest banks were given government-mandated stress tests designed to determine the capital needs of the major banks that control the majority of the lending activity in the country. Three of those banks—JPMorgan Chase, Capital One and Regions—have branches in the Capital Region. Not releasing the results could heighten public concerns about the banking system’s stability, while others fear a partial release could cause a bank run on the weaker banks.
Cloutier anticipates the tests will reveal the banks have a tremendous amount of bad assets and don’t want that made public. He predicts the federal government will financially float the “zombie banks” at great cost to taxpayers until the economy improves.
“They change stories as often as I change underwear, and I change them often,” he says.
Whether made public or kept private, Sonny MacArthur, a community bank consultant with the Porter Keadle Moore accounting firm in Atlanta, anticipates the results will remain first and foremost.
Most of MacArthur’s clients fear they’re going to be thrown under the bus for what the bigger banks are doing. If it happens, he says stiff regulations would hit at an already challenging time to do business.
“What we see for the 19 largest banks, we’ll see for the rest of us,” MacArthur says. “Community banks continue to worry about credit quality. That’s the 800-pound gorilla.”
Louisiana’s $386.1 million share of capital from the Troubled Asset Relief Program:
Whitney Holding Corp., New Orleans—$300 million
Community Trust Financial Corp., Ruston—$24 million
MidSouth Bancorp, Lafayette—$20 million
First NBC Bank Holding Co., New Orleans—$17.8 million
PSB Financial Corp., Many—$9.3 million
Liberty Financial Services, New Orleans—$5.6 million
Patterson Bancshares , Patterson—$3.7 million
FPB Financial Corp., Hammond—$3.2 million
Citizens Bank & Trust Co., Covington—$2.4 million
SOURCE: U.S. Treasury Department
Bailout amounts received from ?the federal government:
Banks—$246.8 billion
Toxic asset purchase—$100 billion
AIG—$69.8 billion
Fannie Mae/Freddie Mac—$59.8 billion
Foreclosure relief—$50 billion
Auto companies—$24.8 billion
SOURCE: U.S. Treasury Department
