Policy Changes Make Banking ‘More Resilient,' FDIC Chief Says

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By Jeff Bater

June 15 — Tighter regulation of banks since the financial crisis has made the system more resilient, a top regulator said in defense of industry rules amid attempts to roll back the Dodd-Frank Act.

Federal Deposit Insurance Corp. (FDIC) Chairman Martin Gruenberg, in a speech to the Exchequer Club, said banking agencies have strengthened the quality of regulatory capital, finalized requirements for increased liquid asset holdings of big banks, and, through stress testing, sharpened the focus on rigorous management of risks at large institutions.

“As an objective matter, the banking system is significantly more resilient today as a result of these reforms,” Gruenberg said. “To cut to the chase, I believe the evidence suggests that the reforms put in place since the crisis have been largely consistent with, and supportive of, the ability of banks to serve the U.S. economy.”

Criticism of Dodd-Frank

Since the 2010 passage of Dodd-Frank, banks have regularly complained about post-crisis policy changes and the costs those rules carry. This month, a leading House Republican, Rep. Jeb Hensarling of Texas, unveiled a plan that would rescind many of the law's requirements (110 BBD, 6/8/16).

For instance, Roger Beverage, the president of the Oklahoma Bankers Association, told a House panel June 9 that meeting customer needs has grown harder because of “the avalanche of new rules, guidances and seemingly ever-changing expectations of the regulators.” Beverage, testifying before the House Small Business Committee's Subcommittee on Economic Growth, Tax and Capital Access, said the new regulatory atmosphere — not local economic conditions — is often the “tipping point” that forces small banks to merge (112 BBD 6/10/16).

Shadow Banking

Banks have warned in the past that post-crisis rules could drive activity in the BBD, 5/22/14). For many years before the financial crisis, the loan holdings — and more broadly, the financial asset holdings, of U.S. insured banks decreased steadily relative to the holdings of nonbanks, Gruenberg said. However, that pre-crisis migration has turned and, since 2010, banks' share of total loans held by the domestic financial sector has climbed, he said.

“Banks' offloading of loans through securitization before the crisis was one of the factors driving their reduced share of loans relative to nonbanks, and was arguably driven by the desire to avoid bank capital charges,” he said. “Now, while bank capital requirements have been strengthened, the data suggest banks are financing credit relatively more with their balance sheets and relatively less with securitizations.”

At the end of 2015, large banks had twice as much Tier 1 capital and liquid assets in proportion to their size as they had entering the crisis, and the loss-absorbing quality of their capital has greatly improved, Gruenberg said.

Retrenchment Over

He characterized loan growth at banks as strong. “A look at broad trends over time suggests that the most important driver of bank lending is the business cycle and the credit needs of businesses and households,” Gruenberg said. “Bank lending and the total debt of households and businesses grew rapidly during the run-up to the crisis, and then declined during the crisis and for a few years after. The retrenchment from the crisis is largely over, and bank loan growth and risk appetite appear to have returned.”

The FDIC reported June 1 that first-quarter earnings of banks insured by the agency slowed because of increased provisioning by large banks for energy-related loans amid falling oil prices (106 BBD, 6/2/16). The agency data also showed that community bank profit rose considerably, up 7.4 percent from the same period a year earlier.

“Despite significant headwinds, bank earnings have been on a generally favorable trajectory as we move farther from the crisis,” Gruenberg said in his speech. “The major earnings headwinds during the post-crisis period have been compression of interest margins, the working off of high levels of non-current loans coming out of the crisis, and for the largest banking organizations, litigation expenses. The improvement in bank earnings reflects a return to profitable banking, but with capital levels that are better able to absorb losses than was often seen during the pre-crisis years.”

Market Liquidity

His remarks also addressed questions that have surfaced over whether post-crisis policy changes have caused a pullback from market-making activity by bank-affiliated broker-dealers — and whether that, in turn, has hurt financial market liquidity.

“Much of this discussion has centered on the secondary market liquidity of corporate bonds and U.S. Treasury bonds,” Gruenberg said. “Recent research does not seem to support the proposition that post-crisis market liquidity for bonds has declined and in fact describes improvement in a number of standard measures of liquidity. This could certainly change under more stressful conditions, but stronger and more resilient banking organizations should make the economy and financial system as a whole better able to navigate such conditions and less prone to a collapse in market liquidity.”

To contact the reporter on this story: Jeff Bater in Washington at jbater@bna.com

To contact the editor responsible for this story: Mike Ferullo at mferullo@bna.com