Economy, federal rules challenge Kentucky banks
I get the newsletter from the Kentucky Legislative Research Commission. It’s full of all kinds of neat stuff that doesn’t make the news a whole lot. In fact, more often than not I have to just paste the text in here because no media feels like fooling with it. So far, this has been the case with this little piece of information:
Community banks across Kentucky are finding the general economic slowdown and federal regulations their biggest challenges, not foreclosures and other mortgage-related issues, a panel of lawmakers heard today.
The Interim Joint Committee on Banking and Insurance, meeting at Centre College, heard testimony both from industry leaders as well as state regulators on the conditions of banks in the commonwealth.
“Kentucky banks are some of the strongest in the nation,” said Debra Stamper, general counsel to the Kentucky Bankers Association. “Kentucky banks hold firm to a long history of conservative, well-managed banking practices.” The result, she said, is that state banks do not show the headlining results of major banks in other states, both in good times and bad.
Charles Vice, who heads the state’s Department of Financial Institutions, detailed various measures of financial stability for state banks. While Kentucky’s nonperforming assets — generally loans delinquent for 90 days or more — have increased by about three-fourths since the end of 2007, the number across the nation has tripled, he noted.
Both KBA and DFI pointed to the economy rather than irresponsible loan practices as a prime reason for the increase in foreclosures in Kentucky. The nationwide economic meltdown caused in part by Wall Street’s downturn has caused a spike in unemployment, harming otherwise reasonable loans in Kentucky, the Midwest, and other manufacturing-heavy regions.
Rep. Steve Riggs, D-Jeffersontown, asked why subprime mortgages got most of the media attention even though they composed only about 10 percent of all home loans in the state. “What’s being gained by pointing fingers at the wrong group?” he asked. Vice responded that the subprime percentage was higher in some states and that subprime borrowers made convenient scapegoats while noting that subprime borrowers were not necessarily lower-income borrowers, an important distinction that many have failed to note.
The one Kentucky bank failure this year, Vice pointed out, involved an institution that had only moved its headquarters to Louisville this year and was federally chartered and regulated. Of the more than 150 banks the state regulates, he said, about 20 percent are facing some sort of action plan that may be as simple as developing their own program for improvement.
Only 12 Kentucky institutions have received federal TARP funding aimed at troubled banks, with $191 million spread among them — less than the nationwide average for a single bank.
Vice also pointed to a new bank that opened in Kentucky earlier this year, with another group inquiring about opening a new bank despite the increased capital requirements that now are mandated on new banks. “That’s a positive sign,” he said.
Vice, Stamper, and KBA’s Jim Cooper also pointed to increased FDIC requirements as putting a crimp in banks’ profits. Vice noted that the FDIC’s reserves, collected as a fee from member banks and used to cover the assets of banks that go out of business, was down to $10 billion, or 0.22 percent of nationwide assets, because the number of failing banks has sapped the reserve fund. The FDIC minimum is 1.15 percent. As a result, the FDIC has instituted a special supplement that banks must pay along with requiring pre-payment of their insurance premiums through 2012.
“The FDIC assessment is taking 30 or 40 percent of bank profits in some cases,” said Rep. Mike Denham, D-Maysville.
Stamper also railed against federal legislation, not yet passed by the U.S. House of Representatives, to create a Consumer Financial Protection Agency. Such a law would overburden an industry that is largely working well, she said.
Denham and House Majority Caucus Chair Bob Damron, D-Nicholasville, said legislation to regulate credit default swaps and other derivatives was a more pressing need. “If we don’t fix this core problem, we’ll have another financial crisis in the future,” Denham said.
Damron said the National Conference of Insurance Legislators, of which he is president-elect, will likely pass model legislation in November to put pressure on Congress in that area.
Pretty heady stuff huh? Gotta read it all before we go on. If you don’t, then what I’m arguing here will make no sense at all. What particularly bothered me was:
“The FDIC assessment is taking 30 or 40 percent of bank profits in some cases,” said Rep. Mike Denham, D-Maysville.
That just ain’t right folks. What you’re seeing is a situation where banks that went the high-risk route and got burned are now being propped up by the banks that stuck with traditional, more conservative business practices.
Now, toss in this part:
Denham and House Majority Caucus Chair Bob Damron, D-Nicholasville, said legislation to regulate credit default swaps and other derivatives was a more pressing need. “If we don’t fix this core problem, we’ll have another financial crisis in the future,” Denham said.
Now, what you’ve got is a situation where, for some reason, the Obama administration is worried about some people at financial institutions making any money, while at the same time taking a huge percent of the profits from smaller banks. All the while ignoring the core problems that people who understand all this stuff have complained about for YEARS. Now, the FDIC is compounding and spreading pain as opposed to remedying the problem. That’s just wrong. By taking substantial amounts of cash flow from the areas that should be doing OK, they are risking the smaller economies that otherwise would be propping up the economy right now. You take X amount of capitol from a bank, that reduces their ability to loan by X times a fraction. Now, IMO, rather than punishing banks that did not cause the problem, they should be punishing the hell out of the banks that did. I want to know that every single penny of excess profits at Bank of America and the like are going back to the FDIC before a single penny is taken from a community bank that is otherwise performing in a prudent, profitable manner.
If the FDIC fails, it will be the end of our culture as we know it. I’d like to know one single person in the is country who does not access credit in some form or another.
In a perfect world, the places that caused the problem would be expected to remedy the problem. As such, the burden would fall more like this:
AK 0.05% AL 0.44% AR 3.64% AZ 2.49% CA 26.81% CO 6.42% CT 0.24% DC 0.15% DE 0.02% FL 7.88% GA 24.95% ID 1.14% IL 1.99% IN 0.03% KS 0.23% LA 0.02% MA 0.18% MD 0.51% MI 2.50% MN 0.34% MO 0.77% MS 0.06% MT 0.08% NC 0.98% NE 0.00% NH 0.01% NJ 0.46% NM 0.06% NV 0.46% NY 0.84% OH 0.22% OK 0.04% OR 1.71% PA 0.20% RI 0.03% SC 0.34% TN 0.15% TX 2.95% UT 4.01% VA 1.27% VT 0.34% WA 4.48% WI 0.10% WV 0.09% WY 0.33%
The beauty of this is it spreads the pain where the pain came from. We’ve done a good job in Kentucky, why should we be expected to bail out California again?
Bottom line is once again the only answer the federal government has it to throw more money at a failing concept. The logic behind the FDIC is solid, but the core is the problem. As is noted here, we’ve got a scapegoat, and we’ve got a misdirect. However, even these people can’t pinpoint the overt underlying problem. The Community Reinvestment Act of 1977 wrecked the concept of shared responsibility. Therefore, the concept of shared risk no longer applies. So, to keep addressing symptoms is just kinda stupid. If the feds are going to compel financial institutions to make loans that make no financial sense, then the FDIC needs to be more of a broker than an insurance entity. They just need to be the federal E-bay. The problem of course, is no one would buy the garbage in the first place. So, they most likely won’t now either.
Disclaimer here, I own bank stock. That’s 30% out of my pocket. I have the right to bitch about it. I also have the right to demand that before I’m forced to give up another penny of my money, the Community Reinvestment Act be ditched or the FDIC dissolved since it no longer serves a legitimate purpose due to the concept of risk management being perverted by said Act. And, of course, the Consumer Financial Protection Agency serves no fundamental purpose either. Drop it.
Oh, BTW, the FDIC is yet another troubled “public insurance option”. Remember Fannie Mae and Freddie Mac? Those public options are what’s got this public option in such a mess now. Nancy Pelosi, Harry Reid, and President Obama think health care should be run just like all the other public options.
