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Banking Survey About Small Business

Posted by Wendell Brock on Wed, Sep 01, 2010

Survey Provides Insight for Serving Small Business Customers

The J.D. Power and Associates 2009 Small Business Banking Satisfaction StudySM shares insight on serving small business banking customers to create differentiation and grow revenues.

Small business customers represent revenue opportunities for banking institutions, particularly if the bank can obtain the personal banking relationship as well. The survey finds that small business owners’ average value exceeds the consumer average by $31,000 or 66 percent. Further, highly satisfied small business customers create about 20 percent more revenue for the bank relative to less-satisfied customers. The difference in annual revenue dollars, according to the survey, is $675 per customer.

Unlocking this extra revenue per small business customer requires a strong commitment to relationship management. The survey finds that higher levels of satisfaction are associated with:

  • Assignment of an account manager to every small business customer
  • Completion of a needs assessment
  • Account managers who proactively reach out to customers throughout the year
  • Account managers who focus on quick resolution to problems
  • Account managers who closely manage the credit process

Economic woes weighing on small business

The survey estimates that 48 percent of small business customers are negative about the economic outlook. Downbeat business owners have special needs with respect to banking. In particular, they generally appreciate working with a proactive banker who demonstrates a thorough understanding of their business and its needs. The J.D. Power survey establishes a link between the completion of a needs assessment at the beginning of the relationship and the customer’s belief that his banker “understands” the business. Sadly, only 45 percent of small business customers report that their banker has a complete understanding of the business.

Communicate to create upsell opportunities

Proactive communication is also important. Regular interaction between the account manager and small business customer can minimize misunderstandings about fees and services. It also helps the banker identify opportunities to provide the customer with additional business or personal banking services. The goal is to help the customer manage his business and personal finances more efficiently, while creating revenue opportunities for the bank. To fulfill that goal, the banker must a trusted advisor who maintains regular contact.

Manage new loans for higher satisfaction

Many small business customers are currently concerned about obtaining the funds they need to manage through this economic downturn. The J.D. Power survey reports that account managers who focus on streamlining the loan funding process tend to score higher on small business customer satisfaction metrics. Account managers who can identify a lending need and then move the customer through the application and funding process quickly add value and generate customer loyalty.

The survey also notes that small business account managers do not have to be high-level bank employees to be effective. Lower-level service personnel are able to achieve very high satisfaction scores, particularly when they focus on communication, quick problem resolution, and efficient loan funding.

See the video overview of the J.D. Power and Associates 2009 Small Business Banking Satisfaction Survey here: http://businesscenter.jdpower.com/library/videos.aspx?localID=286679 and read the press release here: http://businesscenter.jdpower.com/news/pressrelease.aspx?ID=2009227

Topics: Banking, banker's survey, Commercial Banks, Building Smarter Banks, Deposit Growth, Deposits

FDIC Chairman Speaks...

Posted by Wendell Brock on Thu, Jul 15, 2010

FDIC Chairman Sheila C. Bair said, "Today represents a significant milestone in the history of financial regulation in the United States. With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, a meaningful framework is now in place that addresses many of the weaknesses in our financial system that led to the financial crisis.

From the outset of this process, the FDIC has pushed for a credible resolution mechanism that provides the authority to liquidate large and complex financial institutions in an orderly way. The legislation will enforce market discipline by making clear that shareholders and creditors bear the losses for the risks they take. It also will protect taxpayers by empowering the government with the means to end Too-Big-to-Fail and providing substantial new protection to consumers and the financial system.

The responsibility now shifts to regulators to implement this law in a manner that is aligned with its principles. To this end, the FDIC will move swiftly and deliberately through the various rulemakings and studies required under the bill. We will do so in an open, transparent and collaborative fashion. In addition to a dedicated webpage where the public can track key steps in the implementation process, we will also release the names and affiliations of outside individuals and groups that meet with FDIC officials about the bill. We will webcast open Board meetings on implementation issues and provide ready access to comments received for all rulemakings.

As I have often discussed, my vision for financial reform encompasses three key pillars: resolution authority, systemic oversight and consumer protection. On resolution authority, the new law will give the FDIC broad authority to use receivership powers, similar to those used for insured banks, to close and liquidate systemic firms in an orderly manner. On systemic oversight, it creates a Systemic Risk Council — a concept originally advanced by the FDIC — to provide a macro view to identify and address emerging systemic risks and close the gaps in our financial supervisory system. Regulators will also be empowered to provide much-needed oversight to derivatives markets. On consumer protection, the creation of the Consumer Financial Protection Bureau will put a new focus on the unregulated shadow financial sector by setting and maintaining strong, uniform consumer protection rules for both banks and non-bank financial firms.

I am also very pleased that the bill will strengthen the capital requirements of the U.S. banking system. For the first time, bank holding companies will be subject to the same standards as insured banks for Tier 1 capital. Excess leverage and thin capital cushions were primary drivers of the financial crisis, which resulted in severe, sudden contractions in credit and led to the loss of millions of jobs. This provision will bring stability to the financial system, allowing it to support real, sustainable, long-term growth in the real economy. Senator Susan Collins was the sponsor of this key provision, and I commend her efforts in this area.

I would also highlight the new backup authority the FDIC will have over bank holding companies, which will augment our current backup authority for insured institutions. The legislation also will improve our ability to manage our deposit insurance fund and build stronger reserves.

As I have often noted, no set of laws, no matter how enlightened, can forestall the emergence of a new financial crisis somewhere down the road. It is part of the nature of financial markets. However, what this law will do is help limit the incentive and ability for financial institutions to take risks that put our economy at risk, it will bring market discipline back to investing, and it will give regulators the tools to contain the fallout from financial failures so that we will never have to resort to a taxpayer bailout again.

I commend Chairman Dodd and Chairman Frank for their committed leadership in navigating this bill through the legislative process and look forward to the hard work ahead to implement the law."

Now there will be more regulation to absorb and implement increasing the cost to do business.  We are interested in your comments about this legislation...

Topics: FDIC, regulators, Commercial Banks, Credit, Deposit Insurance Fund, Consumer Confidence

Bair Says More Regulation is Needed

Posted by Wendell Brock on Mon, Nov 02, 2009

Sheila Bair argued to Congress last week that the government should "impose greater market discipline on systemically important institutions." Her rationale for the argument was that those large firms have been funded by the market as if they were too big to fail, while their management teams depended on faulty risk management practices; these circumstances, combined with ineffective regulation, created a the bulk of our current economic problems. Bair's commentary indicates that we will ultimately have much more regulation throughout the financial industry, simply because what happens to large institutions will trickle down to impact the smaller community banks.

Bair went on to say:

In a properly functioning market economy there will be winners and losers, and some firms will fail. Actions that prevent firms from failing ultimately distort market mechanisms, including the market's incentive to monitor the actions of similarly situated firms. The most important challenge now is to find ways to impose greater market discipline on systemically important financial organizations.

Shareholders, creditors to take losses

It is true that we need to create an effective, bailout-free system to unwind large failing institutions - and to do so without creating a financial tsunami that wipes out the rest of the economy. But the reality is that everyone will feel the impact of a large institution's failure. It is impossible that a CitiBank, Wells Fargo, Bank of America or Chase failure could result in only a slight ripple through the economy. Those closest to the institution will feel the pain the most and people on the far fringe, the least -- but it will be felt by all nonetheless. The government needs to stop trying to make our lives pain-free in all aspects of life. We simply cannot be shielded from ALL risks.

In the current meltdown, for example, shareholders felt the brunt of the financial crisis pain. Investing is an inherently risky enterprise, and to devise regulation that would soften the impacts of investment failure runs contrary to the tenants of our economic system. Because shareholders voluntarily took risks with the companies they invested in and supported, they should absorb the repercussions when those firms fail.

Bair agrees with this argument. She advises:

Under the new resolution regime, Congress should raise the bar higher than existing law and eliminate the possibility of open assistance for individual failing entities. The new resolution powers should result in the shareholders and unsecured creditors taking losses.

Bair also addresses the current priority given to secured creditors. Such creditors have, in the past, made credit decisions based on collateral value without thoughtfully considering creditworthiness as well. This puts the creditor at risk of default and forced liquidation, while encouraging lack of discipline in the market. Addressing this issue can help to minimize costs to receivership and spread out losses related to failures more broadly.

Other key points in Blair's testimony included:

  • Resolution of systemically important financial firm failures is currently managed through the bankruptcy process, where there is no protection for public interest.
  • Holding company affiliates are often dependent on the ongoing operations of systemically important firms. Regulation is needed to require these affiliates to have greater autonomy. Holding companies should have wind-down plans.
  • Open company assistance benefitting shareholders and creditors should be banned by Congress.
  • A Financial Company Resolution Fund should be established and pre-funded through assessments against large financial firms.
  • The FDIC should have authority to resolve "systemically important and non-systemically important depository institution holding companies, affiliates and majority-owned subsidiaries." This authority would allow the FDIC to maximize the value of the assets, particularly in cases where certain functions lie outside the FDIC's current authority.
  • The FDIC supports the creation of a powerful Financial Services Oversight Council to monitor and manage system-wide risks. The Council should be given a minimum rulemaking authority "that must be met and could be exceeded." The Council should oversee a group of regulators, but also have its own power to act if the regulators do not.
  • The full text of Sheila Bair's testimony can be found at: http://www.fdic.gov/news/news/speeches/chairman/spoct2909.html

    Topics: FDIC, FDIC’s, Bank Regulators, Commercial Banks, Bank Regulation, Bank Regulations, Troubled Banks

    The FDIC’s NEW Advisory Committee on Community Banking

    Posted by Wendell Brock on Fri, Oct 16, 2009

    In May of 2009, the FDIC authorized the creation of an Advisory Committee Community Banking with the purpose that this committee would help the FDIC understand the particular issues that small rural and urban community banks face in the ever-changing financial landscape.

    The committee is consists of no more than 20 volunteer members from the community banks around the country along with small business, education, non-for-profit organizations and other individuals that use the services of these community banks. It is expected that the committee will have an annual budget of $300,000 and two full time FDIC staff people committed to serving their needs. The committee charter will last for two years unless it is renewed by the FDIC. The committee will also report directly to the Chairman of the Board of Directors of the FDIC.

    The committee's first meeting was this week and below is the press release from that meeting. At the bottom is a link to the FDIC website where more information may be obtained about the meeting. We hope this positive for the community banking sector as they struggle under the weight of very difficult regulations, limited budgets, and with razor thin margins. They are scheduled to meet twice a year, so the next meeting should be in April.

    Press Release from the Advisory Committee on Community Banking

    At its first meeting since being established by the FDIC Board in May, the FDIC's Advisory Committee on Community Banking today discussed the impact of the financial crisis on community banks. Other issues addressed were regulatory reform proposals under consideration by Congress and their effect on community banks, the impact of FDIC supervisory proposals on these banks, and community banks' perspectives on funding the FDIC's Deposit Insurance Fund.

    "I was extremely pleased with the robust discussion among our committee members on issues that are so critical to both the FDIC and our nation's community banks," said FDIC Chairman Sheila C. Bair. "The committee members voiced a number of interesting ideas that they will pursue."

    The Advisory Committee was formed to provide the FDIC with advice and recommendations on a broad range of policy issues with particular impact on small community banks throughout the nation, and the local communities they serve. The committee is comprised of 14 community bankers from across the country, and one representative from academia.

    "We are fortunate to have so many highly respected professionals who are willing to volunteer their time and talents to help the FDIC analyze the issues most important to community banks," said Paul Nash, Deputy to the Chairman for External Affairs, and the Designated Federal Official for the Advisory Committee on Community Banking.

    The members' opinions on the FDIC's proposed rulemaking to prepay three years of deposit insurance assessments will be included in the public comment file.

    For more information on the Advisory Committee on Community Banking please visit http://www.fdic.gov/communitybanking/index.html.

    Topics: FDIC, Community Bank, Banking industry, Bank Regulators, Commercial Banks, Regulations, Bank Regulations, FDIC Advisory Committee

    United Bank Acquires All the Deposits of First Georgia Community Bank, Jackson, Georgia

    Posted by Wendell Brock on Mon, Dec 08, 2008

    First Georgia Community Bank, Jackson, Georgia, was closed today by the Georgia Department of Banking and Finance, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with United Bank, Zebulon, Georgia, to assume all of the deposits of First Georgia Community Bank.

    The four branches of First Georgia Community Bank located in Jackson, Covington, Griffin and Locust Grove will reopen on Saturday as branches of United Bank. Depositors of the failed bank will automatically become depositors of United Bank. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. Customers of the failed bank should continue to use their existing branches until further information is received from United Bank.

    Over the weekend, depositors of First Georgia Community Bank access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

    As of November 7, 2008, First Georgia Community Bank had total assets of $237.5 million and total deposits of $197.4 million. United Bank agreed to assume all the deposits for a .811 percent premium. In addition to assuming all of the failed bank's deposits, United Bank will purchase approximately $60.6 million of assets. The FDIC will retain the remaining assets for later disposition.

    Customers who have questions about today's transaction can call the FDIC toll-free at 1-800-930-5172. This phone number will be operational this evening until 9 p.m., Eastern; on Saturday from 9 a.m. to 6 p.m., Eastern; and on Sunday 12 p.m. to 6 p.m., Eastern; and thereafter from 8 a.m. to 8 p.m. Interested parties can also visit the FDIC's Web site at http://wwwdev/bank/individual/failed/firstga.html.

    The FDIC estimates that the cost to the Deposit Insurance Fund will be $72.2 million. United Bank's acquisition of all deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. First Georgia Community Bank is the 23rd bank to fail in the nation this year, and the fourth in Georgia. First Georgia Community Bank, the failed bank, is not affiliated with First Georgia Banking Company. The last bank to be closed in the state was The Community Bank, Loganville, GA, on November 21, 2008.

    Topics: FDIC, failed banks, Bank Regulators, Commercial Banks

    Prosperity Bank Acquires All the Deposits of Franklin Bank, S.S.B., Houston, Texas

    Posted by Wendell Brock on Fri, Nov 07, 2008

    Franklin Bank, S.S.B., Houston, Texas, was closed today by the Texas Department of Savings and Mortgage Lending, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Prosperity Bank, El Campo, Texas, to assume all of the deposits, including those that exceeded the insurance limit, of Franklin Bank.

    Franklin Bank's 46 offices will reopen as branches of Prosperity Bank under their normal hours, including those with Saturday hours. Depositors of the failed bank automatically become depositors of Prosperity Bank. Customers of both banks should continue to use their existing branches until Prosperity Bank can fully integrate the deposit records of Franklin Bank. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage.

    As of September 30, 2008, Franklin Bank had total assets of $5.1 billion and total deposits of $3.7 billion. Prosperity Bank agreed to assume all the deposits, including the brokered deposits, for a premium of 1.7 percent. In addition to assuming all of the failed bank's deposits, Prosperity Bank will purchase approximately $850 million of assets. The FDIC will retain the remaining assets for later disposition.

    Customers who have questions about today's transaction can call the FDIC toll free at 1-800-591-2845. This phone number will be operational this evening until 9 p.m. central; on Saturday from 9 a.m. to 6 p.m. central; and on Sunday noon until 6 p.m. central and thereafter from 8 a.m. to 8 p.m. central. Interested parties can also visit the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/franklinbank.html.

    It is important to note that neither the FDIC as receiver nor Prosperity Bank as the acquiring institution will e-mail customers of Franklin Bank asking them to validate their deposits or to request personal, confidential information, such as account numbers, Social Security Number, driver's license number, etc. If customers receive e-mails asking for such personal information, they should consider them to be fraudulent in nature and should not respond.

    The FDIC estimates that the cost of today's transaction to its Deposit Insurance Fund will be between $1.4 billion and $1.6 billion. Prosperity Bank's acquisition of all deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. Franklin Bank is the eighteenth bank to fail in the nation this year, and the first in Texas since Bank of Sierra Blanca, Sierra Blanca, Texas, on January 18, 2002.

    Topics: FDIC, failed banks, Bank Regulators, Commercial Banks

    Fifth Third Bank Acquires All the Deposits of Freedom Bank, Bradenton, Florida

    Posted by Wendell Brock on Fri, Oct 31, 2008

    Freedom Bank, Bradenton, Florida, was closed today by the Commissioner of the Florida Office of Financial Regulation, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Fifth Third Bank, Grand Rapids, Michigan, to assume all of the deposits of Freedom Bank.

    The four branches of Freedom Bank will reopen on Monday as branches of Fifth Third Bank. Depositors of the failed bank will automatically become depositors of Fifth Third. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. Customers of both banks should continue to use their existing branches until Fifth Third can fully integrate the deposit records of Freedom Bank.

    Over the weekend, depositors of Freedom Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

    As of October 17, 2008, Freedom Bank had total assets of $287 million and total deposits of $254 million. Fifth Third agreed to assume all the deposits for a premium of 1.16 percent. In addition to assuming the failed bank's deposits, Fifth Third will purchase approximately $36 million of assets. The FDIC will retain the remaining assets for later disposition.

    Customers who have questions about today's transaction can call the FDIC toll free at 1-800-591-2767. This phone number will be operational this evening until 9:00 p.m. eastern; on Saturday from 9:00 a.m. to 5:00 p.m. eastern; and on Sunday Noon until 5:00 p.m. eastern and thereafter from 8:00 a.m. to 8:00 p.m. eastern. Interested parties can also visit the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/freedom.html.

    The FDIC estimates that the cost to the Deposit Insurance Fund will be between $80 million and $104 million. Fifth Third's acquisition of all deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. The last failure in Florida was First Priority Bank, Bradenton, which was closed on August 1, 2008. Freedom Bank is the seventeenth FDIC-insured institution to be closed this year.

    Topics: FDIC, failed banks, Bank Regulators, Commercial Banks

    Monroe Bank & Trust Acquires All the Deposits of Main Street Bank, Northville, Michigan

    Posted by Wendell Brock on Fri, Oct 10, 2008

    Main Street Bank, Northville, Michigan, was closed today by the Michigan Office of Financial and Insurance Regulation, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC approved the assumption of all the deposits of Main Street Bank, by Monroe Bank & Trust, Monroe, Michigan.

    All depositors of Main Street Bank, including any with deposits in excess of the FDIC's insurance limits, will automatically become depositors of Monroe Bank & Trust, and they will continue to have uninterrupted access to their money. Depositors will still be insured with the new institution. Therefore, there is no need for customers to change their banking relationship to retain deposit insurance.

    The failed bank's two offices will reopen Saturday, October 11th, as branches of Monroe Bank & Trust. Over the weekend, customers of Main Street Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

    Main Street Bank had total assets of $98 million in total assets and $86 million in total deposits as of October 7, 2008.

    Monroe Bank & Trust has agreed to pay a total premium of 1 percent for the failed bank's deposits. In addition, Monroe Bank & Trust will purchase approximately $16.9 million of Main Street's assets, and have a 90-day option to purchase approximately $1.1 million in premises and fixed assets. The FDIC will retain the remaining assets for later disposition.

    Customers with questions about today's transaction or who would like more information about the failure of Main Street Bank can visit the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/mainstreet.html, or call the FDIC toll-free at 1-866-934-8944, today until 9 p.m.; Saturday from 9 a.m. to 5 p.m.; Sunday from 12 p.m. to 5 p.m.; and thereafter from 8 a.m. to 8 p.m. All times are Eastern Daylight Time.

    The FDIC estimates that the cost to its Deposit Insurance Fund will be between $33 million and $39 million. Monroe Bank & Trusts' acquisition of all deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to all alternatives because the expected losses to uninsured depositors were fully covered by the premium paid for the failed bank's franchise.

    Main Street Bank is the first bank to be closed in Michigan since New Century Bank, Shelby Township, Michigan, on March 28, 2002. This year a total of fourteen FDIC-insured institutions have been closed.

    Topics: FDIC, failed banks, Bank Regulators, Commercial Banks

    National Bank Acquires All the Deposits of Meridian Bank, Eldred, Illinois

    Posted by Wendell Brock on Fri, Oct 10, 2008

    National Bank Acquires All the Deposits of Meridian Bank, Eldred, Illinois

    Meridian Bank, Eldred, Illinois, was closed today by the Illinois Department of Financial Professional Regulation-Division of Banking, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC approved the assumption of all the deposits of Meridian Bank by National Bank, Hillsboro, Illinois.

    All depositors of Meridian Bank, including any with deposits in excess of the FDIC's insurance limits, will automatically become depositors of National Bank, and they will continue to have uninterrupted access to their money. Depositors will still be insured with the new institution. Therefore, there is no need for customers to change their banking relationship to retain deposit insurance.

    The failed bank's four offices in Altamont, Carlyle, and Eldred will reopen for normal hours on Saturday, October 11th and the Alton office will reopen Tuesday, October 14th, as branches of National Bank. Over the weekend, customers of Meridian Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

    Meridian Bank had total assets of $ 39.18 million in total assets and $ 36.88 million in total deposits as of September 25, 2008. National Bank will purchase approximately $7.55 million of Meridian's assets, and did not pay the FDIC a premium for the right to assume all of the failed bank's deposits. The FDIC will retain the remaining assets for later disposition.

    Customers with questions about today's transaction or who would like more information about the failure of Meridian Bank can visit the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/meridian.html, or call the FDIC toll-free at 1-877-894-4713, today until 9 p.m.; Saturday from 9 a.m. to 5 p.m.; Sunday from 12 p.m. to 5 p.m.; and thereafter from 8 a.m. to 8 p.m. All times are Central Time.

    The FDIC estimates that the cost to its Deposit Insurance Fund will be between $13 million and $14.5 million. National Banks' acquisition of all deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to all alternatives.

    Meridian Bank is the first bank to be closed in Illinois since Universal FSB, Chicago, Illinois on June 27, 2002. This year a total of fifteen FDIC-insured institutions have been closed.

    Topics: FDIC, failed banks, Bank Regulators, Commercial Banks

    What Must Be Done

    Posted by Wendell Brock on Thu, Oct 02, 2008

    With the continuing debate over the health of the U.S. financial system, Wall Street and the economy, everyone's talking about whether taxpayers should be responsible for the bailout. But perhaps the conversation would be more productive if we talked about what else we can do to avoid the bailout and shut down the power-grab that's currently playing out. And, yes I say power-grab because anytime the government gets involved , it takes power away from the people. Period. If our lawmakers give Wall Street the $700 billion, they are taking away the public's power to spend money as we wish-because we have to pay higher taxes to cover those bailout costs. The people who receive the $700 billion will have to untie the knots in the strings attached, just to get to the money. That reduces their freedom to make decisions in this new, less-than-free market.

    For those reasons, we should be looking at other alternatives. Here are two things that must be done to alleviate the current situation:

    1. Change how banks account for the assets on their books

     2. Repeal Sarbanes Oxley (SarBox)

    Booked Assets

    Several years ago, politicians determined that banks assets should be marked to the market. This means that the value shown on the books has to be the current market value, or the amount the asset can be sold for at that time. This doesn't work, simply because the underlying value of the asset may not change as fast as the market. For example, say a bank spends $10 million to purchase a mortgage-backed security or MBS (a bond), which holds the mortgages of fifty $200,000 loans at 5 percent. The fifty houses tied to those mortgages have value and that value moves up and down over time. But those value changes won't happen as quickly as the interest rate changes on Wall Street. After all, once the mortgages are turned into a bond, they are traded as other bonds; thus, the value is largely based on market interest rates. Of course, an MBS investor has the added concern of relying on fifty homeowners to make their payments, while a corporate or government bondholder only relies on one entity, the issuer, to make those debt payments. But this is part of the added risk MBS represent-that one or more people will miss a payment, or that a property falls into default and is foreclosed.

    Because these MBS assets are market-traded, their value is constantly changing. And since the assets must be marked to market, their value on the bank's balance sheet should experience the same constant changes. This works out alright, as long as the movements are small. In the current environment, however, the downward pressure has driven the market value of the MBS so low that no one is buying or selling them. The market has essentially stalled. And that means the value of the MBS is close to nothing! Now, the fifty mortgaged homes underlying the MBS still have value, and perhaps all fifty homeowners are still making their mortgage payments as promised. So is the MBS actually worth nothing? No! But accounting rules require that banks reduce the value of these assets to something close to zero, because that is what the market will pay.

    A better option would be to use a three-year rolling average of the value. Doing that would imply a far higher value currently, but it would be a value that is more reflective of the underlying assets (those fifty houses). Even though the homes' values may have fallen 10 or 20 percent, the MBS is still worth something, as long as those homeowners are making their payments. Even in a foreclosure situation, there is still value in the house. The rolling average allows for a smoother change in asset values (up or down) and provides time for banks to work out problem assets.

    In an up-market, the rolling average allows for a slower climb up, which limits growth. This would provide a little distance and help keep values in perspective. Under this system, we most likely would not have seen the crazy growth in asset values that we saw in the past several years. Some people figure this could put $500 billion back on the books of banks!

    The Repeal of SarBox

    Sarbanes Oxley has failed in its purpose. It was passed in reaction to faulty auditing in a few big public companies that failed. This was supposed to help the public see into what is really going on in a company by making the financial statements more transparent. Obviously, this did not work. Fannie Mae and Freddie Mac, AIG and Lehman Brothers were all public companies and they failed, catching many investors off guard.

    SarBox has succeeded in making the process of becoming a public company so onerous and expensive that companies are looking to other methods for capital rather than going public. This creates several relevant consequences for consumers and investors:

    1. The number of available companies to invest in is reduced.

    2. The value of current public companies is inflated.

    3. The ability to bring good ideas to the market place is limited.

    4. The number of people who want to be involved in public companies is reduced.

    The extra regulatory expense of compliance is ranges from $100,000 to $3,000,000 or more annually, per public company. To pay this expense, the companies raise the prices they charge for their goods and services, which places the cost burden on consumers. Higher prices reduce sales and profitability of the companies. It's simple economics.

    Monthly, millions of people invest millions of dollars in the equity market through their retirement plans. If there are no new businesses to invest in, the stock prices of the current businesses rise. Retirement savers are bidding prices up so they can own something, anything in the equity market. For example, say the stock market in 2004 consisted of 5,000 companies, and $100 million of new money poured in every year from retirement plans and investors. If 250 new companies were brought to the public market each year, the stock market today would have 6,000 companies absorbing investments of $400 million. In reality, that has not happened. So if the market stays at 5,000 and the same additional $100 million is invested annually, then the stock prices of those 5,000 companies would go up-simply because more money is being poured into the market. Has there been a change in the true value of these companies? No, the price was simply bid up because there was more money to buy. Many companies are not going public because of the SarBox hassle factor so there are fewer IPO's hitting the street.

    The expense of SarBox also prohibits companies from coming to the market with their good ideas. Many people and their companies have chosen to find other methods of financing to avoid dealing with the added regulation of SarBox. One executive told me that it was just "too much of an expense and headache," because the company "would have to hire a compliance person at $60,000-$100,000 per year along with the added auditing expense of another $100,000 per year and the additional filing expenses another $20,000 or so." And, in the end, this executive didn't figure the expense was worth the problems. SarBox requires the board and management to take personal liability for all the problems of the company. People don't want to do that! Responsibility is critical in any business venture, but no CEO or board member knows every detail of what is going on in any company. And yet, these executives are personally liable for all activities of the company. Many people do not need the increased liability; this is akin to driving without insurance. This again keeps good companies from coming to the marketplace.

    Modifying the mark-to-market requirement and repealing SarBox would bring billions back to the books of banks and strengthen their balance sheets. The result would be fewer bank failures, more companies in the marketplace, more choices for investors and, probably, lower prices. These are not the only solutions, but they are a major step in the right direction.

    Topics: Bailout, Commercial Banks, Bank Regulation, Bailout Options

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