You know there’s a gapping disconnect when bankers say they want more regulation.
But that’s essentially the result of a study by the Professional Risk Managers’ International Association, a group of risk management professionals, many of whom are bankers.
The PRMIA study this month found that the overwhelming majority of its polled members believe much, much needs to be done to analyze and quantify systemic risk. Put another way, the PRMIA members want the proposed Office of Financial Research, which would be tasked, through the proposed financial reform legislation, with aggregating and analyzing system-wide financial data.
Specifically, 82% of financial risk experts who participated in the survey said that current systemic risk monitoring resources are “inadequate,” while 72% consider that system-wide data is “critical to monitoring systemic risk.” And here’s the clincher: 63% “recognize that government efforts to collect system-wide data would be a major undertaking but doable and worth the effort.” If bankers want it, then it must be radically needed.
With all due respect, and without reading the actual report, I interpret this a bit differently based on conversations I have with my Bank customers. I don’t think that “inadequate” necessarilly means “not enough.” Rather, the regulatory bodies are gathering the wrong data and misapplying faulty metrics to their enforcement actions. Further, they are not normalizing data to the current environment. In addition, they are very quick to broadly brush a financial institution based on ratios without as though all risk management was 100% objective. Instead, they should be applying subjective information to the overal regulatory process.
For example, I have seen banks come under fire in the following ways:
– Banks are being forced to put loans that are performing 100% as agreed or better into nonaccrual based on a new appraisal that causes the LTV to be out of whack. This is especially true, not surprisingly, of commercial and development loans. They should be having a conversation with the bank about these loans and the ability of the borrower to continue to pay to be sure, but if every indication is that they will remain paying credits, they should be pegged for monitoring, and allowed to remain in performing status until such time that they can be shown to be potentially in a default situation. The impact to the banks is that when they put loans in nonaccrual, they must post reserves with the Fed or their correspondent bank and not allowed to earn much more than 1/8% or so on them if anythign at all. The impact to capital and income by forcing them to reserve performing loans can be devastating. These deposits can total into the millions or even 10’s of millions of dollars even for community banks. As a segue, just as insurance companies are allowed to earn a conservative return on their IBNR until claims are payed, banks shoudl be permitted to earn a similar return on loss reserves until the loss is as least reasonably likely.
– Banks are being slapped on the hand for increasing or higher than say 15% brokered deposits, even when these deposits are fully insured through thinsg like CDARS/Promontory reciprocal deposits. They are treating all brokered deposits as if they were hot money. Often they are not and are they are paying lower interest rates on them. While these deposits are generally more nervous than core deposits, they do not get near the level of roll out that more traditional brokered deposits.
– Some subjective credit should be given to banks that lost a chunk of their securities portfolio and capital took due to the Fannie and Freddie preferred stock becoming bird cage liners.
– There was a time in the not too distant past when all concerned with ERM rightly fretted over a 2% non-performing loan ratio. Now, there seems to be a trend to back this up to 2% of anythign 30+ days past due. Some credit should be given to banks that have continued to be proficient in getting those borrowers that get into the first layer of lateness back in line. I visit with a lot of bansk that still are. But they are being told that a 31 day past due loan will almost certianly become 90+ in the next quarter. Not always true. Again, these loans should be monitored more diligently than they once were, but until the bank demonstrates an inability to get the slightly pasts into line, they shoudl be given some leeway. The proficiency in keeping them in line is most often a factor of making local loans by well known customers of the bank. The regulators need to have this conversation with the bankers. Further, where we fretted when they got as high a 2%, we should applaud those who can keep it under 3.5% or so, so long as capital and net income is supportive. In my opnion 3.5% past due is the new .5% past due. Until things substantially turn around in the economy. Again, normalizing data across the board is a needed concept.
There are other examples, btu these are the ones that come to mind as I see them day in and day out.
Just my $.02.
Tim