Congress Gets Failing Grade in Bid to Stop Next Crisis: M&T CEO

WASHINGTON — The head of M&T Bank Corp. came to the nation's capital Monday with an unfavorable assessment of whether the Dodd-Frank Act will do what lawmakers intended.

Robert G. Wilmers, chairman and chief executive officer of the Buffalo, N.Y.-based company, said in remarks to American Banker's regulatory symposium that Congress missed key areas for reform in last year's financial law. He said Dodd-Frank should have done more to rein in credit rating agencies, curb the trading activities of large banks with a government guarantee and deal with the government-sponsored enterprises.

"One devoutly wishes to be able to say that this new law has done that which it was passed to do: prevent a recurrence of a financial crisis like the one we have experienced," Wilmers said. "I fear very much, however, that it will likely fall short."

Although the law forces federal regulators to stop using the rating agencies for their purposes, Wilmers noted the poor record of the rating agencies in evaluating mortgage-backed assets in the private sector.

He cited data reviewing 2,679 residential mortgage-backed securities originated during the recent housing bubble, 99% of which were rated triple-A at origination. But 90% of these bonds now have non-investment grade ratings, he said. Wilmers also criticized Standard & Poor's recent decision to downgrade U.S. sovereign debt, which came less than a year after the rating agency announced that it was holding its rating of the United States steady at triple-A.

"In other words, over the course of 284 days, S&P changed its position on a matter of exceptional gravity," Wilmers said. "Yet had anything truly changed as regards to the fundamental strength of the U.S. economy to suggest it now has less wherewithal to honor its scheduled debt payments?"

Wilmers said the large credit rating agencies are still hugely profitable, they benefit from decades of government support, and that Dodd-Frank did not do enough to clamp down on them.

"It is one thing to remove requirements — quite another for an oligopoly which the government has over past generations helped to establish and embed to be replaced with what we need: an open, competitive, effective and accurate ratings system," Wilmers said.

While M&T Bank is one of the nation's 20 largest bank holding companies, with assets of $79 billion as of June 1, 2011, Wilmers contrasted its business model with those of the six largest banks. For example, he said trading revenues at the biggest banks were 23% of their noninterest income last year, compared to just 2.6% for the rest of the industry.

"While traditional community banks have continued to depend on fundamental, bread-and-butter banking services, larger institutions have come to rely on a much broader and more complex range of activities, including trading, as a source of income," he said. "As a result, their risk profiles are uniquely different from traditional banks."

He acknowledged the largest financial institutions will face additional capital requirements under the post-Dodd-Frank regime. But he added that the law still allows banks with deposits insured by the Federal Deposit Insurance Corp. to engage in trading.

"It is far from obvious … that the new law portends significant change," Wilmer said. "Crucially, the major bank holding companies who engage in and rely on trading revenue can continue to do so with the protection of the FDIC system - established to protect depositors, not speculators."

Wilmers was also harsh in his evaluation of the federal government's failure to resolve the future of Fannie Mae and Freddie Mac. Specifically, he noted, policymakers have done nothing to define the government's future role in the GSEs.

"The sheer delay in reaching a decision about the extent of that role, whatever it will be, helps to prolong our housing market crisis, as lenders and borrowers alike are left to wonder about the future structure of housing finance," he said.