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For all the invective directed at the Federal Reserve Board over the financial crisis, the central bank still emerged as the big winner under draft legislation to rein in systemic risk.
October 28
The latest proposal to deal with systematic risk rankles bankers in the industry's middle tier, who are being asked to share the costs of seizing much larger — and very different — institutions.
"If Goldman Sachs does something screwy, why should I have to pay?" asked Gerald H. Lipkin, the chairman, president and chief executive officer of the $14.2 billion-asset Valley National Bancorp in Wayne, N.J. "You're going to hit me on the head because some regulator didn't do his job?"
At issue is the idea of having the Federal Deposit Insurance Corp. charge a fee to all institutions with more than $10 billion of assets whenever a systematically important institution fails.
The draft bill that the House Financial Services Committee and the Treasury Department released late Tuesday proposes new regulatory oversight for the country's largest financial services companies.
If ever any systematically important institutions are deemed to be failures, the bill calls for the FDIC to step in, just as it does with banks now. The resolution process would be paid for by proceeds from the sale of the institution and its assets, along with a fee that would be assessed afterwards.
Only companies with more than $10 billion of assets would be charged the fee.
But Dick Evans, the chairman, president, and CEO of the $16 billion-asset Cullen/Frost Bankers Inc. in San Antonio, said the $10 billion mark is far too low.
"I don't believe we can solve this issue by drawing a line in the sand, but if we have to draw a line in the sand, I think it should be $100 billion because that is where most of the risk-taking happened," he said.
Jeff Davis, an analyst at First Horizon National Corp.'s FTN Equity Capital Markets Corp., said he thinks the size cutoff could cause some companies approaching $10 billion of assets to pull back on lending.
"I think, if it passes, there will be less lending," Davis said. "It will certainly encourage any bank that doesn't have really large aspirations to stay put."
The bill does not spell out what makes an institution systemically significant, instead saying regulators should determine this based on asset size, reliance on short-term funding and off-balance sheet holdings, among other things.
Several bankers said the institutions that get designated as systematically important should be the ones paying the fee to resolve such failures.
"Congress' goal of monitoring and reducing systemic risk is valid," said John Kanas, the chairman, president and CEO of the $11 billion-asset BankUnited in Coral Gables, Fla. "Unfortunately creating a list simply based on asset size will not meet this goal. Basing the list on high-risk or globally interconnected business activities would be a more effective approach."
Greg Bents, a vice president at the $9.8 million-asset State Bank of Ceylon in Minnesota, said he is glad the proposal spares small banks like his from paying to resolve "too big to fail" institutions.
Though he is unsure whether the demarcation line should be at $10 billion of assets, he agreed in general with the concept of assessing only larger companies.
"They caused the problem, they can pay for it," he said.
But Evans said the industry crisis came about because of the megbanks and investment banks that took on too much risk in the trading room and the derivatives market. He said those are the institutions that should shoulder the cost of resolving huge failures.
"There should be some correlation to 'too big to fail,' and those that take the higher risk should pay a higher percentage of the cost, and not try to spread it over the entire system," he said.
Evans also said he believes lawmakers are trying to revamp the regulatory system too rapidly, without having a clear understanding of the problems that need fixing. "We are jumping to a solution too fast, and that has unintended consequences."
Lipkin, who spent more than a decade at the Office of the Comptroller of the Currency, including five years as deputy regional administrator overseeing the banks in New York and New Jersey, blamed regulators for the industry crisis and said banks like his should not have to pay for bad decisions at "too big to fail" institutions.
"It's the regulators who fell on their faces," not companies like Valley National, Lipkin said. "We don't make subprime loans. We don't have a problem."
Lipkin said bank failures have not cost taxpayers anything, because the FDIC covers the expenses, using the fees that all banks pay for deposit insurance. But he is not in favor of having banks pay for the failure of other types of financial institutions.
AIG wasn't even a bank, and I should make them whole? They're an insurance company. Let the insurance companies make them whole. Goldman Sachs is not a bank. Why should I have to make Goldman Sachs whole?"
George L. Engelke Jr., the chairman and CEO of Astoria Financial Corp. in Lake Success, N.Y., said that even though his company has $20.7 billion in assets, it is really no different than a small community bank.
"In this big, highly populated market, it doesn't take much to get your assets up above $10 billion, but we are a simple thrift," he said.
It angered him to be lumped in with much larger financial services companies.
"We did not take part in the esoteric stuff coming out of the big monsters," Engelke said. "But based on this, I guess I am bad because I have more than $10 billion in assets and because the regulators didn't do their job. It is horrendous to single out banks like this."
Engelke said he worried the bill could change investor perceptions of his company.
"Why would you invest if you know there is the Damocles sword dangling to bail out some monster?" Engelke said. "That is a very negative market signal."
Several bankers privately questioned if all those over $10 billion of assets have to pay would they then get considered as a systematically important institution.
Chuck Stones, the president of the Kansas Bankers Association, said that is the only justification he can see for a size distinction in assessing the fees.
"I'd be in favor of it if $10 billion-asset banks were regarded as having systemic risk," Stones said. "But if those banks are not going to be in the anointed group, I don't know why they would be on the hook for it.
