As leaders from the Group of 20 developed economies meet in Pittsburgh to discuss the international response to the financial crisis, PNC Financial Services Group Inc. Chairman and Chief Executive James E. Rohr spoke with American Banker about his expectations for the G-20 summit, his thoughts about the regulation of consumer financial products, his opinion of the U.S. economy and his assessment of PNC's Dec. 31 acquisition of National City Corp. of Cleveland.
A condensed version of the interview follows.
You are hoping the G-20 will push the idea of a global systemic regulator. Why?
ROHR: Basically the entire world made bets on housing prices, and not just U.S. housing prices. Clearly the products [sold by Wall Street] really went in that direction. It clearly went awry. We really need to have someone looking systemically at what we as an industry, as a global industry, are doing and I hope there will be some progress on that.
Do you anticipate a G-20 agreement on higher capital requirements for banks?
ROHR: [A push for] more capital I think will come out of it, and I think you'll see more capital specifically around trading and derivatives, as well as requirements on liquidity.
And then there's the executive compensation issue.
ROHR: Our philosophy has always been to reward our employees with bonuses based on performance, and we always extended parts of the bonuses over time. We've had clawbacks in our asset and liability compensation system for many years. So a lot of the things we're talking about — in terms of rewarding employees with shares as opposed to cash and tying their bonuses to the risks they take — are things that we've done for many years. They're saying they're not going to put caps and limits on [bonuses]. That's an issue that I think they'll argue about. But it's a global business, and if you limit compensation, the talent will simply flow to where it's not [limited], and that's not necessarily good for the industry.
Can real reform on pay occur without prescriptive rules?
ROHR: If you ask the regulators to make sure that the compensation programs include a view toward risk, I think the regulators will figure out how to do that. By the way, the directors want to figure out how to do that, too. It is a cyclical business, and we don't want to go through this again either.
Are global initiatives on these kinds of matters really workable?
ROHR: We've been trying to work on these kinds of [international] agreements for decades with the Basel agreement. Trying to legislate something on a global basis when you have different systems and different markets is very difficult. However, I think philosophically your approach to regulation and your approach to risk is something that they can agree upon. Whether they come down and agree upon the exact same capital ratios … I'm not sure you'll ever get an exact agreement. But I think the direction and the philosophy around the management of risk, and around concerns about counterparty risk … and liquidity risk, on those things I think you can come to a philosophical agreement.
On the domestic front, what are your thoughts on calls to more closely regulate mortgages, credit cards and other consumer financial products?
ROHR: I think we need to have more regulation there … [but] I don't think we need another regulator. I know there has been a new agency proposed. One of the things that has happened to us is that in some cases we have too many agencies. To the extent that we have better regulation, then you could have some of the existing regulators enforce it like they do with money laundering or CRA lending.
What is your assessment of the U.S. economy?
ROHR: Unemployment is still rising and housing is still falling, but at a much slower pace than they were. For us, our delinquencies — 30-day and 90-day delinquencies — have been flat for five months. So it appears that we at least are bottoming. If you think about how it usually works, usually the market comes back, then the economy comes back, then nonperforming assets and loan-loss provisions peak, and then chargeoffs and unemployment peak after that. It would appear at this point that we are headed down that path. It appears that the market has come back to some extent. It has appeared the economy has bottomed. So we should be, I hope, on the road to having this recession bottom out and then start to turn around.
Can you update us on PNC's acquisition of National City?
ROHR: The National City acquisition is going well. The National City employees have really adopted the PNC philosophy much more rapidly than you ever could have imagined, and we're really headed down a very good path.
We still have troubled credit that came with the transaction and we're working our way through that. We marked that down substantially to market, and since that time the economy has been soft, so we have to keep working our way through those problems.
Is that why you've chosen to hold onto Troubled Asset Relief Program money rather than repaying it as some of your competitors have?
ROHR: On Tarp, 5% capital is OK. We're earning money and adding to capital and helping to earn our way through that. We're in no rush to pay the capital back … and if we ever have a double dip in this recession, I think you're going to be happy having 5% capital.
But has holding on to Tarp hurt your competitive position or the confidence of customers?
ROHR: We're growing market share in virtually every market we're in. All of our legacy PNC markets are over plan for sales, 80% of the Nat City markets are over plan for sales … and we've raised an additional $9.5 billion of transaction accounts — not CDs, but transaction accounts — so we're doing fine. Obviously our customer service and sales have been good. I don't think there's been any impact on us.
Should your larger competitors, the ones in the "too big to fail" category, face more stringent capital requirements than banks at or below the size of PNC?
ROHR: The regulators simply need to understand the risks that are inherent in each individual company and then apply the capital requirements that are appropriate to each institution.
Would you ever want to grow PNC to the point where it would be seen as being "too big to fail"?
ROHR: I think our focus right now is simply to get the National City transaction buttoned up and get return on assets somewhere in the 1.3%-1.4% range, which would have a major impact on our shareholder value.