Listening to Jim Rohr talk about financial services policy reminds me how important it is to get out of Washington every once in a while.
Rohr, who stepped down last week after running PNC Financial Group for 13 years, approaches policy questions with a sort of practicality that's rare here. He's also pretty unfazed by many of the things that have Washingtonians pulling their hair out.
Still, Rohr does have a list of policy issues that he thinks deserves more attention.
"Cybersecurity is one of the biggest issues we have," he says during an interview in his office overlooking downtown Pittsburgh. The frequent attacks on banks' systems are not simply about disrupting service. "All this is test-and-learn," he says, and defenses must be beefed up before the bad guys learn enough to do some serious harm.
"When you are thinking about risk to the financial system, we are doing a really good job of nailing down the historic mistakes," Rohr says. "But we are missing what technology is doing to the industry."
Firms beyond banking are claiming an ever larger share of online payments and yet they do not face the same capital, security or anti-money laundering requirements that banks do, he says.
"PayPal is part of eBay. eBay doesn't have any capital. No capital. There's none. There is no tangible capital and there is no BSA-AML requirement."
Rohr adds, "I think it's a competitive issue down the road, but I think it's a systemic risk issue right now, and no one is addressing it."
Rohr also worries that some financial institutions don't have the resources or perhaps the sophistication to defend themselves from hackers.
"One of the things that concerns me is they are going to go in and take over the identity of a small bank," he says, and then use that entry point to get inside the larger firms. "One of the questions we need to ask ourselves and this won't be popular but are you too small to defend yourself?"
This connects directly to the debate over Too Big to Fail. Rohr does not think the largest banks are "too big" and he worries that government plans to whittle them into smaller pieces will backfire.
"If we're going to reduce the size of the banks and reduce their capital budgets, that will reduce their tech spending in a world that is going absolutely in the other direction," he says.
"We have nations attacking our financial system and we want to reduce ourselves to a lower common denominator? I just don't think that's a good idea."
The TBTF debate in Washington has shifted from a strict size cap to ratcheting capital requirements high enough that companies voluntarily shrink. In the wake of the Dodd-Frank Act, Rohr says the largest banks have enough capital on their books. What's more, he says decisions about capital levels should be handled by professional regulators not politicians.
"More capital doesn't necessarily make the banks that much safer," he says. "You have to assume we are in the business to make loans and make money. The idea that you can remake the entire industry through a legislative bill with people who have never been in the industry is well, you will get what you ask for."
None of this is terribly surprising coming from someone who has been in the business 41 years all of them at PNC. But here's something that may surprise you: Rohr supports the heart of Dodd-Frank.
"There is no question we needed legislation. We needed reforms," he says.
Among the Dodd-Frank provisions he endorses: creating a council of regulators to spot the next systemic risk; tougher capital and liquidity standards; limits on counterparty risk; mortgage lending reforms and trading limits.
"All of those things are good things," he says. And he applauds Congress for leaving the details to the regulators.
Like others, Rohr wishes the bureaucrats were moving faster but notes, "it takes time to figure out because it's not simple." And the fact that authority rests with a handful of agencies complicates an already tough job.
"Just getting the change right would be difficult if there were just one regulator," he says. "But the multiple regulators multiply almost every rule by 2 or 3 or 4. It's cumbersome for us and it's not easy for them either."
Mortgage rules are a good example.
"We have four regulators telling us how to make mortgages with rules that will never allow it [the crisis] to happen again, and we have another set of regulators telling us we have to make loans to people who will never pay us back in neighborhoods where the collateral is not good."
Rohr predicts Dodd-Frank will not be re-opened for changes.
"There is such a split in Congress, and I am pretty certain that the President views Dodd-Frank and Obamacare as his two signature issues and he isn't going to touch them."
Rohr urges patience: let Dodd-Frank unfold and then see where things stand before making changes. The US has the most resilient financial system in the world, he says, and adopting substantially higher capital standards a la the Brown-Vitter bill would cripple returns. That in turn would cause investors to flee, creating a self-defeating cycle.
"If banks earn 5% they aren't going to raise any capital. It's just not going to happen," Rohr says simply.
Government officials should raise capital requirements more selectively, he says, not across the board.
"Rather than raise capital for everybody, they can raise the capital for you just by flunking you on the stress test," he says. "I don't think that's a bad thing."
But Rohr is worried the Federal Reserve's stress-testing models will end up trumping all others.
"The thing that concerns me is everybody is trying to model like the Fed and one of these days the Fed is going to be wrong," he says. "What I hope is people are modeling their companies in other ways with different sets of assumptions.
"One of the things I learned over a long time is diversification of risk is the single best risk manager You can't be lucky. Over time you have to be diligent about spreading that risk."
Our interview occurred the day after PNC reported first-quarter earnings. Rohr says it was "different but not bad" to be a passive listener as his successor, CEO Bill Demchak, and PNC's chief financial officer Rick Johnson handled the call with analysts and reporters.
"There are a lot of cases where CEOs stay too long," Rohr says. "I said I would leave before I am 65. Now it's here."
Rohr will stay on for a year as PNC's executive chairman. I asked him, considering all the pressure on banks to split the chairman and CEO roles, if he thought Demchak would add the chairman title in April 2014.
"I actually don't think it matters," Rohr says. "We have a very strong lead director. If Tom Usher wanted me fired, if the board wanted to fire me, I don't care what titles I had. I would be packing my bag in a minute in a half."
Post-Enron, he says, the boards of most public companies meet in executive session without the CEO. "It really doesn't matter if you are the chairman or the lead director. It's meaningful independence that matters."
Rohr is similarly unconvinced the industry ought to bother with any sort of campaign to improve its image.
"When you repossess houses and cars, you are never going to be popular," he says.
Still, Rohr says bankers could help themselves by working with federal regulators to get the Dodd-Frank rules on the books.
"We have to work with the regulators to figure out exactly how the new rules are going to work, whatever they are. We have to figure them out and get them to work.
And then we just have to execute," he says. "I don't think any advertising campaign is going to help us."
Rohr has done a lot of things right during his tenure as CEO, including a smooth management succession plan. (He calls Demchak "a brilliant guy, just terrific.") But perhaps his biggest achievement is the culture he's built at PNC. It's a get-it-done-without-drama company, and that's pretty remarkable considering Rohr, through 10 acquisitions, quintupled PNC's size during his tenure, to $305 billion.
Rohr says the first document he signed after joining PNC in the early 1970s was a United Way pledge. "The commitment to the community has been historic.''
PNC's culture isn't a top-down affair. Employees came up with its seven operating values. "It wasn't done by three guys in a closet," Rohr says. And those values performance, teamwork, customer focus, diversity, integrity, respect and quality of life were put to the test 18 months ago by a third party who surveyed employees throughout the PNC franchise to see whether they believed the company was living up to its goals.
"It's a chancy thing for a CEO to do," Rohr admits, especially in the wake of PNC's takeover of rival National City. "But the results showed we are a company that really does believe in its values, and we really do operate as a team."
"The way people treat each other does drive a lot of our success," Rohr says.
As he leaves the day-to-day management of PNC behind him, Rohr is truly uncertain about the industry's future.
"I dare you to tell me what the industry is going to look like two or three years from now," he says. "I don't know because there are so many different rules and regulations being proposed."