Slideshow 2014 Predictions Revisited: What the Seers Got Right and Wrong

  • December 19 2014, 9:00am EST
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A year ago we asked BankThink contributors to make bold predictions about how the financial industry would evolve in 2014. Here's a look back at their forecasts and the actual outcomes.

<strong>PREDICTION</strong>: Shadow Banking Comes into the Light

"2014 is the make-or-break year for U.S. systemic regulation. Increasingly fearful of a restructuring of financial markets to the 'shadows,' the [Federal Reserve] and Treasury will focus not just on all the unfinished Dodd-Frank rules, but also on using their power under that law to designate specific activities and practices as systemic risks. With this power, they will try to regulate activities like repos across the financial industry, covering not just banks, but also hedge funds, asset managers, and other big players."
— Karen Shaw Petrou, managing partner at Federal Financial Analytics Inc.

OUTCOME: U.S. authorities' efforts to curb shadow banking haven't yet led them to categorize specific activities as systemic risks, but that may change soon. The Financial Stability Oversight Council toyed with the idea this year and then appeared to back away. Industry observers will be paying close attention to the FSOC's meeting Thursday to see if there's any further movement in this direction.

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<strong>PREDICTION</strong>: The Dawn of Tiered Regulation

"Building on the strong base of their own research, findings and experience, regulators will increasingly design rules and regulations adjusted to the diversity in charter, business model, size and geography of the banking industry. Moreover, they will take specific steps to help turn around the decline in community banking, by chartering new banks and removing unproductive mandates. But, unless policymakers labor mightily, these efforts will only slow, but not arrest, the unhappy reduction in the overall number of banks in 2014." — Wayne A. Abernathy, executive vice president for financial institutions policy and regulatory affairs at the American Bankers Association

OUTCOME: The Federal Deposit Insurance Corp. moved to ease the process of applying for new bank charters in November. But many in the industry continue to feel that smaller banks face regulatory burdens disproportionate to their business models and the amount of risk they pose to the financial system. In December 2014, the number of federally insured institutions in the U.S. fell to 6,546, down from 6,812 at the end of 2013, according to FDIC data.

<strong>PREDICTION</strong>: Too-Big-to-Fail Reckoning

"The General Accountability Office will deliver its report in 2014 estimating the subsidy that the six [too big to fail banks] receive for the implicit government (taxpayer) guarantee of their funding elements. GAO's 'goldilocks' estimate will either be: too high (prompting more purchased analyses by the TBTFs' lobbyists countering its findings); too low (questioning the GAO's credibility); or, just right (raising the question: How can we use that subsidy to right size these banks that threaten the entire financial system?). The TBTFs cling to their subsidy and the GAO's report will prompt the first serious debate over these banks' quasi-GSE status." — Cornelius Hurley, director of the Boston University Center for Finance, Law & Policy

OUTCOME: The GAO report, released in July, estimated that the size of big banks' implicit subsidy had fallen or even dipped into the negative in the years since the financial crisis. True to Hurley's prediction, the report led to a heated debate over whether the too big to fail problem has really been solved.

<strong>PREDICTION</strong>: Payday Lenders Go Splat

"The payday lending industry will continue to hemorrhage, dying a slow death by a thousand cuts. Both tech innovators and banks will introduce new credit products to replace soon-to-be-discontinued deposit advance loans, and the [Consumer Financial Protection Bureau]'s forthcoming regulations of payday lending will further push the industry away from two-week balloon payments as the standard loan term for nonprime small-dollar loan customers." — Jennifer Tescher, chief executive of the Center for Financial Services Innovation

OUTCOME: The CFPB, led by Richard Cordray (pictured), has pushed back the release of its-highly anticipated payday lending rules, with the proposal now slated to come out within the first seven months of 2015. The year 2014 also failed to produce a slew of new small-dollar loan products from banks and tech companies. However, the payday lending industry has continued to shift toward installment loans, perhaps in anticipation of the forthcoming CFPB regulations.

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<strong>PREDICTION</strong>: Big Tech Out to Eat Banks' Lunch

"With increased competition, regulation, and balance sheet pressures, 2014 will see a marked increase in the ongoing contraction of the financial services ecosystem-our current environment doesn't seem sustainable. Hundreds (thousands, long term) of banks and credit unions will consider selling; even more fintech players will be acquired or fail (there are over 900 payment startups alone.) Big tech will more visibly enter the primary battle for banking's future by better delivering better customer experiences around financial and payment data; namely Amazon, Apple, Facebook, Google-and especially PayPal." — Bradley Leimer, digital strategy lead for the Mechanics Bank in Richmond, Calif.

OUTCOME: Bank M&A did pick up in in 2014, with notable deals including CIT Group's proposed acquisition of the holding company for OneWest Bank and a number of high-profile community bank deals such as Susquehanna Bancshares's sale to BB&T, AmericanWest Bank's sale to Banner Corp. and Hudson Valley Holding's sale to Sterling Bancorp. While there was no obvious uptick in fintech acquisitions or failures, the industry did see some banks join forces with startups. BBVA, for example, snapped up tech companies including big data firm Madiva Soluciones and online banking company Simple. Meanwhile, the debut of Apple Pay this fall made major waves in the financial industry, inciting much discussion about whether the mobile wallet constitutes a threat to banks.

<strong>PREDICTION</strong>: The FHFA Turns a New Page

"I expect to see a dramatic shift in the [Federal Housing Finance Agency]'s focus next year with new leadership at the agency that reinvigorates mortgage assistance programs. Efforts to build infrastructure for a post-GSE secondary market will ease somewhat as priorities change. The GSEs will remain in a holding pattern in 2014 with modest efforts by the agency taken to adjust guarantee fees in light of expected upward pressure on mortgage rates." — Clifford Rossi, Professor-of-the-Practice at the Robert H. Smith School of Business, University of Maryland

OUTCOME: The FHFA did shift focus under new director Mel Watt, who emphasized increasing Americans' access to homeownership. The agency's biggest move toward that goal came with the introduction of the GSE's new 3% down payment loans in December. Post-GSE secondary infrastructure efforts advanced slightly with the FHFA taking early formative steps toward the creation of a common securitization platform, which would issue uniform securities for Fannie and Freddie. Efforts to reform the GSEs effectively died in the Senate in May, although some parties are optimistic that Congress will tackle the issue again in the new term. While mortgage lenders have been pushing Fannie and Freddie to lower guarantee fees, a change has yet to materialize; mortgage rates also failed to increase as expected.

<strong>PREDICTION</strong>: The Next Generation of Home Loans

"2014 will be the year we will finally have a realistic discussion on a national housing policy and the role government will play in financing the American Dream. New home financing products will begin to sprout, because consumers want and deserve a variety of home financing options and will not accept only vanilla and one-size-fits-all mortgage loans. Mortgage loans should not be like the Ford Model T, available in only in one color." — Richard Booth, a certified mortgage banker and industry consultant

OUTCOME: The year did bring a few new home financing loan options, of which Fannie and Freddie's new 3% down payment loans were the most prominent. Another noteworthy product that entered the market this year was the Wealth Building Home Loan, a 15-year mortgage designed to help low- and moderate-income homeowners build equity more quickly.