Superintendent of Banks, Richard H. Neiman, Addressed the New York Bankers Association About the States' Role in the Current Regulatory Reform
October 23, 2008
Good morning - and thank you for that warm welcome. I’m so pleased to be with you again this year at your annual convention. And what a year it has been! I thought it would be hard to top the headlines we were discussing together last year, but so far, 2008 has been even more of a roller-coaster ride for the financial markets.
When I spoke to you last year, I presented my vision for the Department and the core principles that would be guiding us in these unchartered waters. I wanted to put the right priorities in place to provide structure, while keeping these principles flexible enough to adapt to the quickly changing circumstances. So today I would like to look back at last year, through the prism of those priorities, such as consumer protection and regulatory reform. There are three areas I will focus on, as we consider where we stand in New York:
- First, the current environment- including the Treasury relief package;
- Second, the impact on New York state and New York banks; and,
- Finally, the impact on regulatory reform.
I think this gets to the heart of the issues facing all of us. You’re taking stock of your business as well, evaluating the current impact of the credit crisis and considering future trends.
In particular, this crisis has propelled issues of regulatory reform and global competitiveness into the spotlight. These are top priorities for us at the state level, and will be pressing questions facing the next White House administration.
I would like to offer you my perspective on where we are and what may lie ahead.
1. The Current Environment and the Treasury Relief Package
First, on the current environment…. there’s no doubt that 2008 will be one for the history books. We, and the generations that follow, will be studying these market events and the government response for a long time to come.
And, the past few months have been the most eventful of all. During the third quarter of this year, conditions in the financial markets deteriorated sharply and precipitated a world-wide economic crisis. Historic headlines have been a near daily event:
- the placement of Fannie Mae and Freddie Mac into conservatorship;
- the failures of leading thrifts- IndyMac and Washington Mutual;
- the sale of Wachovia, the fourth largest bank in the US;
- the need to rescue insurance giant AIG;
- and the failure of Lehman Bros.
I could go on. But the point is to illustrate the stubbornness of the current down-cycle that we find ourselves in. There has been government action throughout the same time period to try to unfreeze credit markets- including rate cuts, new facilities to increase liquidity, and expansions of deposit insurance. Yet despite this wide range of responses by the Treasury Department, the Federal Reserve, the FDIC, as well as central bankers and finance ministers world-wide, the credit markets are only just beginning to thaw.
The Treasury Program
And so we have come to the most comprehensive effort yet to tackle this problem- the Emergency Economic Stabilization Act of 2008, which just passed Congress after a nail-biting round of debates.
The centerpiece of the Act is the $700 billion Troubled Asset Relief Program. The Program gets to the root of the credit freeze - uncertainty regarding bank solvency. It gives Treasury the flexibility to help banks repair their balance sheets through capital injections in exchange for preferred stock and rights to buy common stock, and by purchasing illiquid assets. I encourage you to review the capital purchase program guidelines issued this week- there are sufficient funds available for all eligible financial institutions, but the deadline to apply is November 14, in just a few short weeks.
Now, ideally markets would demonstrate a greater self-healing ability - but in the present circumstances these measures were critically necessary to protect the global economy. We need a coordinated global response to a global problem, and the Program is a step in the right direction. For example, the capital purchase aspects of the Program are in-line with the actions of international finance officials. I heard positive feedback on this while I was at the Institute of International Finance and Group of 30 meetings last week, which were held during the IMF and World Bank sessions.
Attending these international meetings confirmed the necessity of including a state perspective on these issues. I encourage Congress to include state representation on the Congressional oversight panel.
Need to include systemic modifications
While New York supports these actions, there remains much more to be done. Unfreezing credit markets is vital, but lasting stability needs a solution that also addresses the origins of the problem: the escalating numbers of American families who are losing their most valuable asset - their homes.
I couldn’t agree more with the recent comments by FDIC Chairman Sheila Bair, who strongly encouraged the Treasury Department to use its new authority under the Program to facilitate modifications through loan guarantees and credit enhancements. We need more focus on preventing unnecessary foreclosures. The FDIC’s approach to modifying loans in the IndyMac portfolio demonstrates that systemic modifications are achievable. The $8 billion multistate agreement with Countrywide is another mass modification program, and New York has joined with a host of other states in calling on servicers to follow these examples.
The State Foreclosure Prevention Working Group just issued a letter to that effect, and the Group’s latest report illustrates the pressing need. The report shows that industry loss mitigation efforts are not keeping pace with increasing delinquencies. The number of at-risk borrowers who are not on track for any kind of workout has risen - from 7 out of 10, up to 8 out of 10 over the first half of this year. This is sobering, but better options exist. For one, the Treasury department should use its expanded authority to encourage more lenders and servicers to participate in the new Hope for Homeowners program through FHA.
Serious challenges remain - a lot of damage has been done, both to the markets and the broader economy, and we have more hard days ahead. But even so, I don’t think it’s too much to hope that we have sowed the seeds for a recovery. And I believe that our long-term position - both for the U.S/ and for the industry in New York - will be stronger for having squarely faced this first truly international capital crisis.
2. The Impact on New York State and New York Banks
New York State
For the time being though, the challenges are very real and no one is immune. Even consumers who aren’t shopping for a mortgage or car loan, or don’t have other financing needs right now are going to be impacted in two major ways.
First, there is the destabilizing effect that foreclosures have on entire neighborhoods. Even borrowers who own their homes free and clear are seeing their property values erode. A recent study by the Center for Responsible Lending projected $64 billion in lost equity in New York through the end of next year, due to proximity to foreclosed properties. We’re addressing this in New York through the state’s Neighborhood Stabilization Initiative, which facilitates the purchase and rehabilitation of previously foreclosed, bank-owned properties by eligible homebuyers.
And second, losses in the finance industry have a direct impact on the state’s revenues - which in turn hinders the state’s ability to provide vital services to all residents. The finance industry accounts for 20% of the state’s income - and that has shrunk dramatically due to lower corporate profits, reduced bonuses, and industry layoffs. Numbers for those layoffs are still coming in, but a significant downturn could shed 40,000 jobs in the financial sector in New York City. And because each financial sector job supports about three other positions, the total effect could be multiplied into a loss of 120,000 jobs for the City’s economy.
New York Banks
But, I don’t mean to paint a picture that is entirely bleak. New York banks have been resilient and creative in the face of adverse market conditions. It’s true that financial ratios are down across the board, but the industry in New York as a whole compares favorably with trends for the U.S. and remains well-capitalized. The Treasury Program will contribute here, as New York banks come to participate and receive additional capital. There are also private sources to improve the balance sheet.
I’m particularly encouraged to hear that community banks and credit unions in mid-Hudson and the central upstate region are expanding their business. As some larger regional and national competitors pull back on lending, even to credit-worthy borrowers, local financial institutions are there. Consolidation - which has increased with lightning speed this year - has also left gaps in some upstate markets that translate into new opportunities for community banks. And I encourage all of you - whatever your asset size or market niche - to seize the good business opportunities that definitely do exist, and continue to make prudent loans. The institution that makes local credit available during these tough times can expect a further plus by developing a loyal customer base for the future.
Our foreign and wholesale banks area is also seeing growth. This year we approved licenses for two Chinese banks - China Merchants and the Industrial and Commercial Bank of China (ICBC). These are historic events - these are the first branches of banks from mainland China to open in the U.S/ after a gap of seventeen years, ever since the adoption of the Foreign Bank Supervision Enhancement Act back in 1991. Once again, New York is proving itself to be the capital of global finance.
3. The Impact on Regulatory Reform
I can’t leave the subject of New York’s competitiveness without mentioning our most recent announcement - the decision by Goldman Sachs to establish a New York state-chartered bank. I’d like to elaborate on this news, which is good news for the entire industry. It is a testimony to New York’s enduring role at the center of world markets. And it also reveals some intriguing glimpses of the future, which is my other main topic today - how the credit crisis impacts regulatory reform.
The Reinvention of Wall Street
Monumental events have reinvented Wall Street. All five of the major independent investment banks are gone - through bankruptcy, acquisition, or conversion to commercial bank holding companies. A new supervisory model for the investment banking industry is beginning to take shape. The current market crisis has served as a catalyst for moving the debate about regulatory reform forward in practical terms, as business choices contribute to building a twenty-first century regulatory framework.
Goldman Sachs’ decision to form a New York state-chartered bank has historic implications not only for their company, but for the entire financial regulatory system. I like to think of their decision in two parts - first, the decision to restructure as a bank holding company, and then the selection of the New York state charter.
First, Goldman Sachs has transformed itself from an investment bank principally regulated by the Securities and Exchange Commission (SEC) into a bank holding company regulated by the Federal Reserve. The SEC, of course, will retain supervision over the activities that remain in Goldman Sachs’ broker-dealer.
As a result of its restructuring, Goldman Sachs will be subject to a regulatory regime with higher capital requirements, lower leverage and continual on-site examination. Taking this step is an acknowledgement that, as the country works its way through this unprecedented period of market strain, financial institutions will benefit from the supervisory and regulatory structure that provides the highest level of assurance and confidence to investors, customers and counterparties.
And as to its charter, Goldman Sachs had a choice - whether to create a national bank regulated by the Comptroller of the Currency or a state bank regulated by a state banking regulator. The decision to select a New York charter reflects confidence in New York as a progressive state and in its Banking Department as an effective regulator.
The New York State Banking Department has a demonstrated history of successfully partnering with the Federal Reserve Bank of New York to reduce the duplication that might otherwise result from overlapping regulatory schemes, as demonstrated daily in our shared oversight responsibility for almost all of the U.S. branches of foreign banks. An equally successful partnership exists with the Federal Deposit Insurance Company (FDIC) with respect to insured state non-member banks.
Goldman Sachs’ choice of a state charter demonstrates that state banking regulators like New York deserve a prominent place in the twenty-first century regulatory framework. This decision also reflects confidence in the vitality of the dual banking system, a system that is well positioned to adapt to today’s financial environment. States offer progressive laws coupled with a supervisory force that understands diverse local needs -- whether for wholesale activities, community banking or consumer protection, and can respond quickly to facts on the ground.
On the subject of those progressive consumer protection laws - I’d like to thank Mike Smith, his committee, and the NYBA membership for critical input in developing the Governor’s subprime legislation. Your feedback made it a better bill. It is one of the most comprehensive state laws in the country, and could serve as a national model.
Last year, however, Treasury Secretary Henry Paulsen, in his “blueprint” for financial services regulatory reform, proposed to eliminate state regulation of banking institutions. And Congress recently made it clear they will consider restructuring financial services regulation after the election recess.
As we embark on this national debate over regulatory reform, there will be much focus on whether a singular federal regulator – regardless of charter type or geographic footprint – is the appropriate model for our time. The decision by Goldman Sachs reinforces that the dual banking system is alive and well and should certainly be part of any restructured regulatory regime. Within such a framework, competition between regulators – while maintaining a common set of principles and standards - promotes innovation at the regulatory level in order to keep pace with innovation at the business level. Institutions will be seeking out the regulator that is most effective for their business model.
Effective partnership between state and federal supervisors leads to better regulation. It combines what is best in our current system and reflects the complexity and interconnectedness of our time. It is a model that leverages the synergy between complementary levels of supervision and is the right path to follow in realizing an optimal regulatory structure for the U.S.
The current credit crisis has done much to reshape the industry landscape already, and there are lessons learned that should guide us in moving forward. I am confident that New York and you as members of the industry here will have a large role to play in righting the ship for the entire global financial system.