Superintendent Richard H. Neiman Addresses the New York Bankers Association About the Current State of the Industry and Future Trends
February 2, 2010
Thank you, Mike, for that warm welcome. I would also like to thank the NYBA members for your constructive partnership as well, especially in contributing to the development of Governor Paterson’s 2009 mortgage reform legislation. Your insights made the bill an even better law, as we continue working together on solutions to stabilize the housing market.I look forward to this event every year, and consider speaking to your annual meeting and legislative conference as something like a “State of the Industry” address from my perspective as Superintendent. So today I would like to take this opportunity to take stock of where we are as an industry in New York, as well as consider future trends.
B. Current state of the industry
It is no secret that these are hard times for the industry, and not just economically. Reputationally, banks- and regulators, too- have been given a black eye. While there is plenty of blame to go around, criticism has not distinguished enough between bad actors, many of which were not actually banks, and the thousands of responsible banks left picking up the pieces. So I am pleased to be here today to affirm my confidence in New York banks and my commitment to New York as a global financial center. New York should lead the recovery and support the emergence of a renewed banking sector.
2. Mixed messages
Renewing the banking sector is a process though- and I understand the pressure on banks in this recession, as well as the mixed messages you may feel you are receiving.
- We want banks to be profitable again and able to attract private capital, but we’re seeing public criticism when banks report high earnings.
- We want banks to increase lending, but regulators expect improved underwriting standards.
- We want banks to remain competitive and innovative, but there is growing public and Congressional concern around compensation and bonuses.
I appreciate the challenges in balancing these goals, and I believe that overall we are moving forward in the right direction, even if it seems at times as though progress comes in stops and starts.
3. Community bank issues
As part of this forward progress, I would also like to acknowledge the many community banks in New York and the special contributions they have made to keeping credit available. I am optimistic that community banks as a whole will continue to be reliable sources of hometown credit for consumers and small businesses. Many are experiencing challenges, however, from downward pressure in commercial real estate markets.
As you know, I also serve as a member of the TARP Congressional Oversight Panel. The Panel just held a hearing in Atlanta last week, to assess the scope of the commercial real estate problem and explore solutions, with special emphasis on community banking.
It is clear to me that there is an urgent need to conduct prudent workouts, as well as take appropriate write-downs. These issues are also emphasized in the policy statement on commercial real estate that was issued last fall by the federal banking supervisors. We are implementing the federal policy statement in our exams as well. The Banking Department’s staff is available as a resource to you, as you assess your portfolios and put this guidance into practice.
Another area of interest to the Panel is the extent to which community banks want or need a TARP capital support program. President Obama has called for using $30 billion in TARP funds to create such a program. I would like to hear your views on this proposal. Is TARP support for smaller banks needed, or would the potential for restrictions and stigma reduce participation? Your ideas on crafting a capital support plan or other alternatives are welcome.I am also passionate that the important and continuing role of community banks should be preserved in any outcome on regulatory reform at the national level. While changes are needed in the regulatory framework, we need to ensure that reform efforts provide a level playing field among institution types and sizes.
C. Future trends – regulatory reform
This point about regulatory reform brings me to my second theme this morning- trends for the industry in 2010. We heard President Obama’s State of the Union speech just last week, and it is clear that regulatory reform remains a top priority in Washington. Reform is a key issue for me as well in my role on the Oversight Panel.
I see three aspects of regulatory reform as particularly critical-
- Consumer protection issues;
- Regulatory architecture and the impact on the dual banking system; and,
- Systemic risk and the social utility of the financial services industry.
1. Consumer protection
Consumer protection issues have been a top priority for me from day one as Superintendent, when I was immediately confronted with the effects of abusive mortgage practices and the failure of large non-depository mortgage lenders. I whole heartedly support improved consumer protections, and the legislative actions we have taken in New York are models for national minimum standards.
There are two fundamental questions involved in realizing this vision, however: the role of states in relation to national standards and enforcement; and whether it is necessary, or even desirable, to create a new federal consumer protection agency.
Preemption. The first point on the role of the states relates to preemption. States need the flexibility to adopt higher standards in response to local conditions, as states are often the first to spot emerging problems. The House bill on regulatory reform gets to the heart of the preemption problem. It would correct the imbalance that has been so pronounced since 2004, when the Comptroller issued his sweeping ruling that set aside state consumer protection laws. The Supreme Court’s decision in the Cuomo case also upheld state enforcement abilities. We should remain vigilant that the proper state-federal balance is maintained as the reform process continues. However, I believe that we have made real progress in scaling back excesses in the legal theory of preemption.
CFPA. It is when we move from theory to practice, however, that the consumer protection debate heats up even further. I will be frank here- I remain unconvinced that a new consumer protection agency is the right solution. National minimum standards, which would serve as a floor that states could exceed, could be set by the Federal Reserve or the FTC. But the deepest concern that I have with the new agency concept is that it would separate safety and soundness from consumer protection at the federal level. This siloed approach overlooks the fact that the two disciplines are inextricably linked through regulation of the underwriting process. It also artificially splits our oversight into two incomplete perspectives and enforcement efforts: regulators cannot protect consumers from the type of lax underwriting practices that triggered the current financial crisis with one hand tied behind their backs. We need to adopt a more holistic approach to supervision, by strengthening the consumer protection function within existing agencies instead.
2. Regulatory architecture
This issue of a new consumer protection agency is also part of the broader discussion of how best to modernize our regulatory architecture. I support the Administration’s proposal to combine the Office of Thrift Supervision (OTS) and the Office of the Comptroller of the Currency (OCC), the two federal chartering agencies that were the occasion for harmful charter shopping. But proposals to go farther and create a single monolithic federal regulator are a step too far. Streamlining the so-called “alphabet soup” of regulatory agencies in the US has merit, but there are more compelling issues of regulatory effectiveness that should determine the optimal degree of consolidation.
There are over 8,000 banks in the US, mainly smaller community banks that are state-chartered. It would be inevitable that a single federal regulator would favor the interests of the handful of large national banks that hold the majority of US assets. That is not a good outcome for New York or for the nation.
Calls to eliminate the supervisory authority of the Federal Reserve and the FDIC present additional concerns. Performing examinations gives the Federal Reserve and the FDIC a critical window into industry practices, which informs their respective missions as lender of last resort and provider of deposit insurance. We need a diversity of regulatory viewpoints to respond appropriately to emerging risks in a complex financial services marketplace, just as multiple judges in the Olympics contribute to a fair outcome. The FDIC’s insistence on retaining the leverage ratio is a timely example of the benefits that come with multiple regulators.
3. Systemic risk and social utility
The proper role for the Federal Reserve and the FDIC also ties into my third priority for regulatory reform- deciding how best to insulate from systemic risk, including the risk of institutions that may be deemed “too big to fail.” I support an expanded role for the Fed in managing systemic risk, which could be further strengthened by a separate systemic risk council.
It is ironic that actions that were necessary to address the financial crisis actually made some institutions larger and more complex. So it is abundantly clear that we must address the extent to which institutions are subject to the federal safety net, with implicit guarantees beyond FDIC deposit insurance. We cannot bring closure to this period of unprecedented public support for the financial system- and we cannot effectively prevent future crises- without serious soul-searching about the dual nature of banks as risk-takers and as providers of a social utility.
The Administration is already developing a proposal to restrict proprietary trading, hedge fund and private equity activities by banks and bank holding companies. Many details are yet to be announced, and I hope that the industry here in New York will take a lead role in shaping this proposal into the right solution. I believe that meaningful change is coming, even though anything reminiscent of Glass-Steagall is not popular with industry; Congress and the public have recognized that excessive risk-taking in the capital markets through activity unrelated to client business is incompatible with taxpayer guarantees.These are very complex issues, however, and it requires unique expertise to distinguish pure proprietary trading from client-oriented activities and positions taken in connection with market-marking. But that is just the type of expertise we have here in New York, and a solution that our industry has helped to design will be more effective and appropriate than one imposed by Washington alone.
The bankers in this room and your association have a unique opportunity and responsibility to contribute to the reform process. I look forward to working with you in this effort.