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Uncertainty Is the Only Certainty

By: Bill Poquette

An unintended theme of the Kansas Bankers Association’s CEO and Senior Management Forum in Colorado Springs last month was uncertainty — economic uncertainty, political uncertainty, uncertainty about new regulations coming to implement the Dodd-Frank Act.

Uncertainty is paralyzing everyone and every industry, declared the opening speaker, Donald J. Musso of the investment banking firm FinPro. “No one knows what they are supposed to do,” he said.

Specifically for banks, uncertainty looms in terms of capital, loan concentrations, funding, asset quality, consumer compliance and implementation of the Dodd-Frank Act. The industry will also be impacted by the economic uncertainty of employment and personal income, real estate values and affordability, credit availability and demand, and government spending and borrowing, Musso explained. Other factors include market uncertainty, including changing consumer behavior and changing demographics, and capital markets uncertainty over secondary markets and investor preferences. “All of these external factors will impact community banks in a big way,” Musso warned.

The employment situation is worrisome to FinPro. While there has been a moderate decline in unemployment, it is because more workers stopped looking or accepted part-time work. This does not bode well for real estate and foreclosures have continued unabated, although Musso expects them to peak in the fourth quarter of this year. He also predicted a “huge decline” in consumer loans due to high unemployment and stagnant or declining net wages.

Included in the fallout from the Dodd-Frank Act, Musso sees a “scarily powerful” Consumer Financial Protection Bureau, which trade groups hope will focus on nonbanks. He also advised that executive pay raises will be scrutinized by examiners, even in community banks.

In his comments on capital markets, Musso advised the KBA members that secondary markets may not return and banks should plan on more balance sheet lending. They should also update and maintain capital plans in his view. And if the proposed mark-to-market rules of the entire balance sheet are accepted, “consolidation will double and so will failures.”

Evaluating the Dodd-Frank Act overall, Musso said he doesn’t see how it can work and there will be a lot of unintended consequences that should have been thought through. The good news, if there is any, is that financial supermarkets are dead in Musso’s view. Glass-Steagall will be reinvoked de facto, or large companies will incur significant costs to be in diverse businesses. There will be a realization, he believes, that borrowings are not evil but an essential funding tool and great for managing interest rate risk. And regulators will realize that their current policies on portfolio limits and the allowance for loan and lease losses don’t add up — unless they are attempting to drive consolidation. But Musso’s really good news for the KBA members was that their state is doing well.

Click here to view photos from the KBA's forum.

Political uncertainty was reflected in the comments of Jennifer Duffy, senior editor of the nonpartisan Cook Political Report. Among her observations were that voters seem to embrace change rather than stability, and there are very few true independent voters — they tend to lean one way or the other.

Noting that only 21 percent of the electorate believes Congress is doing a good job, she wondered who they are: Other members? Family and friends? Voters never like Congress but generally do like their own representatives, according to Duffy. Yet, 51 percent are now saying, “It’s time to go home.” That, she said, is a stunning number.

Politics were also woven into the report of ABA Chairman-elect Steve Wilson, chairman and CEO of LCNB Corp., the holding company for LCNB National in Lebanon, Ohio. “Political risk is the greatest risk we have now,” he said. The industry needs to get people who understand banking into office in the 112th Congress, he urged.

Wilson warned that the effects of the FASB mark-to-market proposal could be worse than the Dodd-Frank Act. “Everybody has come out against it, including regulators,” he said. “We need your help,” he added, suggesting that comment letters from bank investors would impress FASB more than those from bank executives.

Bill Poquette is editor-in-chief of BankNews.

Copyright © September 2010 BankNews Media