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The HQ Conundrum
What makes you believe money is sitting on the sidelines ready to come in?
TAYLOR: The baby boomers are still not ready to spend yet; they need a little more sunshine before they are ready. But there are others that can’t wait. There are some folks that just got married and need a home. If they buy an existing home, somebody else moves up to another home. There are some inevitable laws of economy that mean people are going to spend money. And I see business people out there taking some reasonable risks now—they have got some money saved up and have some capital to take those risks. And they are much more ready today to do that than I have seen since 2007.
LEARY: We went into the election season a deeply divided country, and we come out of it still deeply divided. There’s 190 million voters, and a 2.5 million or 3 million vote difference in the country? That breeds the uncertainty that we have, and on strong positions. Unfortunately, coming out of the election, I don’t see that mentality and attitude in Congress changing that much.
I have been struck throughout the Great Recession that it remains an age of uncertainty. There are very few fundamental issues still playing out, or they are playing out so far below the surface that we don’t sense them. We remain deeply divided and we remain very uncertain about what is solid, what is stable and what’s not.
A lot of that uncertainty is coming from banking regulation. Here we are three years after Dodd Frank and we are still not sure.
LEARY: We are a third of the way through the Dodd Frank rules, and it’s three years later. The rules that are mandated are being pushed back continuously, because it may have been a great idea in Congress but you try and write a rule to implement some of these great ideas and it is extraordinarily difficult to do with sensitivity.
BEARD: That’s a good segue into this Basel III battle going on. Most of us around the table want safe banks. There’s no question about it. But when you get down to how you do that, there’s a huge division. Take small community banks and think of the complexity of just computing the capital requirements of Basel III—we are talking about adding bodies to do that very calculating function—and there’s just not a sensitivity to the cost of that. So when you get into a bank like ours—we are about a billion dollars in assets—we have to add two to three people just to keep up with the regulation. And that cost—on top of the compressed margins that we are dealing with—is really a difficult thing to throw onto the banking system. And it’s particularly difficult for the community banks.
We were at a meeting recently with the UBA; I was sitting next to somebody on my right that had over 100 people working on Basel III, and on my left it was a little community bank that had about 40 people total that said they weren’t even sure they could spell it let alone do it. So you’ve got that proper concern for the safety of the banks that translates into just silliness when it’s applied to the actual day-to-day operation of the banking industry. Basel III, to me, is the poster boy for that kind of thing.
HOWELL: Basel III particularly hits the community banks because of the capital requirements in that. A lot of banks today just can’t get more capital. They can’t go out and raise capital because it’s dilutive to the shareholders. This is a real challenge that’s got to be dealt with, and the regulators seem to be holding firm on this.
BEARD: We are not a public company. We don’t have access to the public markets. So to raise capital becomes a very difficult proposition. They are trying to entice an investor into an industry that has been vilified in the press, into an industry that has had the margins compressed and that faces uncertainty. That’s not an easy proposition to capital, which is fluid.
My concern is that over time, particularly for the smaller banks, it drives capital out of the market and it becomes more of an illusory idea that you can go raise capital. It sounds fine on paper, but where do you really go to raise that kind of capital? And if you have that kind of uncertainty, it goes into prospectus or disclosure. Who is going to put capital at risk in that kind of business?
It’s a fundamental question of do you want community banks or not? And if you do, you’ve got to figure out a way that’s intelligent to protect the economy if we are concerned about the banks going under. But at the same time, look at the realities of trying to operate a community bank and do it in a way that’s thoughtful.
Which gets to a comment I heard from a representative of community banks, who said the only way to survive is to get big. He said, “Wait a minute, I thought the U.S. government was against big banks. So now you are forcing everybody to be big.”