No one can talk about banking without offering speculation as to what the industry may look like under President-elect Donald Trump.
Let Mike Horn, a former New Jersey banking commissioner who now represents community banks at McCarter & English, be the first to tell you:
“There’s no doubt — there are changes on the horizon.”
A partner of his at the law firm, Veronica Montagna, is equally certain of that. But what kind of future is in store for banks and their shareholders?
Montagna says they can expect something brighter.
There’s a consensus in the industry that major regulatory structures that have come to bear on the banking industry — such as the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in the wake of the financial crisis — could be trimmed around the edges at the very least.
Teetering on the edge of potential upcoming changes is a ruling from October in a federal case involving oversight of the independent Consumer Financial Protection Bureau, an agency created by Dodd-Frank that works with regulators and handles mortgages and other loans. The federal judge’s finding was that the president represents oversight, and could even remove the bureau’s sole director at will.
Don Musso has been watching the developments closely and translates them all for the clients of his bank consulting firm, FinPro Capital Advisors.
“The (ruling) means it’s now in Trump’s purview after he gets through inauguration,” he said. “I would also expect to see with his administration a new FDIC chairperson as well as bifurcation in the system, where you have a big bank regulator and a small bank regulator.”
In short, he’s expecting a much different regulatory landscape.
“But it’s not going to mean regulation gets removed that’s there for safety and soundness,” he said. “I expect he’ll be pretty smart in how he executes this.”
The argument from smaller financial institutions always has been that the 2007-08 crisis was not of their doing, but that the resulting regulations came in a one-size-fits-all approach that they believe doesn’t make sense.
Different but familiar market
Some banks have given up home mortgage lending as a result of increased scrutiny, but other institutions have been taking their place, according to Mike Horn of McCarter & English.
Banks now only originate about half of the market’s mortgages, and non-bank lenders (that Horn argues have much less regulations imposed on them) have been creeping up to the majority position.
“They’re not all fly-by-night operations, but a lot of them don’t have to worry about the same standards as bank lenders; they make their loans anyways,” Horn said.
It’s worth noting that a similar situation was also the case about 10 years ago ... right before a year the financial industry is still trying to forget.
Gerald Lipkin, Valley National Bank’s chairman, CEO and president, reiterated that view.
“The abuses of a handful of financial institutions — some of which were not even banks — left a lasting impact on community banks, and commercial banking in general,” Lipkin said. “Among other things, we now spend thousands and thousands of hours every year compiling data for regulators — data that I don’t believe does much of anything for a bank of our size.”
An advocate for her many clients in the sector, Montagna thinks it’s important that the administration supports community banks because, she said, “they have more skin in the game and know their borrowers better than large banks,” hence curtailing risk.
On top of that, she said the banks are having trouble staying afloat.
“They just don’t have the manpower to keep up with what they’re required to do,” Montagna said. “That’s forced a lot of consolidation in the industry.”
Industry experts nearly unanimously agree that a shift in the regulatory framework would affect the trend of bank consolidation, which has steadily brought the amount of New Jersey-chartered banks to under 100 recently for the first time in decades.
John McWeeney, CEO and president of the New Jersey Bankers Association, said a lot of aggravation about the cost of regulation pushed smaller banks into merging with larger partners.
“With changes to regulation, there might be a lot more confidence to go it alone,” he said.
Of course, the biggest indicator for potential success — or lack thereof — in the banking industry is the economy.
“And things are pointing to the economy strengthening,” McWeeney said. “And there’s been a lot of talk about infrastructure spending at the federal level — as well as locally with the state’s passage of the Transportation Trust Fund — so, it’s safe to assume that there will be investment spending that will drive economic activity.”
“Overall, bankers can be a lot more optimistic heading into the new year than previous ones.”
Adding to that optimism is the suggestion that there could be an interest rate increase from the Federal Reserve during its last meetings in December. Musso and his bank consulting firm are predicting that there’s a high likelihood of at least a quarter-percentage-point interest rate hike coming.
Checking out millennials
When it comes to grabbing the attention of the consumer demographic everyone today seems to be vying for, credit unions think they shouldn’t be overlooked.
Millennials have been attracted to the mantra of people helping people that these member-owned financial cooperatives follow, according to New Jersey Credit Union League CEO David Frankil.
“The more millennials start to look at the structure of their banking relationships, the better credit unions have become,” Frankil said. “It’s a natural progression to what you’re seeing in lots of other industries. They are looking for products and solutions that represent values that match theirs. Credit unions are a great fit for that.”
This has contributed to growth across the board at New Jersey credit unions, Frankil added.
Affinity Federal Credit Union, which has grown its membership 5 percent this year and expects to grow more next year, doesn’t discount the influence of millennials on the credit union sector.
“Certainly, millennials have bought into the basic concept of credit unions, being nonprofits that are member owned,” said Kevin Brauer, chief financial officer at Affinity. “It’s an opportunity for us going forward.”
This would follow years of historic lows that bankers say cut into their profit margins.
And they’re not alone in saying it.
“At the end of the day, banking and credit union institutions have the same basic mathematics,” New Jersey Credit Union League CEO David Frankil said. “Interest rate compression has occurred over the past several years and interest rates have been kept low, which has hurt margins for financial institutions across the board.”
The state trade association leader for nonprofit, member-owned credit unions said the caveat is that banking institutions have been able to make up for the squeezed margins with various programs that credit unions would not themselves introduce.
Credit unions are therefore particularly interested in having a receptive ear in Washington, D.C.
“One of the things that has always rankled us about the Dodd-Frank debate is that credit unions were not even remotely a part of the crash,” Frankil said. “Yet we ended up getting lumped in together under the general rubric of financial services when it came to the regulatory framework.
“We ought to be treated a little bit differently because the whole ethos of a credit union is fundamentally different, and we don’t engage in those types of activities — and I’m hoping the new administration is going to be receptive to that concept.”
Kevin Brauer, chief financial officer at Affinity Federal Credit Union, said that his financial institution — the state’s largest credit union — has an eager eye on what’s to come, but won’t fixate everything on it.
“We’ll have to be agile enough to do business regardless of what the new administration brings,” Brauer said.
That’s also the view of one of the state’s largest community banking institutions, Investors Bank.
CEO Kevin Cummings expressed that it’s hard to be completely certain what the new administration will do, but he hopes it becomes clear soon.
“The most important thing to come out of getting through with the election is that it takes uncertainty out of the game,” Cummings said. “A reduction in uncertainty is always good for business.
“So, we’re looking for a new administration that can be transparent on what they’re planning to do with Congress; because the more information we get out there, the better the business community will feel.”
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