Tuesday, February 18, 2014

Officially Distorted


Recent controversy about the officiating at the Sochi Winter Olympics sparked a thought about how the 2008 financial crisis, and the aftermath we are living in today, have, hopefully, only temporarily distorted the traditional role of bank regulators in the marketplace for banking services.

Historically, as a bank regulator and bank examiner, your job was to calmly officiate in the marketplace for banking services.   As a member of a rulemaking body, subject to statutory guidance and notice-and-comment rulemaking, you helped establish the dimensions of the ball field and rules for player behavior.   In your day-to-day job as a bank examiner, you were also an umpire or referee on the field who monitored player behavior, called out-of-bounds play, and penalized some for personal fouls.  And as a corollary part of the job of officiating, you sometimes had to sideline someone from play or, in grave situations, ask the Federal Deposit Insurance Corporation (FDIC) to carry an ailing player off the field on a stretcher.

The game itself, though, was played by teams of bankers, doing what bankers do well - making a visible contribution to a safe, sound,and prosperous banking system that is earnestly attending to the legitimate credit needs of the most powerful economy on Earth.

Like any sports competition, the fans show up to the game to applaud the performance of the players on the field and appreciate the quality of the game play. None of the fans came specifically to see the game officials... except maybe the spouses, kids, or significant others of the officials themselves.

But you pick up any national or banking trade media publication these days and there are tons of copy tilted toward the topics of regulation, compliance, and policing unsavory banking behavior and only a smattering of news coverage about trends, tools, and techniques for scoring the game's goals.

Every fan knows that when the game's center of attention becomes the officiating, there is something grossly wrong with the game.  The game should be about the bankers and not the officials.  Hell, even the officials on the field, diligently doing their jobs, would  prefer the spotlight shine on the players and the goals of the game itself.   How many bank regulators relish the prospect of being summoned up to Capitol Hill for congressional video replays of every close call they make (or should  have made) in the scrum down on the playing field?

Like the Polar Vortex that brought us one of the chilliest winters in recent memory, the regulatory "Big Chill" on the banking marketplace seems to be showing small signs of a Spring thaw.  Although there do seem to be a couple of exceptions to this hypothesis.... the activities of the Consumer Financial Protection Bureau and the continuing gang-beating of the global megabanks.

First, while there is still much to do on the Dodd-Frank Act implementation, the outlines of major unfinished rules are generally visible, and there are signs that the rulemaking process is beginning to slowly wind down.  Regulators appear to be just as fatigued with this seemingly endless process as the banking community.

Second, bank enforcement actions are being terminated by regulators at a rapid clip as the level, and direction, of bank prudential risk metrics are improving as banks have finally worked through most of their legacy problems.

Third, bank merger and acquisitions (M&A) activity has been popping in the last few months.  Acquisitive-minded  banks have emerged from their financial storm shelters as the climate seems to be more hospitable.  In 2013, the average unasssisted community bank acquisition crept out of the discount-to-book zone and rose to around 1.2X book value and 25X earnings.

Lastly, based on my unscientific poll, bank consultants, on the community bank beat, who practice in the regulatory relations arena are getting fewer phone calls from bankers desirous of those specific services.  Inquiries now tend to tilt towards corporate governance, regulation implementation, expert witness, and due diligence work.

I think if this "Washington Spring" is real, the roles of the players and the officials should start normalizing over the next three years or so.

Like sports officiating, banking regulation and supervision was not meant to be a public limelight and celebrity status area of professional practice.  The public attention should deservedly go to the competitors in the marketplace.  And again like sports officials, their professional satisfaction should come from being tacitly appreciated for the fair, dedicated, and quietly professional execution of their official responsibilities.

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