Category Archives: Commercial Banking

What Innovations are Critical for Smaller Commercial Banks

When it comes to innovation, community banks generally don’t have the resources—either financial or people—to compete with the country’s largest banks—where the technical staff focused just on innovation alone is probably several times larger than a smaller institution’s entire workforce.

Of course, no one expects smaller banks to compete with a megabank like Wells Fargo & Co., but there are smaller institutions that are playing the innovation game very well.

One of those is Radius Bank, a Boston-based bank that has approximately $1 billion in assets and four years ago made the radical decision to close all of its branches except for one, and convert its local brick-and-mortar retail operation to a digital platform that operates nationally. President and CEO Michael Butler, who appeared on a panel of like minded bankers at Bank Director’s FinXTech Annual Summit in New York on April 26, said that one of the more challenging aspects of that decision was changing Radius’ culture to support its new business strategy. Not all of the bank’s employees were happy about the change in strategy, and Butler said there has been approximately a 50 percent turnover in the bank’s workforce over the last four years. Many of the older employees who resisted the change have been replaced by younger, more tech savvy employees who normally would choose to work at a tech company rather than a bank. Butler said the company has spent a lot of time trying to create the kind of “vibe” that will attract those kind of individuals. “It’s a lot about the people you bring into your organization,” said Butler. At 57, Butler has the background of a traditional banker even though he has led the charge towards digitalization. “My job as the grey hair is to not let them kill themselves,” he joked about some of the bank’s younger staff members.

Another panel member—Jay Tuli, senior vice president for retail banking and residential lending at Leader Bank, a $1 billion bank located in Arlington, Massachusetts—was instrumental in creating ZRent, an online portal that the bank launched in January 2015. It enables landlords to automatically collect rent payments via ACH transactions. ZRent has been a successful customer acquisition tool for Leader Bank, and it is now licensing the software to other banks that want to use it.

Radius and Leader Bank are both located in the Boston area (Arlington is just six miles northwest of the city), so they have the advantage of taping a deep talent pool in one of the country’s most attractive locations, with a number of highly regarded universities in their backyard. Like Radius, Leader Bank has seen a big turnover in its staff over the last eight years. Tuli said that the average age of its 300 or so employees is 31. “There’s a lot of young talent in Boston, and we’ve benefited from that,” he said.

So, if being located in a large urban market is a key element in the innovation game, how to account for the success of Somerset Trust Co., a $1 billion bank headquartered in Somerset, Pennsylvania, a small community situated about 80 miles southeast of Pittsburgh? Somerset had just 6,277 residents according to the 2010 census. A third panelist, Chief Operating Officer John C. Gill, said the bank has always placed a very high premium on having excellent technology, and sees this as a critical component of its organic growth strategy. Only about 19 percent of its consumer banking transactions occur in the branch today. It sees innovation as an imperative despite its rural location.

Somerset has learned to play the innovation game by partnering up with fintech companies. A couple of years ago, Somerset teamed up with Malauzai Software in Austin, Texas, to develop a mobile banking solution that allows Somerset’s retail banking customers to securely check balances, use picture bill pay and remotely deposit checks from any location or device. There are banks much larger in size that are still working on delivering these capabilities to their retail customers. Working with another fintech company, Bethlehem, Pennsylvania-based BOLTS Technologies, Somerset has also launched a new mobile account opening platform that has greatly reduced the time it takes to open a new account, and is expected to save the bank approximately $200,000 a year. Somerset and BOLTS were finalists in the 2017 Best of FinXTech Awards, which were announced at the event.

Gill said that Somerset is very comfortable partnering with fintech companies to develop product capabilities that it would not be able to develop on its own. “Banks have the customers and low cost funding,” he said. “Fintech companies bring innovation.”


Outlook for the Big Banks Under the Current Administration

For a brief moment, Wall Street stopped on Monday, as if time was suspended in an alternative reality.

President Trump, for the first time as resident of the White House, said aloud that he was considering breaking up the nation’s biggest banks. Of course, he had said it on the campaign trail, but this seemed different.

“I’m looking at that right now,” Mr. Trump told Bloomberg News during an interview in the Oval Office. “There’s some people that want to go back to the old system, right? So we’re going to look at that.”

The headline ricocheted around the email boxes of senior bank executives across the industry. At the Milken Global Conference in Los Angeles, where Treasury Secretary Steven Mnuchin had just finished speaking — and didn’t mention breaking up the banks — the hallways quickly buzzed about the comment, according to participants, as their phones lit up. Shares of bank stocks dived lower within seconds of the headline, only to recover quickly.

Mr. Trump’s comments shouldn’t come as a surprise: His chief economic adviser, Gary D. Cohn — formerly president of Goldman Sachs — has been not-so-quietly trying to socialize the idea of bringing back the Glass-Steagall Act, the Depression-era law that was enacted to prevent investment and commercial banks from combining. The law was repealed in 1999, helping to bring about the supersized banking giants that dominate the market today.

Before Monday’s musings, Mr. Trump’s thoughts on the matter had felt like a theoretical exercise, those who have met with him say.

What would be surprising, however, is if Mr. Trump made it a reality. It would be one thing for him to “do a big number” on Dodd-Frank, the 2010 law that imposed stricter regulations on banks in the aftermath of the financial crisis — he has repeatedly stated that he wants to pare it back, repealing parts of the law. But it would be a much more seismic shift to bring back Glass-Steagall, which would be the equivalent of doing “a big number” on the banks themselves. The biggest names in banking would presumably face the choice of having to shed either their commercial banking arm or their investment banking division.

When Mr. Trump met with business executives in February at the White House, he turned to Jamie Dimon, chief executive of JPMorgan Chase, an unabashed defender of big banks, for advice. JPMorgan Chase would not exist in its current form were it not for the 1999 repeal of Glass-Steagall.

“There’s nobody better to tell me about Dodd-Frank than Jamie, so you’re going to tell me about it,” Mr. Trump said at the time, to the consternation of proponents of more banking regulation.

Viewed through the prism of goosing the economy and creating jobs — as Mr. Trump has pledged his efforts should be viewed — it’s hard to see how breaking up the biggest banks would help, especially in the short term. Indeed, it would most likely have the opposite effect.

Mr. Trump’s chief complaint about Wall Street is that he doesn’t think lenders are extending enough money. “I have so many people, friends of mine, that had nice businesses. They can’t borrow money,” he famously said. “They just can’t get any money because the banks just won’t let them borrow, because of the rules and regulations in Dodd-Frank.”

Given that commercial lending is at a record, according to the Federal Reserve, that’s a hard statement to square.

But let’s be generous and assume for a moment that he is right. What is undoubtedly true is that big banks would probably be even more conservative with their loan books during whatever transition would be required to comply with a new version of Glass-Steagall. Such a law would inject as much uncertainty into the economy as Dodd-Frank did initially, when banks were sorting out how they would comply. The process did throw some big banks’ lending into a state of paralysis.

And while proponents of ending too-big-to-fail love to point to the repeal of Glass-Steagall as the culprit, by now that meme should have resolved itself.

“I don’t think that Glass-Steagall was a cause of the crisis,” Ben Bernanke, the former Federal Reserve chairman, who has no horse in this race, told me matter-of-factly.

Indeed, he said, he would be worried if the law were brought back, because it would hamstring the government if it ever needed to intervene in a crisis similar to what happened in 2008. “If Glass-Steagall had been in effect, we couldn’t have had some of the failing firms taken over,” Mr. Bernanke said. “JPMorgan took over Bear Stearns, and so on.”

On the other hand, Neel Kashkari, the president of the Minneapolis Federal Reserve and a former Treasury staff member who oversaw the bailouts of the banks, has been on a campaign to break up the biggest banks, concerned that they still pose too much of a risk to taxpayers if they were to fail.

Mr. Trump’s comments came on the same day that he and his team spoke with about 100 community bankers led by Cam Fine, president and chief executive of the Independent Community Bankers of America. One issue they discussed was the idea of a two-tiered system of regulations, one for big banks and another for community banks. Whether that construct is now being interpreted as a new version of Glass-Steagall or a breakup of the banks remains an open question.

But let’s be clear: If Mr. Trump were to try to bring back what he described on the campaign trail as Glass-Steagall, it wouldn’t be to prevent the next crisis. He would have to be convinced that bringing back the law would stoke the economy. And that’s an even scarier prospect, because it means firms like Morgan Stanley, Goldman Sachs and Bank of America, which have been forced to reduce the risk they take, would ultimately be less regulated.

There are a lot of good reasons to reform Dodd-Frank. And there are lots of good ways to make regulations less onerous to the nation’s smaller banks, which complain they are drowning in legal and compliance bills; giving them some relief could indeed open the loan spigot even more. But both of those measures would be very different from bringing back Glass-Steagall.

Whether Mr. Trump’s talk translates into action on this front remains to be seen. The prevailing view seems to be: “Be prepared for more headline risk for big banks as lawmakers keep piling on the anti-Wall Street rhetoric — most of it will be substantively meaningless,” according to Ian Katz of Capital Alpha, whose comments were highlighted by Ben White of Politico.

Of course, with President Trump, the prevailing view could change in an instant.


Strategies to Improve Your Commercial Loan Origination

Today’s business borrowers demand a lot more than just good rates. They expect to communicate with their lender via a variety of channels at a time that suits them. They are too busy running their own businesses to prepare thick files of financial information. And they want to deal with partners whom they regard as having a modern, world-class business model and technology stack. Continue reading Strategies to Improve Your Commercial Loan Origination

Regulatory Relief on the Horizon for Community Banks?

A group of Wisconsin bankers on a recent lobbying trip to Washington, D.C., returned with heightened optimism that some of the rules now governing community banks — regulations they contend are too costly — will be eased.

Community banks in Wisconsin and the U.S., defined generally as banks with assets of less than $10 billion, have complained since 2010 that reforms passed by a then-Democrat controlled Congress and aimed at preventing another financial crisis unfairly imposed an expensive compliance burden on them.

Continue reading Regulatory Relief on the Horizon for Community Banks?

Proposed Accounting Changes Should Make Hedging More Attractive to Community Banks

In the regular course of business, banks are exposed to market risks from movements in interest rates, foreign currencies and commodities. Many banks respond by utilizing over the counter derivative instruments to hedge against volatility. Under current accounting standards, banks must account for derivatives under the ASC 815 (formerly FAS 133) models. Continue reading Proposed Accounting Changes Should Make Hedging More Attractive to Community Banks

CRE Lending Changes Are Coming

Regulatory relief for community banks appears to be on the way, and the changes will likely make commercial real estate lending easier.

Banking regulators on March 21 issued a joint report to Congress on their efforts to reduce regulatory burden. Most notably, the report stated that regulators were considering changes to the capital treatment of risky commercial real estate, mortgage servicing assets and certain deferred tax assets. Continue reading CRE Lending Changes Are Coming

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