An Open Letter Calling For The Establishment Of The Consumer Beverage Protection Bureau (CBPB)

I'm fed up and not going to take it anymore! So I am proposing to my state's Senators to submit legislation to form the Consumer Beverage Protection Bureau (CBPB).

Dear Senators Casey and Toomey:

I am a citizen of your fine state and am writing to strongly encourage you to submit legislation to establish a Consumer Beverage Protection Bureau. The establishment will serve to protect the citizens of our fair land from the aggressive and deceptive practices of the beer industry.

For too long, the beer industry has been praying on our citizens. Luring us into beverage centers with cardboard cutouts of attractive young women or the likes of Kevin Harvick and Dale Earnhardt Jr. Such marketing tactics have had a disparate impact on those that fancy attractive women and NASCAR fans. Note that I made no reference to the identity of those clearly in the beer industry's cross hairs as I now have adopted political correctness in my protest letters. And don't get me started on Busch beer clearly targeting plaid shirt-wearing mountain folk. smh

Once the beverage centers lure you in, past the attractive woman or Earnhardt Jr. cutout, what do they feature? Expensive, high margin craft beer. Not the more reasonably priced Busch. We are bombarded with images and smooth marketing schemes of Troegs, Harpoon, and Flying Dog. The deception gets worse. Anheuser-Busch fools us into believing craft beers such as Elysian, Breckinridge, and Goose Island are brewed in small batches by people with long, scraggly beards. Not so. They are owned by Anheuser-Busch, who is in turn owned by beer conglomerate InBev. From Belgium! 

Gentleman, this is our new Battle of the Bulge!

Here is what I propose. Form the CBPB, that is within the Federal Alcohol Administration, yet is not accountable to the FAA or the President of the United States. In addition to investigating such deceptive practices, the CBPB should have examination authority over large beverage wholesalers to ensure that their practices are "fair", whatever definition they drum up for that term.

Give the CBPB the power to:

- Rescind or reform contracts;

- Demand monetary refunds;

- Disgorgement of violators' assets;

- Return of property;

- Restitution;

- Compensation for unjust enrichment;

- Payment of damages or other monetary relief;

- Public shaming of a beer distributor's violation;

- Limits on the activities or functions of a person;

- Civil monetary penalties

In this way, the CBPB can stop the practice of beer distributors from upselling a Hoppy Ending Pale Ale to the college student that just wants a PBR. The added compliance costs may put the small beverage distributor out of business in favor of their larger brethren, limit beer drinker choices, and raise prices. But let's face it, those small operators are not likely to support lifer politications anyway, and who wants that?

No, creating a government bureaucracy accountable to nobody creates jobs, and is a great gig for smart people like Jeopardy winners that can solve complex problems in the form of a question, such as "What is Fair?"

This madness must end! Support the CBPB!

Sincerely, your faithful servant that believes the government can solve what "ales" us...

~ Jeff Marsico

Why are banks slow to adapt alternative credit data? I'll tell you why!

Deposit insurance. 

In order to get federally sponsored deposit insurance, that is industry self-funded mind you, the Federal government and state governments set up a regulatory scheme to ensure the safety of customer deposits.

All have benefited. The banking system is stable, which is critical to national and state economies. Depositor money is safe. Also critical. And let's not forget about the thousands of employees that work for regulatory bodies, compliance personnel in banks, and consultants that help them comply.

So what am I talking about, that deposit insurance is why banks don't do like FinTech lending firms and use alternatives to the FICO score in underwriting consumer credits? 

Our legislatures did not limit themselves to safety and soundness when they created banking law. No, they dabbled in money laundering, terrorism, drugs, Internet gambling, and, oh yes, fairness.

Fairness.

What does that mean?

Whatever you want it to mean.

So when yesterday's American Banker asked why alternative credit data was a hard sell for small banks, running afoul of the Fair Lending Act was a key concern (see table).

I would argue that using alternative data to make consumer loan decisions scares bankers because it has not played out with the "fairness" laws and regulations out there, and the disparate impact doctrine used by regulators to determine if a practice is discriminatory. 

According to the FDIC, disparate impact occurs when a policy or practice applied equally to all applicants has a disproportionate adverse impact on applicants in a protected group. Even if it serves as a good predictor of a borrowers propensity to pay back the loan. If a financial institution uses payment of utilities in its credit decisions, and declines credit because prospective borrowers pay utilities late, this could have a disparate impact on a protected class. But bankers won't know that when they establish the criteria. They have to find out later, after a bureaucrat in Washington does a white paper.

This application of law will continue to be a challenge for financial institutions looking to compete with FinTech firms and mine other data sources to predict a customer's credit worthiness.

I got news for our lawmakers and regulators. I only know bankers that want customers to pay back their loans. And because deposit insurance is a national program, so should they.

~ Jeff

Why No De Novo Banks? Math.

There is increasing chatter about relatively small banks, under $100 million in assets, looking for an exit. Because they are so small, there may not be a line of buyers waiting for a book to come out from the investment banker. So perhaps an investor group would be interested in taking out current shareholders and recapitalizing the bank?

During previous periods of bank consolidation, the net decline in financial institutions was buffered by the number of de novo banks. For example, in 1997, the merger peak in the past 20 years, there were 725 mergers, and 199 de novo banks.

Not so today. Conventional wisdom puts the blame on regulators. They’re not approving charters, or making it extremely difficult to do so. The regulators deny this. But there is truth to it, in my opinion.

If a bank has a business model that is unique, or serves a narrow constituency, regulators push back in the name of concentration risk, or untried business models. I recall an Internet bank that was trying to get off of the ground in Michigan in the late 1990’s. The concept was new, and growth was projected to be robust, albeit not off the charts.

The FDIC required the bank to raise $20 million in capital, a tidy sum back in the 1990’s when banks got started with less than half as much. So because the business model was relatively unique, the regulators required a very high level of capital. The bankers couldn’t raise it, and the de novo never got off of the ground.

Today, regulators still favor plain old business models. Yet they are also requiring high levels of capital. Primary Bank in New Hampshire, started last year, raised around $27 million. Sure more is better from a safety and soundness perspective. But that capital comes from somewhere. And that somewhere, investors, have choices on where to invest their money.

In comes the math problem.

Let’s say an investor group, tired of big banks making decisions about their communities hundreds of miles away, decide to explore starting a bank. They put together an outline of a business plan, project out their financials several years, and go visit the FDIC.

The FDIC looks at the business plan, critiquing any part of it that is outside the norm, serving a particular industry or industries, relying on non-traditional distribution methods, and so on. They suggest that being more plain vanilla will increase their chances of approval. And by the way, it will require $25 million in startup capital.

The investor group puts together a prospectus, and begins soliciting shareholders for commitments. 

Now, Joe Investor has $10,000 to invest. Does he put it with this new bank? Or does he invest in an S&P 500 Index Fund?

The S&P 500 has a compound annual growth rate of 5.0% over the past 10 years, and 13.0% for the past five years. And The 10-year includes the Great Recession, so Joe Investor projects the S&P 500 compound annual growth rate of 9.0% for the next 10 years. For reference, the S&P 500 grew 9.2% annually during all of my adult years since 1984. 

For Startup Bank, the organizers have projected the following over the next 10 years.

A $10,000 investment in a de novo bank pales in comparison to the return Joe Investor could receive by investing in an S&P 500 mutual fund. And if Joe needs his money out of the fund, he places his trade and the money is in his bank account within three days.

Startup Bank, on the other hand, would likely trade very little. For all publicly traded banks between $400-$500 million in assets, the average trading volume is 1,432 shares per day. Joe putting in a sell order on his holdings could move the market and decrease his value. I learned this the hard way, by the way. So take it from my experience.

Lest you think that the dearth of de novo banks is a regulatory problem. I got news for you. It’s a math problem.

~ Jeff

Banking Regulators Should Major in the Majors

The amount of agida being given to the Current Expected Credit Loss (CECL) standard mandated by the Financial Accounting Standards Board (FASB) reminds me of Chicken Little's claim that the sky is falling. It hammers home my belief that bankers dedicate significant resources, swerving to and fro, conforming to the myriads of standards, regulations, and exam practices that have little to do with their safety and soundness.

Rick Parsons, author of Broke: America's Banking System and Investing in Banks: Strategies and Statistics for Bankers, Directors, and Investors, drove this point home in Broke, stating regulators, directors, and bankers should major in the majors. Namely, focus on those risks that cause banks to fail. Rick recently spoke about CECL and other current banking topics on my firm's June podcast.

I should note that Rick is in favor of CECL, because it would improve loan risk-based pricing and elevate reserve levels. Point taken. When a bank tech vendor asked me about building a CECL platform, I said if it raised the reserve for commercial banks to 1.2% of loans, then bankers would buy it! That's the ALLL levels bankers defaulted to before all of this complexity surrounding loan loss reserve calculations, and now CECL.

Rick was spot on in his major in the majors commentary. We have diluted examiner resources to the point of ineffectiveness. Instead of focusing on what causes banks to fail, namely operational processes that lead to excessive risk taking, especially credit risk, they focus on everything. Meaning they focus on very little. 

Instead of examiners majoring in the majors, bankers spend countless hours responding to regulatory concerns over their search criteria within their Bank Secrecy Act (BSA) programs, and how many errors the bank had in SAR reporting. For the uninitiated reader, BSA was Congress' means to use banks to police their customers to ensure they weren't laundering money or funding terrorists. To my knowledge, there has never been a BSA violation that caused a single bank to fail. But bankers sure spend a lot of time on it. And HMDA reporting? Don't get me started.

One major law that Rick pointed out that has been a total failure was the social engineering pie'ce de resistance, the Community Reinvestment Act (CRA). To ensure banks lent money into communities where they took deposits, banks are required to report, and regulators are required to grade banks' efforts on this ridiculous law that did nothing to help the plight of inner city residents. 

But ample resources are dedicated to it. And banks must at least achieve a "Satisfactory" to be approved for many things, such as mergers. And there is no lawmaker that will propose its demise even though it has been a "Fail" at achieving their social engineering goals. The press might report the lawmaker is "against inner city residents". Stupid.

No bank failed due to having a poor CRA record. And how many communities were adversely impacted by a bank's "needs improvement" CRA rating?

These are the rabbit holes examiners jump into, and require bankers to dedicate human and financial resources to comply and improve them. 

CECL is another ridiculous concept foisted on banks by the FASB that, although at least focused on credit risk but in the name of financial transparency, will do little to nothing to make a bank safer and sounder against failure, in my opinion. 

Yet here we are. Diluting banker resources further. Have we lost our minds?

~ Jeff

Former Pennsylvania Secretary of Banking Lays Down Ideas on How to Love Your Regulator

Glenn Moyer, the former Secretary of the Pennsylvania Department of Banking and Securities (pictured), spoke at a banking industry event this past week. His subject: How to love your regulator. Glenn is a senior advisor to my firm and I suggested the topic. He rolled with it.

Regulator relations is a pressure point in our industry. Some of the more common complaints include regulatory guidance that seems to change with the breeze, and community banks being treated like “too big to fail” (TBTF). So Glenn’s comments were timely. And since he was the immediate past Secretary, and a former bank CEO, his comments were insightful. 

Here are four of his talking points that hit home.

1.  Never ask your regulator “What would you like me to do?"

This indicates to your regulator that you are out of ideas. That your management team is out of ideas. That perhaps you had no ideas to begin with. From my perspective, I would worry that the regulator would answer you. Glenn’s experience aside, how many other regulators have run a bank?

2.  Communicate your strategic direction to your examiner in charge (EIC). And include his or her boss in the conversation.

This is particularly true if you are charting a path that is different than in the past, or is somewhat unique. Regulators do not like to be surprised. Imagine an examiner coming into the next exam to find that you suddenly entered into reverse mortgage lending and the portfolio has grown faster than all others. That might inspire a higher zoom magnifying glass to see “what else” you have been up to.

3.  A repeat MRA (Matters Requiring Attention) is never good.

In my practice we occasionally hear bankers lament that they have been unfairly treated by their examiners on relatively minor issues. When we peel back the onion to uncover why the regulatory scrutiny on small potatoes, we find MRA’s that were contained in past exams. So examiners asked that the bank clean something up, and later come back to find out the bank did nothing to clean it up. Why would we be surprised by a reduction in our CAMELS?

4.  Document the collegial tension between independent directors and senior management.

This goes against the grain of boards that like to demonstrate unity and therefore have unanimous votes. Voting aside, regulators like a board that challenges management's strategic decisions. Particularly decisions that increase the bank's risk profile. Board minutes are an interesting animal. Actually, having read volumes of board minutes, I may have overstated "interesting". But if there is healthy debate about the bank entering a new line of business such as reverse mortgages, include the highlights of the debate in the minutes. Don't just state "Director Smith moves to approve entering the reverse mortgage business. Director Jones seconds. Vote is unanimous." Don't give the impression that your board is a rubber stamp. Because regulators rely on your board to protect the safety and soundness of your bank. I think I read that somewhere in a Director Roles and Responsibilities pamphlet.

What do you say about how to build a great rapport with your regulator?

~ Jeff

Dear Mr./Ms. Bank Regulator

My firm will occasionally provide feedback on correspondence to our clients' regulators. Today we did just that. Our advice: don't come off as combative. Since hitting send on that e-mail, I reflected on how a half Italian, half Irish firebrand like myself became so melancholy. 

Truth is, I haven't. I thought about what we should have said to the regulator, versus the sweet words I was encouraging our client to use. I mentioned to him that we should keep two versions of the letter: one that we will send crafted to get our intended result, and one that says what we mean. Below is a sample letter to your regulator, saying it like you mean it.

August 2, 2014


Mr. John Whatshisname
Examiner In Charge
Bank Regulatory Body
1 Bureaucrat Way, NW
Washington, DC 20429

Mr. Whatshisname,

Below is our response to the Matters Requiring Attention ("MRA") that were included in your most recent examination report on Schmidlap National Bank ("Schmidlap"). 

Although our Tier 1 leverage ratio is greater than 10%, you criticized us for our stress scenarios contained in our capital plan. You opined they lacked analytic rigor. Aside from the clear lack of analytic rigor you exercised to come to this conclusion, it is important to remind you that estimating future negative events that impact our capital is guesswork. We like our guesses better than yours, and our spreadsheets are bigger than yours. So, no, we are not re-doing our capital plan.

Our level of investor commercial real estate is trending closer to your guidance levels. We get that. What you suggest we do is create greater diversity in our loan portfolio. We have a lot of small restaurants in our markets that can pledge pizza ovens as collateral. We are now training our lenders on pizza oven market valuations and setting a pizza oven loan to value limit in our loan policy. We will be dispatching lenders to pizza shops up and down our valley in the coming months. Mangia!

In the management section, you had two items for us: our succession plan and strategic risk. If I win the lottery, Frank will take my slot. If Frank gets hit by a beer truck, Jane is up to the task. If Mary goes buh-bye, Alex will step in. There's our succession plan. The Board is a little more difficult, because getting local luminaries to get paid twenty five grand a year to put up with your bullsh*t is difficult. We're working on it.

In terms of strategic risk by the recent new products and delivery channels we have added, we will need further definition from you on "strategic risk". When sending your clarifying statement, also send your resume containing the qualifications you possess to dictate product and delivery channel strategies. Also, please clarify the definitions contained within CAMELS, because we didn't think the S meant strategic. If our memory serves correctly, and the S does not stand for strategic, then we don't give a rats a** what you think about our products and delivery channels.

We recognize that there are so many laws and regulations that apply to banks that you can couch any criticism you have for us under some law, such as the Truth in Lending Act. It reminds me of high school geometry, when the teacher asked me to solve for a triangle, I would say "CPCT", knowing it could be so. So you can say, "I don't like this checking account... BSA/AML", and I would have to enlist regulatory attorneys to investigate the matter only to come to the conclusion that "you can't fight Uncle Sam".

That, Mr. Whatshisname, is the definition of tyranny. And Schmidlap is not gonna take it.

Warm Regards,
Schmidlap National Bank

Ficticious Interview: Senator Chis Dodd and Rep. Barney Frank

Senator Chris Dodd (D-CT) and Representative Barney Frank (D-MA) were primary sponsors for the Dodd-Frank Wall Street Reform and Consumer Protection Act which was signed by President Obama on July 21, 2010. Rather than arrange for an actual interview with the lawmakers so they can give me non-answer answers, I envisioned how an interview with the esteemed gentleman might transpire. Here is how it played in my head:

jeff-for-banks (jfb): What is your definition of a "financial crisis"?

Dodd: When Joe the Plumber can't get a loan to buy a multi-million dollar home on Florida's Gold Coast. That's not just a crisis, it's tragic.

Frank: When Fannie and Freddie stop contributing to my PAC.

jfb: How did the Government Sponsored Entities, such as Fannie Mae, contribute to the financial crisis?

Frank: I don't think Fannie and Freddie are financially insolvent. I don't believe they require large bailouts (Note: Actual July 2008 quote by the gentleman from Massachusetts. See video below).

Dodd: Barney just told you they stopped contributing.

jfb: Should individuals be accountable for taking loans they could not afford to repay?

Frank: The necessary evil of capitalism is that there are evil forces intent on perpetrating ill-will on the working class and it is the responsibility of everyone to enlist government officials to stand guard against bad players regardless of the cost and reliance on government because we are here for you, the working class, not the rich.

jfb: Huh??? Senator Dodd, same question.

Dodd: Personal responsibility is so 1950's. It took the 60's enlightenment to end such a fascist concept.

jfb: I read that the Bureau of Consumer Financial Protection will have a $500 million annual budget. Is this accurate?

Frank: I hope not. Creating this bureau was a key provision in Dodd-Frank and a budget that doesn't end in a "B", or better yet, a "T", doesn't demonstrate our commitment to creating a black-hole bureaucracy.

Dodd: No worries. We'll charge it!

jfb: The Durbin Amendment requires the Fed to determine the "reasonable and proportionate" interchange fee that can be charged on debit and credit card transactions. Historically, when has price fixing worked?

Dodd: Nixon did it in the 70's with gas prices.

Frank: (laughs) Son, I understand you're a coal cracker from Scranton, had a hard-scrabble life, and may not understand these things. The Durbin Amendment is not price fixing. The Fed is only going to set the reasonable fee that can be charged.

jfb: How do you envision the Fed determining which systemically risky firms to unwind during a future financial crisis?

Dodd: Although the law is 5,000 pages, we left it up to the Fed to determine how to do that. I'm sure they'll do a good job.

Frank: I envision a panel like on the reality TV show America's Got Talent. Bankers like Jamie Dimon can make their case to Piers, Sharon, and Howie who can buzz him if they don't like his shtick.

Dodd: (laughing) Barney's kidding.

Frank: No I'm not. I love that show. Great concept.

jfb: Will Dodd-Frank solve the problems that created the financial crisis?

Frank: We are creating a financial system with greater government control and a new bureaucracy with a $500MM plus budget with significant powers. What could go wrong?

Dodd: What do I care? I'm outta here!

jfb: Thank you for your time gentleman.

Reminder in case you are an angry politico... the above was a figment of my imagination. Any complaints can be lodged to some government agency with a big budget that was designed so you can cry on their shoulder.

- Jeff