Spring has come to Washington, DC, and Tuesday might have been the nicest day of the year. As I was reading through my daily deluge of industry press coverage, I noticed an announcement for the FDIC board meeting taking place that very afternoon. Notably, one of the topics the board was voting on was whether to increase the leverage ratio for the biggest banks. Given capital reform is the hot topic and it was a
nice beautiful day, I took a walk and attended the meeting.
To prepare, I did some quick research before I went. What a board — it’s a who’s who of financial regulators. Tom Curry, Comptroller of the Currency; Thomas Hoenig former president of the Federal Reserve Bank of Kansas City; Jermiah Norton, former Treasury official and executive with JP Morgan; and Richard Cordray, Director of the Consumer Financial Protection Bureau. These board members are credible, and when they speak, they know exactly what they are talking about.
I’ve never been to an FDIC board meeting and wasn’t sure what to expect. When I walked in, an FDIC staff member handed me a stack of papers consisting of rules, comments, and prepared remarks the board members would read. I was warned before I went to not expect much dialogue or Q&A — and there was not. FDIC staff read their remarks, and the board members read their prepared statements. Director Cordray, however, appeared to take notes while the staff talked and then made comments from those notes. Being a Big 10 football fan, I like the pomp and circumstance of big events, and this meeting was full of that. It was a well-choreographed machine.
One lesson I learned, boy did I stand out. In my mind, it was obvious I was the “credit union” guy in the room. Next time, I’ll wear a tie.
The major topic on the agenda was the vote on whether to increase the leverage ratio for the nation’s largest, most complex banks. This was an interagency rule — FDIC staff worked with the Office of the Comptroller of the Currency and the Federal Reserve. An interesting side note, Curry had already signed the rule on behalf of the OCC before he voted as part of the FDIC board.
As the board talked, however, I scratched my head. Here was a group of respected leaders trying to protect the economy from another crisis, and according to their expert opinion, a simple leverage ratio requirement change was enough to protect the industry from another systemic crisis. In their comments, which Chip Filson does a good job dissecting in his piece “FDIC Approves A Simple Leverage Ratio Test To Improve Capital Adequacy Standards,” the board members more or less rebuke the risk-based capital framework as a tool to prevent bank failures and decrease stress on the insurance fund.
At Callahan, we like to emphasize the countercyclical nature of credit unions. For example, during the Great Recession, when others stopped lending, credit unions didn’t. As member-owned financial cooperatives, credit unions take the long view and perform strong and steady despite external cycles. This allows the system to be countercyclical in many ways — but do we need to be countercyclical when it comes to our regulation?
If the biggest and most complex banking institutions are moving away from risk-based capital and instead embracing the leverage ratio, which is virtually the same at the net worth ratio, then why must credit unions move toward a risk-based capital model? That’s a real head scratcher.
Ultimately, I am glad I took a walk on Tuesday and experienced what life is like on the other side of the fence. Next time the FDIC board meets, I might go back even if the weather isn’t nice. Of course, I’ll remember to wear a tie.