Banking Expert Offers Insights into Improving U.S. Banking System

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The Orange County Chapter of the Risk Management Association welcomed author Richard J. Parsons who presented highlights from his book “BROKE: America’s Banking System, Common Sense Ideas to Fix Banking in America” at the Pacific Club in Newport Beach on September 24. Published by The Risk Management Association, “BROKE” recommends systemic improvements to basic banking in America and offers a common sense approach to transforming the industry. White Nelson Diehl Evans works with businesses to present quality financial statements that support banking and lending requirements, and is a proud sponsor of the OC RMA.

Since January 2012, Parsons has authored or co‐authored four articles about bank risk management in The RMA Journal, as well as articles for the American Banker, including “Stinging Frogs and Unintended Consequences” which the American Bankerrecognized as one of its top BankThink articles of 2012.

Parsons began by noting the dramatic decline in the number of California-based banks since 1991. Today, there are 260 fewer banks, or a reduction of 54%. Nationwide, many banks have closed their doors as well. Of the 50 largest banks in 1980, for example, only eight are still in business under the same name. An astounding 3,400 banks have failed in the United States since 1980.

Parsons was a high-level officer of a major U.S. bank, and upon his retirement, he began a study of why banks fail. A key to survival, he noted, is that banks must be responsive to changes in the economy and political system.

CHALLENGES HAVE A LONG HISTORY

Challenges in the American banking system date back to the country’s founding, he noted. A variety of crises have affected the banking industry since then, as political power players have offered different solutions to the system’s problems. Southerners historically, for example, were advocates of states’ rights and believed in local solutions; northerners, such as Abraham Lincoln, preferred federal solutions.

More recently, the 1980s and early 90s saw the S&L crisis. Over 3,000 institutions failed during that era, with 70% of the failures concentrated in 10 states. The decade following was a boom time for banking, aided by steadily falling Treasury bill rates and customers refinancing loans.

The financial meltdown that followed led to financial crisis commissions that offered different viewpoints on the causes, often related to commission members’ political party preference.

IMPROVING THE SYSTEM

Parsons offered a variety of thoughts on improving the nation’s banking system. Regarding regulation of the industry, he quoted former FDIC chairman Irvine Sprague: “We have a regulatory system no sane person would design.”

The federal government has a variety of banking regulatory organizations with overlapping responsibilities and often unclear accountability. He recommended reform of the system to assign clear supervisory responsibility to one agency.

Parsons also noted that the banking industry faces significant talent issues: “There is a finite number of truly skilled bankers.” And, unlike lawyers or CPAs, bankers’ skills are not tested and certified. Also unlike other professions, bankers are not required to maintain sharp skills through continuous education requirements.

Also crucial to the industry and the communities banking serves, Parsons highlighted the critical role informed, skilled directors play in governing banks. He called for banks to place more banking experts on bank boards who have the skills and experience to help banks navigate the increasingly complex regulations and economic situation banks find themselves in today.

Warning flags in the banking industry include rapid growth, unusually high rates of return, low barriers to entry and investors seeking quick profits. For stability in the industry, profit targets should be more modest and growth slow.

Current concerns Parsons has about the economy include the high levels of government debt, the possibility of a sharp increase in interest rates (as T-bill holders demand higher returns) and the possibility that the current hyper-intense regulatory environment could trip up regulators, directors and bankers as they become distracted by minor issues and miss the major ones that cause banks to fail.

Challenges to banks in the upcoming years, he believes, include cyber security. Some community banks may be hard pressed to find the talent needed to manage the many aspects of cyber security. Banks also face challenges from innovators; he mentioned LendingClub as an example, a peer-to-peer online lending company that has the potential to cut into banks’ “sweet spot” of profitability, lending.

For a more complete analysis of the banking system, Parsons recommended reading his book, BROKE.

The Risk Management Association is a member-driven professional association which seeks to promote the use of sound risk principles in the financial services industry. For information on upcoming events with the Orange County RMA Chapter, visitwww.ocrma.org.

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