Can consumers ever trust banks again?
TEXT OF INTERVIEW
Tess Vigeland: More bad news for U.S. banks. Investigations of fraud in the “foreclosure fiasco” are now underway. This just the latest in what many see as systematic problems with the banking industry. So far this year, 129 banks have gone under. That makes a whopping 294 since the financial crisis began in 2008.
The Federal Deposit Insurance Corporation, or FDIC, wants banks to share some of the lending risk and be more prudent with borrowers. There’s a new rule in place requiring banks to hold at least 5 percent of the securities on their books. So if one of the loans goes bad, the lending bank takes some of the loss.
Forbes ranked Sheila Bair number 15 on their “Most Powerful Women of 2010” list. As chairman of the FDIC, Bair oversees the takeover of failed banks and monitors more than 800 other troubled lenders. Sheila Bair, welcome to the program.
Sheila Bair: Hi, I’m happy to be here.
Vigeland: We are now two years past the depths of the financial crisis, but I vividly remember panicked listeners — hundreds of them — writing in to ask if they should or could ever trust the nation’s banks again. Beyond the FDIC deposit protection, do you think they can?
Bair: The system is healing, and we do have a number of banks — about 829 on the trouble bank list now, slightly more than 10 percent of all banks. So, it’s still a small percentage. And most of the banks that are on that troubled bank list do not eventually fail. They’re, in respect to health, given special supervisory attention. So, I think those are all important things to have people to understand. Certainly, if you have uninsured deposits in a bank, you should do your due diligence and make sure you know the management and you can access their financial records — they’re called “call reports” — on our website. So I think certainly, if you are over the insured deposit limits, you should make extra efforts. If you don’t have a federal government full-faith and credit guarantee, you should do your homework and make sure that you understand the investment and the risk of where you’re putting your money.
But the system overall is healing. And most banks are health, most banks are profitable and we’re hoping that as they continue to improve, this will further strengthen their ability to lend into the economy.
Vigeland: We are still, though, hearing a lot about bank failures this year. Is this still an unwinding from the financial crisis, is it something that’s concerning to you?
Bair: Well, it’s peaking this year. Actually, our internal estimates from the beginning of the year of the number of bank failures have come down significantly. We will still have more bank failures this year than we did last year. We had 140 last year, but not much more than that we don’t think. I do think the tide has turned. Now, the only caveat of that is the economy. Obviously, if we get into another difficult economic situation, a double-dip recession, that could change the dynamic. But even in that scenario, banks have been spending the last couple of years improving their balance sheets to the underwriting standards, the lending standards they use to make loan decisions, have improved significantly. So I think that even if we get into a more distressed economic situation, they’re still in better shape than they were when we entered into this first recession.
Vigeland: Obviously, there’s no way to guarantee that we will never have another financial crisis, but do you think that at the very least, enough has been done to prevent a repeat of the causes of this one?
Bair: Well, I think the Dodd-Frank bill gave regulators the tools to deal with the key drivers of this last crisis. Yes, I think there needs to be robust implementation of those authorities. In terms of the key drivers, the regulatory (ALBATROSS?), the excess leverage, the absence of good common sense, consumer disclosures and protections — I think all of those were addressed in the bill, as well as the ability to resolve large institutions, when they get into trouble. So there won’t be anymore bailouts. So I think the collection of tools are important, and they do address the major issues. But it’s really up to the regulators now to fully implement them.
Vigeland: You were one of the early advocates of mortgage loan modifications, way back in fall of ’07. Since then, it’s basically been a policy of asking banks to do the right thing, with a little bit of financial incentive for them. By and large, at least for home owners, that hasn’t worked. What do you think would work?
Bair: Well, I think there has been some benefit from the loan modification efforts; the numbers were not as high as the administration had projected and hoped for. But I think it has been enough to keep some significant number of houses off the market and keep a lot of people in their homes. So I think on the margin it has helped. And there have been loan modifications outside of the government programs as well that I think have helped. I think a lot of this is just going to be a long slog and we need to accept that. The housing market was far too frothy for far too long, and there needed to be a correction. And I think through loan modification, you can help make sure that the people who can pay a modified mortgage, in a way that makes economic sense, can stay in their homes. But for a lot of homes, unfortunately, that’s not going to be a solution. There’s a lot of investor owned property out there, where there’s less borrower incentive to stick with the house even with a restructured loan. And there’s a lot of vacant housing out there too, and it’s all wearing at the market right now. So it’s just going to be a matter of time to work through this.
Vigeland: Sheila Bair is Chairman of the Federal Deposit Insurance Corporation, or FDIC.
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