2011 Gallup survey found that just one-quarter of the American public believes in the integrity of bankers. That number might be even lower if Gallup polled this particular audience, but…maybe we can do a little better here by the end of our talk today.
I do understand the Gallup results, though, even if they fail to distinguish between “Wall Street” banks, which were central to the financial crisis and continue to distort our economy, and “Main Street” banks, which focus on traditional banking services – taking deposits and making loans.
The truth, nonetheless, is that we have a problem which must be confronted: the decimation of public trust in once-respected institutions and their leaders.
Of particular interest to this audience, and as the Gallup poll shows, banks are particularly mistrusted. Yet, a generation or two ago, the leading banks had a clear and respected role in the American economy: providing banking services to corporations, smaller correspondent banks and individuals.
Their chief executives were viewed as national leaders, and they saw public service as part of their obligation to the general interest. Because of their size, sophistication and leadership, these “Money Center” banks were respected by the rest of the banking community and much of the country as a whole.
Back then, banks served individuals and businesses, savings and loan institutions focused on housing finance, and investment banks issued debt and equity for large corporations. Each served markets in which they specialized and thoroughly understood.
This began to change in the 1970s and 80s. Seeking to grow bigger and bigger, the Money Center banks started investing outside their areas of expertise: making loans to less-developed countries, for example, and “Oil Patch” loans to energy companies. In those days, the money center banks were not only lending heavily to shipping companies, they were even taking equity positions in oil tankers.
It didn’t take long for the money center banks to find themselves in serious trouble. Interest rates started climbing, but Citibank’s Chairman took the view that “countries don’t go bankrupt.” He was proven wrong when 27 foreign countries initiated actions to restructure their debt. The oil price bubble burst in 1982, and nearly one-third of all oil tankers were scrapped. Continental Illinois, then the seventh-largest bank in the U.S., failed outright.
Thus began an unfortunate pattern, but no one ever seemed to learn a lesson. As the Money Center banks continued searching for new markets, Wall Street investment banks became more and more creative in the development of financial products.
One’s cash from deposits and the other’s creativity led to a symbiotic relationship, enhanced by the closeness of geography, which culminated in marriage when the Glass-Steagall Act was repealed in 1999. Until then, Glass-Steagall had kept investment and commercial banking separate, at least notionally.
By 2008—when the real estate bubble turned into the real estate crisis—Wall Street banks were betting on increasingly opaque financial instruments, built on algorithms rather than underwriting. In the process, they were contorting the overall American economy.
Today, the six largest banks own or service 56% of all U.S. mortgages—and nearly two-thirds of the mortgages that are in foreclosure proceedings. One bank alone services almost 30% of the mortgages in foreclosure.
Finance, insurance and real estate rose from 11.5% of GDP in 1950 to 20.6% in 2000. Meanwhile, the average compensation for the chief executives of four of the six largest banks in 2010 was $17.3 million—more than 262 times that of the average American worker.
Yet, the Wall Street banks still fight against regulations that would restrict their capacity to trade speculatively for their own accounts—even as they enjoy the backing of federal deposit insurance. Last year, the six largest banks spent $31.5 million on lobbying activities to protect a system that benefits them greatly, but puts taxpayers at great risk.
That’s not to say that they lobby to change all the rules—others, apparently, they just ignore. Since 2002, the six largest banks have been hit by at least 207 separate fines, sanctions or legal awards totaling $47.8 billion.
None of these banks had fewer than 22 infractions; one had 39 across seven countries on three continents. According to research we did at M&T, those big six banks were cited 1,150 times by The Wall Street Journal and The New York Times over the past two years in articles about their improper activities.
Because the Wall Street juggernaut has tarnished the reputation of banking as a whole, it is difficult if not impossible for Main Street bankers, once viewed as thoughtful stewards of the overall economy, to plausibly play a leadership role today. Inevitably, their ideas and proposals to help right our financial system are viewed—not as high-minded—but as self-interested.
The other side of the coin is that regulators are left to operate in isolation, without thoughtful guidance about the overall impact of their actions, because informal conversations that once were routine might now be viewed as suspect.
This vacuum of leadership and trust is being filled with new policies, procedures and protocols, designed by politicians and bureaucrats, that will decrease the efficiency of the financial system.
Let me be clear on this point—I’m not complaining about a five or 10 or 20 percent increase in regulatory costs. I’m talking about more than 500 percent. Before the financial crisis, M&T spent about $50 million to comply with government regulations. Now our costs exceed $342 million on an annualized basis.
These higher costs, along with pending capital and liquidity requirements, will diminish the availability and increase the cost of credit to individuals, families, business owners—and to community groups like yours.
So how can we restore our capacity to work together constructively and productively?
We must regain the sense that leaders, both public and private, will do their best to propose and consider ideas that serve the general interest, not their own agendas. Then, there can be an ongoing dialogue among bankers and regulators—not premised on confrontation nor framed by fear, but based on the understanding that a safe and secure financial system is a prerequisite for a healthy economy.
Our goal is not to seek favors or special dispensation. We simply want to do our part in helping to craft a regulatory system that enables rather impedes sustainable economic growth.
That’s what Main Street bankers have always done, and what I think banking should be. And when I say Main Street banking, I don’t just mean small community banks in small communities. Community banking works just as well in big communities like New York City.
In reflecting on my years in banking, to me the role of banks has always clear, if limited: to take deposits and make loans, and to do it soundly. Speculation was never part of the job—and never should be. The vast majority of bankers adhere to this traditional role, and can rightly be viewed as responsible and ethical members of their communities.
Those bankers have been ill-served by others whose non-traditional approach to banking has brought about public opprobrium—not to mention the worst financial crisis since the Great Depression. It’s time for people to understand that all banks have not been equally culpable for the problems we face today. We ask the media, the politicians, the regulators, even the protestors—give us back our good name, and we will do our best to deserve it.
Thank you very much.
Robert G. Wilmers
Chairman of the Board and Chief Executive Officer