Tuesday, November 10, 2009

Risk Averse Regulators

A friend of mine runs a small bank. He said the regulators came in, and said that they had too much money invested in brokered deposits. Like any businessman he wanted a spotless review, because any negative marks could imply he could not do certain things, such as expand a new office, acquire or be acquired. Bad reviews give the government an undefined option to meddle, veto, who knows? So he asked, what level would be alright with you Fed guys? They said, 'that's a business decision". My business friend noted they were very clear that they do not give advice or anything that could be construed as advice.

Translation. We are suspicious of your exposure, but do not want to defend our suspicions.

This is government in action, afraid to make any hard decisions. They just want to s be invited to the boardroom during large corporate events, like some clueless executive eager to seem relevant by being at all the key meetings. They do have a veto power, enough so that people won't laugh at them, but they so fear screwing up, they won't apply it (except with hindsight, where they will be laser-focused on investments that went down).

How could 'more' of this kind of oversight be helpful?


Anonymous said...

You made the Rogues Gallery on the periodic table of finance bloggers:


Michael Meyers said...


Having worked with the government on several project [never fun], I can attest that you are right-on. However, my advice to your friend is not to moan about the situation; this is the way it is with government regulators. Instead, just learn to deal with it! :)


PS- I enjoy your blog greatly!

michael webster said...

Eric, I started watching your videos and thought your beta portfolio ideas were very neat.

Of course, what do I know? I am an attorney with a PhD in choice theory.

On this problem, your friend is going to get guidance from the regulators but he just has to know a little bit more about how to ask the right questions.

Brian the Regulator said...

I want to make sure I read this right: the banker had too much INVESTED in brokered deposits? I imagine the comment was likely more along the lines of the bank being too reliant on brokered deposits fo funding. Brokered deposits, combined with dodgy construction and development loans, are a toxic brew for many smaller banks.

Eric Falkenstein said...

Brian: yeah, maybe I didn't hear him right, because generally brokered deposits are for retail investors. Nevertheless, the point is that his firm's balance sheet was deemed to have too much X, with no guidance as to what would avoid this criticism. Obviously, one can go to zero, but that's extreme. Yet, the regulator does not want to take a stand, because they would have to defend it. obviously, you can have too much of anything, so the criticism at a general level is unassailable.

Adamchik said...

This is a red herring from your friend.

If you are a banker, you know that "hot money" (i.e. brokered deposits) is a very dangerous way to fund your bank. There are other ways to fund your bank - opening more branches to get more retail deposits, FHLB advances, etc. etc. BancVue has some interesting programs to get more retail deposits. There are not that many options - whoever is in charge of the Treasury at the bank should know what the options are.

It is a case of the government being correct, and bankers whining that they don't want any government oversight of any kind (but they love that deposit insurance and love bailouts even more). Banking regulators of smaller banks often do a great job, and offer pretty decent consulting-type advice. They see hundreds of small banks, and know what works and what doesn't.

I am sure that there is more to the story, but bankers' complaints about regulatory exam comments are, more often than not, to be ignored.