I had anticipated that this month I would simply script a quick overview of the recently released CCAR/DFAST severely adverse economic scenario dynamics. And much like last year (“Do the 2017 CCAR Scenarios Signal Regulatory Focus?”, 2/16/2017), opine on any potential hidden (or overt) messages being sent by the regulators in terms of risk management in the banking industry. In that regard, once again the industry’s largest banks will address a harsh, albeit hypothetical, economic environment – worldwide recession, double-digit unemployment, housing prices off 30% and equity values declining 65%, commercial real estate values cratering, GDP nosedives, etc. – that will gauge both resiliency and resolve for a U.S. banking industry that has grown stronger coming out of the crisis.

This year’s severely adverse scenario largely mirrors the turmoil and chaotic disruption of past years, and akin to many of the attributes of the recent Great Recession. Consequently, ho-hum, been there, done that. No pearls of wisdom nor enlightening insights on my end. But in no way are those sentiments to be misconstrued as indicating that I believe the annual stress tests are unnecessary or a waste of time. Rather, amidst some of the regulatory overreach propelled by the Dodd-Frank Act, I see the discipline and risk assessment practices instilled by the stress tests as a valuable exercise for banks, and a soothing underpinning to consumers’ and investors’ confidence in our nation’s institutions.

Consequently, I thought a more topical subject might be the recent trading gyrations in the market. I’ll get to that in a moment, but first I wanted to comment on former Fed Chairwoman Janet Yellen’s parting gift to Wells Fargo.

Hard to believe that roughly 18 months have passed since news broke at the beleaguered Wells Fargo of the now infamous account-openings scandal. At the time, I actually took a little bit of a tongue-in-cheek poke at the situation, parodying the Senate testimony of former CEO John Stumpf with a re-creation of the iconic courtroom scene from “A Few Good Men” (“A Few Good Bankers”, 9/23/16). Little did I realize that a year-and-a-half later Wells Fargo would still be struggling with additional operational missteps (auto-loan and mortgage customer overcharges) and a further tarnished image at what had historically been a highly-regarded institution within banking circles.

The Fed’s recent issuance of a broad and punitive Consent Order, limiting growth, and drawing additional scrutiny to board governance and oversight, tells me that while “regulatory relief” and “Dodd-Frank rollback” have been clarion calls for the industry, particularly since the November 2016 election, expectations may be not-so-subtlety shifting going forward in bank boardrooms. Clearly, penalties associated with any semblance of crossing-the-line could be swift and severe.

Common sense dictates that institutions, and their boards, act with prudence and proper oversight with regard to the risks attendant to their businesses. So while Wells Fargo has been making strides in addressing its shortfalls, terminating more than 5,000 employees and compensating customers for the estimated $6 million in identifiable damages tied to the account-opening debacle (while paying more than $325 million in regulatory fees and litigation costs), the growth restrictions and “recommended” board reconstitution mandated in the Consent Order, in my mind, underscores a critical consideration in every boardroom: insure your risk management architecture and compliance protocols are appropriate and functioning system-wide.

Succinctly, Wells Fargo became a convenient poster-child for the Fed to send a resounding message to every boardroom across the country. I would not expect that new Fed Chair Jerome Powell will want to step on that (political) landmine as he takes the reins, the current administration’s deregulatory agenda notwithstanding.

Bottom-line, management AND the board of directors will be held accountable for failures to properly manage risks. With presumed heightened regulatory focus as the next downturn is somewhere out on the horizon, this cannot be understated.

Bottom-line, management AND the board of directors will be held accountable for failures to properly manage risks. With presumed heightened regulatory focus as the next downturn is somewhere out on the horizon, this cannot be understated.

Shifting gears quickly in closing, as promised, a quick snippet on recent trading activity in the market:

Seeming market tranquility abruptly ricocheted into volatility, and with February 8th closing down more than 1,000 points, a technical “correction” was at hand (a 10% or greater decline from its 52-week high). Since then? The last six trading days have resumed a steady climb up, adding more than 1,350 points to the Dow and, for the moment, somewhat alleviating fears of a more dramatic downturn. I don’t have a crystal ball that can accurately depict what lies down the road, but I actually took comfort in some of the recent “turmoil” in the markets. We often need a reminder that trees don’t grow to the sky, and solid fundamentals are the lynchpin of any long-term strategy.

Early in my Wall Street career, I had an experienced and sage banker remind me that “greed and fear drive the market…and fear is a much stronger emotion.” I have never forgotten those words, and recognize that sometimes things are just outside of one’s control. For me, focusing on the fundamentals always restores some semblance of comfort (and balance) when we have days like we have experienced over the past two weeks.

ProBank Austin brings a multitude of experience, expertise, and market knowledge to the table for our clients, spanning board geographic swaths of the banking industry across this country…and the strong desire to continue to deliver that insight and value-add to all of you in the future. Please do not hesitate to reach out to me and/or any of my colleagues if we can ever be of assistance as you take your organizations forward and assess the competitive landscape.

 

In closing, attached please find our monthly summary of Michigan’s financial institutions. Company press releases announcing Q4/FY2017 earnings continue to look solid (DTA-related noise aside), and bode well for the sector moving through this year. Best wishes for a prosperous and successful 2018!

Do the CCAR Scenarios Signal Regulatory Focus?A Few Good Bankers