Pete Waller has worked in banking for nearly 40 years and considers recently enacted financial reform legislation the most far-reaching of his career — and beyond.
“It’s the most sweeping change in legislation affecting the banking system since the 1930s,” said Waller, president, chief executive officer and chairman of the board of First National Bank of the Rockies based in Grand Junction.
Waller also brings a national perspective to the issue as a member of the American Bankers Association board of directors.
The problem, Waller said, is that the Wall Street Reform and Consumer Protection Act largely “missed the mark” in addressing the causes of the financial meltdown that preceded the recession.
But at the same time, the legislation will impose thousands of pages worth of new rules on commercial banks that already are heavily regulated, he said. “The compliance burden will be immense.”
And the more commercial banks have to spend on compliance, the less they’ll have available to lend customers, including businesses, Waller added.
Among other things, financial reform legislation creates a consumer protection group, mandates more transparency in derivatives trading and limits the types of speculation in which investment companies can engage. The bill allows investment companies to trade interest rate swaps and certain credit derivatives to hedge risk, but requires them to set up separately capitalized affiliates to trade derivatives in what are deemed risker areas.
The bill also includes a limited version of the so-called “Volcker Rule” that restricts exposure to the types of speculation in which banks can engage. The bill allows ongoing investments of not more than 3 percent of tangible equity in private equity or hedge funds.
Waller said the measure includes good provisions in looking more closely into systemic risks and extending increased coverage in federal deposit insurance to $250,000.
But as the 2,300-page bill creates an estimated 5,000 pages of new regulations, Waller said he’s worried about the effects of that regulation — not to mention the unintended consequences that could arise.
Waller cited as example an amendment to the bill that imposes restrictions on the interchange fees paid by merchants on debit card transactions. Waller said he’s worried about the effects of limiting the charges assessed by commercial banks when banks, not merchants, assume the risk that customers won’t pay back credit card charges.
Waller questioned why such a comprehensive and lengthy measure was pushed through Congress so quickly most members likely didn’t have time to read the legislation. Waller also questioned the timing of enacting financial reform when the United States has yet to fully emerge from recession.
Uncertainty over regulation and the economy — along with health care costs and taxes — has contributed to the downturn, Waller said. Even companies with ample capital have been reluctant to expand operations or increase staffing — a situation he characterized as capital on strike. “Capital has to go to work before people can go to work.”
Uncertainty also has played a part in decreased demand for loans from commercial banks even as banks are criticized for not lending more, Waller said. Many businesses that constitute good credit risks are reluctant to borrow money. “Risk aversion is a very real part of the analysis.”
In Western Colorado, declining property values also have affected loans because that property usually constitutes collateral, Waller said. If the value of collateral declines, existing loans must be rebalanced and new loans could be more difficult to obtain.
Waller said First National Bank of the Rockies remains what’s considered “well capitalized” with a leverage-based capital ratio of more than 9 percent, a measure of capital divided by assets. The bank has risk-based capital ratio of more than 16 percent, a measure of total capital to estimated risk-weighted assets.
To quality for regulators’ numerical definitions of “well-capitalized” — the highest category — banks must maintain a leverage-based capital ratio above 6 percent and a risk-based capital ratio above 10 percent, Waller said.
As for his long-term outlook, Waller said he remains optimistic. “I’m feeling a littler better about that lately.”
Energy activity in the region has increased, although not to the booming levels of several years ago, he said.
“It seems to have come back at a more sustainable level.”
Moreover, Western Colorado offers a quality of life that’s going to continue to attract people and businesses, he said. “It’s a marvelous place to live.”
But slow growth well could constitute a new normal over the next five years. Consequently, people could have to tone down their expectations, Waller said. “It could be a slower recovery than we normally see.”