Rethinking: Banking Today

Back in the 1980s, a period, like today, of great stress in the banking industry, I saw a bumper sticker that read: “Don’t tell my mother I’m a banker. She thinks I play the piano at a bordello.” Bank-bashing has once again become a popular sport with little, if any, distinction made between the great majority of well-capitalized, customer-focused and community-minded commercial banks who have acted responsibly, and the few institutions — primarily in the investment banking industry — that have become poster children for excessive risk-taking and eye-popping compensation practices.

Many traditional bankers have grown tired of the high-pitched ranting by media “talking heads,” politicians and others who overnight have become self-proclaimed authorities on banking. Here are a few of the questions being asked, and some answers you’re not hearing:

Q: Why Aren’t Banks Making Loans?

A: Banks are making loans! In fact, during the first full year of this recession, banks’ business loans increased 12 percent, and consumer loans increased 9 percent; in contrast, median business loans declined by 0.7 percent and consumer loans by 5.1 percent during the previous six recessions. Zions Bancorporation’s total average outstanding loans increased 11.3 percent during 2008. During the fourth quarter of 2008 alone, we made more than $2.7 billion in new loans. The real contraction is taking place outside the commercial banking industry; until recently more than 70 percent of credit in our economy came from outside the commercial banking system, up from about 40 percent 30 years ago.

The fact of the matter is that loan demand typically contracts during recessions, as borrowers pay down debt and pull back on their capital spending. Zions Bank, as well as each of our affiliate banks throughout the West, has aggressively promoted the availability of credit, particularly to smaller businesses that rely almost exclusively on bank credit. What we shouldn’t do is become complacent in our underwriting of credit — now or ever. Too-easy credit is what got the world in this mess in the first place.

Q: Are Banks Going to Be Nationalized?

A: While the very term “nationalization” can mean different things to different people, it is generally understood to mean ownership of a majority of the common equity of an institution. While this has happened with a small handful of firms, including Fannie Mae, Freddie Mac (both of which were U.S. Government-sponsored enterprises in the first place) and AIG, it is extremely unlikely that any broad-based nationalization of the industry will occur. This is particularly true of institutions possessing strong “tangible common equity” — the most bedrock form of capital. In this respect, you’ll be interested to know that Zions’ tangible common equity was approximately 78 percent greater than the asset-weighted average for the largest two dozen banks in the U.S. at year-end, while our net interest margin was about 29 percent stronger and our loan losses about 47 percent lower than our peers’.

Q: What About the Taxpayer “Bailout” of the Banks With TARP Money?

A: The investments made in major banks by the U.S. Treasury Department in the form of nonvoting, nonconvertible preferred stock had, as the objective, the further strengthening of the banking system’s capital in order to heighten depositor and investor confidence during a period of extraordinary contraction in the nation’s credit markets, and to give banks added confidence to continue extending credit without worrying about unduly straining their ratios of capital as a percentage of loans. The investment is providing the government with a return of approximately 8 percent (the pretax cost of the 5 percent after-tax dividend each recipient is paying), and that return will ratchet up to about 14.4 percent after five years. Additionally, the government received “warrants” to acquire common stock equal to 15 percent of the amount of its investment in each bank.

It’s also useful to remember that the cost of protecting the depositors of failed banks is borne by the banking industry — not by taxpayers. Zions Bancorporation’s premiums paid to the FDIC are expected to be between $65 and $100 million in 2009, up from $6.5 million just two years ago. And we pay extra millions of dollars to cover the cost of regular examinations by government regulators.

There’s also a very mistaken impression that banks don’t pay much in the way of taxes. In fact, Zions’ 2008 results included nearly $1 billion in expenses that reduced our reported income, but were not deductible on our tax return, including net additions to our loan loss reserves, impairment losses on securities, mark-to-market losses on hedges and goodwill impairment. The fact of the matter is that the TARP capital we’ve received — and must repay with interest — totals less than the cash payments we’ve made to federal and state governments for income taxes in just the past five years!

Q: Shouldn’t We Be Outraged by Bankers’ Excessive Executive Compensation?

A: Certainly there have been some excesses, and perhaps especially so in the investment banking industry. (Though I tend to think one should start such a discussion with the reported $30 million Cameron Diaz received to do voice-over work for “Shrek 3”!) Nevertheless, even in investment banking, there is a market for talent. And perhaps one of the great concerns we should all have about the increasing government influence in our industry is that it will lead to a “brain drain” in which the best people go to work for unregulated hedge funds and other institutions where their ability to create value, or to minimize losses, is more highly prized.

The compensation committee of our board of directors looks carefully at market comparables in establishing pay and incentive plans for our senior people. And I’m comfortable having anyone compare our senior officers’ compensation (the specifics of which are spelled out in mind-numbing detail in our proxy statement) with any of our peers, and with companies of similar size outside the banking industry. Finally, on a personal note, I’ve taken no bonus the past two years, and the furnishings in my office I paid for personally — back in 1991.

I am proud to be a banker because of the important role bankers play in the well-being of the economy. Banks provide significant strength to the communities we serve, and are in a critical position to help individuals, businesses and communities work through problems in these challenging times.

Harris H. Simmons is chairman, president and chief executive officer of Zions Bancorporation.

*Artwork from kevindooley under Creative Commons license at Flickr.com.

Featured in the May/June 2009 issue of Zions Bank’s Community magazine.