For the past two years, taxpayers and bank customers alike have been buoyed by one hope: that banks would emerge from the crisis much as a survivor might emerge from a plane crash — not only thankful but essentially reborn, eager to chart an entirely new course.
But although markets are liquid again, a boatload of Troubled Asset Relief Program (TARP) capital has been repaid, and federal regulators are beginning to piece together legal reforms, questions as to what banks have learned and how they might change remain very much open.
For answers, we went straight to the source: CFOs in the financial services world, at institutions that are healthy and buoyant as well as at firms that may be only a few rough waves away from capsizing. They described how they are working hard to correct past mistakes by centralizing the underwriting function, building quality capital, moderating real estate–secured lending (or getting rid of it entirely), and carefully matching assets and liabilities. It’s Banking 101, but many banks strayed from the core curriculum in the boom lending years.
What these stories also reveal is that it is still too early to tell how banks will do when the doctor (federal regulators) takes them off the respirator. Profits are up, but loan portfolios are still bleeding. The long horizon is also fuzzy: Will banking be better off if institutions shrink and become more like utilities? Evidence supports the case for smaller banks, but the case is far more ambiguous for restricting bank activities to basic lending and deposit collection. Certainly the banking industry will need to look far different from the way it looked two years ago, if only to avoid a calamitous repeat of its recent history. CFOs will play a central role in helping banks steer clear of future crises.
Wells Fargo: “We Never Drifted”
Wells Fargo knows a thing or two about how to survive a crisis; after all, it had to endure the California Panic of 1855, when the company’s mission was to carry gold and freight between the mining regions of the West and the financial centers of the East. Thanks in part to a wagon-load of TARP funding, it appears ready to emerge from this most recent crisis, having reported revenue of $88.7 billion for 2009 and net income of $12.3 billion.
CFO Howard Atkins is a survivor as well, having outlasted the finance chiefs at the nation’s other largest banks. Atkins attributes both his and the bank’s success to the fact that Wells Fargo stuck to its business model and stayed out of activities that entangled other large banks. It was also helped by the capital position it enjoyed as the crisis began two years ago. Early last decade, many banks issued hybrid securities — instruments that combine elements of debt and equity — to buy back their common stock. “We never really thought that was a smart thing to do,” Atkins says. “It may have helped earnings per share in the near term, but it weakened the banks’ capital structures.” The Basel Committee on Banking Supervision has come around to that view and plans to phase out the acceptance of hybrids in banks’ Tier 1 capital calculations and make retained earnings and common equity more prominent.