Yes, risky lending practices led to the Great Recession, says Gavin Gee, director of the Idaho Department of Finance. But he says thousands of pages of new regulations, most notably those introduced in the Dodd-Frank Act of 2010, have been overkill, stymieing community banks and credit unions that Gee’s office regulates.
Gee, 66, married his wife, Libby, 42 years ago. They have four adult children and 10 grandchildren. He walks or jogs on the Boise Greenbelt almost every day.
Q: How healthy are Idaho community banks?
A: All but one were profitable in the first quarter. The economy has been strong since the recession. We’ve seen a lot of improvement. We don’t have a single troubled bank. During the crisis, we had a number of banks under formal enforcement actions, and now we don’t have any. The industry is strong.
Q: Bankers frequently complain that regulations created by Dodd-Frank have limited business. How has Dodd-Frank affected Idaho banks?
A: I’m not particularly a fan of Dodd-Frank, which many would say was an overreaction to the financial crisis. Dodd-Frank was written to address the issue of banks being too big to fail, but that hasn’t changed a bit. The banks that were too big to fail before are even bigger today.
Community banks are not too big to fail. We know that from firsthand experience. That gives a huge advantage to big banks.
36%Growth in total income of Idaho-based banks during the first three quarters of 2016, to $13.8 mllion
4.8%Asset growth during that time
0.52%Ratio of noncurrent loans to total loans, down from 1% last year
0.92% Return on assets, up from 0.82% last year
Because of the added regulatory burden, it’s now so difficult that some of our smaller banks are no longer making mortgages. That doesn’t make sense to me. ... Isn’t this something a community bank ought to be able to provide, and to do it profitably? To help their customers buy a car, or a home? We really do need right-size regulation so it’s still profitable for community banks to make those kinds of loans.
Q: Do you see positives to Dodd-Frank?
A: Most in the banking community would call the creation of the Consumer Financial Protection Bureau a negative, because it introduced so many regulations. But it made some positive changes that benefited consumers.
Q: Such as?
A: If you get a mortgage today, you get a stack of paper so thick that hardly anybody reads them. More disclosure rules have turned out to be less disclosure. There’s a proposal to create forms that are simple and explain terms in plain English. That would be positive.
They’ve created a national complaint database. [The database records consumer complaints about any loans made by banks or other lenders.] While many in the industry don’t like that it’s public, the concept is a good one.
Q: What are some of the more recent developments in the bank-regulation world?
A: There’s virtual currency, the bitcoins of the world. Transactions with those currencies often happen outside of the traditional banking system, which concerns banks.
We also have a new competitor to banks: financial technology companies, or what we call fintech. These are private companies getting into the bank business without getting bank charters. They are making commercial and consumer loans. It’s all online. Sofi an example. Lending Club is an older one. There’s a lot of concern about their underwriting standards, that they will get into trouble the same way banks do — by making too many bad loans.
Q: As a state regulator, how do you tackle fintech?
A: More states are saying they should regulate fintech companies. Banks are complaining that they are subject to regulation when these companies, which compete for customers and loans, face little or no regulation. How is that fair?
At the same time, these companies aren’t banks. They don’t take deposits. Our concern is, if they are making consumer loans, even if they operate exclusively online, they still need to be licensed. If they only do commercial lending, we have no jurisdiction.
Q: What other concerns do you hear from community bankers?
A: The banks continue to be concerned in growth from the farm-credit system, a quasi-government entity, competing in the ag sector. There’s also an increase in commercial lending competition from largest credit unions, which are tax exempt, increasing competition.
We can’t do anything at state level about the farm-credit system or credit union tax exemptions. Those would take an act of Congress.
$14.1 million Net income of Idaho-based credit unions in the first three quarters of 2016
1%Increase in net income from last year
10.7% Increase in net worth
8.4% Loan growth
Q: What trends do you see in the consumer complaints your office receives?
A: We’ve seen a decline in investment and mortgage fraud. In the aftermath of the Great Recession, we had Idaho’s largest Ponzi scheme in the Rexburg-Idaho Falls area. [The department won a $27 million judgment against Daren Palmer, who received an eight-year prison sentence for the fraud. The scheme took nearly $76 million from investors]. There’s been a decline in those kinds of major frauds and enforcement actions. We’ve taken a number of smaller actions. However, there has been a very significant increase in cyber crime, so financial regulators, including our department, are devoting resources to enhance cyber security in banks and other financial institutions.
Q: How would you describe the influence that Idaho Sen. Mike Crapo wields as a senior member of the Senate Banking Committee?
A: In a close election for control of the Senate, the outcome of the presidential election may influence the outcome of close Senate races. If the Republican wins the White House, it may be likely that enough Republicans would be elected to control the Senate and vice versa. If the Republican nominee became president, it’s very likely Sen. Crapo would be chairman, an extremely important and powerful position.
Even if that doesn’t happen, because of his seniority, he has a critical role in the banking world. Sen. Crapo has been a strong supporter of decreasing regulation, especially for community banks.
Q: You are concerned about bank branches in small Idaho towns closing.
A: Given the increasing popularity of online, mobile and other forms of electronic banking, some financial institutions see decreasing value in physical branches. My concern is that small rural communities could lose their financial institution offices.
Banks and credit unions play a critically important role in making credit available, supporting local economic and community-development efforts, and often providing leadership and staffing for local government, education, civic, charitable and other organizations. In Idaho, we have had 43 branch offices close since 2013, several in small rural communities.
Zach Kyle: 208-377-6464, @IDS_ZachKyle. Edited for length and clarity. This story appears in the Aug. 17-Sept. 20, 2016, edition of the Idaho Statesman’s Business Insider magazine as part of a special section on banking and finance. Click here for the e-edition (subscription required).