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Insights into the Banking Environment

2013 Banking Outlook Conference: Navigating the New Banking Landscape, February 28, 2013

Donna Fay: I'm Donna Fay with the Federal Reserve Bank of Atlanta at the Banking Outlook Conference. Today we are talking with Nancy Bush, contributing editor to SNL Financial.

Nancy, thank you so much for joining us today.

Nancy Bush: Thank you.

Fay: Our first question: What are your top three concerns about the low-interest-rate environment today?

Bush: I guess my biggest concern—first concern and biggest concern—would be the impact that it is having on bank consumers. I don't think that many savers understand the reasons behind the low-rate environment. And, as we know, seniors and others are being hit particularly hard by this rate environment. They've seen their CDs repriced fairly dramatically. It's taken a fair amount of their spending power, you know, sort of out of their pocketbooks, and I'm concerned about that. My next concern, of course, would be that during periods of low rates, excesses arise, and particularly excesses in loan pricing and loan concentration, you know, sort of in the balance sheet issues. And of course part of that would be that as the low-rate environment goes on, the banks start to reach for yield, particularly in their securities portfolios. So, you know, I will welcome the day when we do see a more normal rate environment and I hope that the transition to that environment will not be too rocky.

Fay: My next question is, what do you think investors can expect in bank earnings growth going forward?

Bush: Well, I think we are going to have a couple of years here as the industry sort of transitions into this higher-rate environment, where earnings growth is going to be fairly subdued. You know, as we were talking about at the conference, banks are running out of earnings that they can draw from their loan-loss reserves, they are hitting pressure on their net interest margins, and they are encountering the costs of Dodd-Frank and trying to sort of work through those costs. So I don't expect...I think sort of a mid-single-digits earnings growth—sort of, 5 percent, maybe 7 percent at the upside—would be what we could expect, and I think would be acceptable in this kind of rate environment. If we get much beyond that, if we see banks growing their earnings double digits or, sort of, old historical rates, then I actually would be a little bit concerned.

Fay: Interesting. Currently, there is a debate on some banks being "too big to fail." What are your thoughts on this?

Bush: Well, I think it's a very interesting topic. It's interesting to me in that both the far left and the far right of the political spectrum seem to have joined in saying there are banks that are too big. As we know, the top five banks or so are approximating about 50 percent of deposit share in the U.S., and there is a feeling that smaller banks are disadvantaged, you know, by a sort of implicit subsidy that is given to the largest banks because of their perceived safety as too big to fail.

I'm an agnostic on the issue of whether we should, you know, break up the largest banks. I do want to see—I mean, I understand the debate, I understand the issues, I understand the sort of resentment that many have—this issue of "too big to fail." But I think we need to sort of step back. We need to get numbers. We need to get real surveys of how this impacts American competitiveness, not only competition within our own banking industry, but how it impacts American competitiveness globally. So I would welcome a resolution to this issue, but I want to see that resolution be on something other than emotion and sort of gut feel. I want to see it be done by the numbers and explained. I think it's imperative that the Fed be able to explain whatever the ultimate decision is, whether they maintain this banking structure or change it.

Fay: Nancy, it's been a pleasure talking with you today. Thank you so much for your insight, and thank you for joining us.

Bush: Thank you.