The nation's economy is in trouble because of greed and unnecessary risks taken by banks over the last few years, but the economy will be in even more trouble if banks stop taking risks altogether, according to a panel of two local bank presidents and the state's top bank regulator at the September meeting of the Lexington Forum.
"We're in the risk-taking business, and I wouldn't want any bank to ever say we've got to stop taking risk, we can't take risks anymore. The economy and the community, it would die," said Charles Vice, commissioner of the Kentucky Department of Financial Institutions (KDFI). "So we can't stop taking risk, we can't stop looking for ways to help our local communities out."
But risks that proved too complex to understand, or just plain greed, caused much of the problems in the American housing market, according to Central Bank President and CEO Luther Deaton.
"In Lexington and Kentucky, we're pretty fortunate. We're not in the situation other banks are facing," Deaton told the monthly Forum meeting. "They started making loans they shouldn't of. Granted, if you only make loans in your community, you're going to make some bad loans too. They're going to go bad. That's the risk you take. But overall in (this area), we're in good shape."
Vice concurs with Deaton's assessment, and so do reports from the KDFI.
"One thing my office does, and we look at it every single quarter, is how Kentucky banks are doing in aggregate to the states around us. We're doing a lot better than some of those other states, particularly Illinois, Ohio, Indiana and Tennessee," Vice said.
One of the major problems, according to American Founders Bank President and CEO John T. Taylor, is the sheer number of commercial banks currently in business.
"We banks caused a lot of what's going on right now from the standpoint of the banking sector in total. The fact of the matter is, like it or not, there are too many banks in the country today," he said. "We had a run of a pretty good economy for a period of time, but the fact is, because of overcapacity and shrinking margins and earnings and the like and the need to please the shareholders, these banks went out and began to take risks on that weren't commensurate with their return."
Taylor took over at AFB last year after the bank was issued a Cease and Desist Order from the state regulators in Vice's office and the FDIC, which Taylor has classified as a good road map to eliminate "unsafe and unsound" banking practices that had occurred at AFB.
Unlike many of the problems nationally, local banks that have made news recently hadn't been in the subprime market, according to the panel.
"Some of the things that have been going on nationally, like the big problem with the housing industry, those same challenges aren't pushing down on us because we haven't taken the risks; Kentucky (banks) haven't placed the same bets as other banks," Vice said. "So we do have some housing challenges, but we're not facing the exact same challenges; we don't have the same large subprime portfolio."
Also there are instruments out there called "liar loans" given to borrowers who had no income, no job and no assets, but who were still getting the loans, Vice added. The American economy is now paying for those previous sins as these unsecured loans are just starting to come home to roost.
"In our business, unfortunately, risk sometimes doesn't show up the next day, it shows up two and three years down the road," Taylor told the Forum. "That's what we're seeing today. We took on risk as an industry, two, three years ago, and it is now showing up."
Members of the Forum asked the panel about issues including whether or not the country is in fact in a recession, should further regulations be placed on banks to prevent future problems, what role state and federal legislation might have had on the matter and what is the future of banking. On that issue, Taylor said banks have learned from earlier mistakes as companies focused more on cheaper technologies to interact with customers rather than face-to-face branch banking.
"I was with an institution that actually made a strategic mistake and they acknowledge it - PNC," said Taylor who joined AFB after running the Cincinnati/Northern Kentucky market for PNC. "They were way out in front on alternative distribution, Internet banking, telephone banking, whatever, and really shut down their branch acquisition strategy in many, many markets, including Lexington and Cincinnati. They saw the Internet and other lower cost distribution models. The thing they missed, and I think is still present today, is these alternative methods of accessing banks, or us accessing customers, are really complimentary; they're not substitutes. People still pick their bank based on two-and-a-half-mile radius from home or work."
The Forum holds its biannual Keeneland meeting on Thursday, October 2, and will host a debate between state senate candidates Democratic Representative Kathy Stein and Republican Councilman Chuck Ellinger. Breakfast is served at 7:30 a.m. and is free to Forum members and $15 for the public. The monthly meeting will return to Annette's City Cafe on Old Vine on November 6.