Ex-FDIC Head on Banks, EconomyIsaac 'Concerned About Our Community Banks'
Simply put, Isaac says in an exclusive interview that the "U.S. economy is really struggling," and could be on the verge of a double-dip recession, if global political leadership does not initiate some significant changes, and fast.
"We don't have sound fiscal or monetary policy right now. Business people just don't know what to do, they don't know what is happening," says Isaac, who was chairman of the FDIC during the banking crisis of the 1980s, serving under Presidents Carter and Reagan from 1978 through 1985. "Nobody is quite sure what the value of the dollar is going to be two years from now. ... We've lost confidence in the economy and the government has done nothing to restore it."
Isaac, the author of "Senseless Panic: How Washington Failed America," now serves as the senior managing director and global head of financial institutions for FTI Consulting. Despite recent market turmoil, he says the U.S. financial system is on a reasonably sound footing, relative to where it was in 2008 and 2009. But if the economy continues to struggle, banks will feel the pain, despite improvements they've made to increase their balance sheets.
"The economy can't be a lot stronger than the banks, and the banks can't be a lot stronger than the economy," Isaac says. "We're in this together." And it's not just a domestic problem. "It's essentially a fiscal crisis that's spread throughout the world."
Globalization and Industry ConsolidationIn many ways, in fact, the financial and economic situation in Europe is worse. "At least in the U.S., we have one administration. Here, our problem is that we have Republicans and Democrats - two parties that are at odds right now," Isaac says. "In Europe, it's a bunch of sovereign countries that are not on the same page. We've got serious political problems in Europe and the U.S., and all of that impacts the economy."
The good news: There's nothing wrong with the U.S. economy that cannot be fixed. The key, however, lies with getting political backing for steps that lead to recovery.
Globalization has increased competition among the world's top banks, as those banks battle for market share. That competition has resulted in cross-border consolidation. Domestically, industry consolidation has helped the market stabilize, and bank failures have slowed as the financial sector has shown signs of recovery, albeit slow.
"We are beyond 18 months from when the recession officially ended," Isaac says. "I'm not expecting to see a lot of bank failures between now and 2012," unless the economy falls back into recession.
Community Banks Will StruggleOver the last two years, consolidation hit community banks and credit unions the hardest. Those with the least assets are typically the first to shutter. Now the pressures are shifting, with smaller, community institutions facing increasing pressures from regulatory demands. "I'm really quite concerned about our community banks," Isaac says. "They are quite threatened because of the Dodd-Frank Act. ... The new regulations are just overwhelming for community banks to comply with," and they offer few revenue incentives.
Community banks are not set up to compete, he says, and complying with regulatory mandates will be too costly. "No trust-preferred stocks can be issued to institutional investors," under Dodd-Frank, Isaac says. "That's what is really hurting the community banks. How do they expect community banks to make that up?"
Rather than addressing the causes of the current financial crisis, most financial reforms cripple banks' abilities to react in effective and timely ways to market stressors. "[Dodd-Frank] has politicized the banks' regulatory system," Isaac says, and "allowed it to remain fragmented."
For more insights, please listen to William Isaac interview Part 1, in which he discusses:
- Nuances of the Dodd-Frank Wall Street Reform and Consumer Protection Act;
- How fraud and cyberattacks could impact consumer confidence and affect future reforms and policies;
- Indicators that will determine if and when the market could expect more bank failures.