“I think the hands of local banks have been tied and their ability to have the type of impact that they could have has been dramatically reduced for a number of reasons,” Steve Calk, chairman and CEO of The Federal Savings Bank, told this publication.
Calk said increases in Tier One capital and leveraged capital ratios have “required banks to retain everything that they can just to stay alive.
“I think more complex compliance and more complex regulatory pressures have driven up costs and made it extremely hard for banks to lend because…it eats into their profitability and as a result they don’t have the flexibility that they once had,” he added. “When you combine the increased costs of lending with the increased costs of compliance, combined with the increased costs of regulatory oversight, it is very, very hard for the average community bank to retain enough capital to grow and lend.”
When asked how his institution has contended with this challenge, Calk noted although the institution’s asset size is in community bank range, “We’re not the average community bank. We’re the fastest growing bank in America for two years in a row.” He said the bank’s return on equity also has been the highest in the country.
“We’re a very unique animal and we’ve created capabilities through growth and loans held for sale. We’re much more focused and experts on the mortgage business,” Calk said.
But he said he has been hearing a common complaint from the top executives of other community banks across country that they “can’t do business because they have to hold on to everything that they have.”
Although some say the market has loosened up a bit recently, Calk said several such institutions’ executives have generally been feeling hamstrung because they “can’t add assets or spend to expand” unless they go outside of the bank for access to capital, which can result in a loss of control over the business.
He likened the effect of higher capital requirements on financial institutions’ ability to spend to a consumer losing the availability of half of his or her income, as they double the amount that must be held in reserve against assets. Rather than needing to set $6 million aside on $100 million of assets, for example, a bank needs to hold $9 million in reserve.
He said bank lenders could close significantly more loans, or 50% more volume, without the capital increases.
“There would be a much faster recovery,” he said.
In other news last week, a Standard & Poor’s presale report on the latest $600-million-plus, traditionally structured Sequoia/Redwood deal (Sequoia Mortgage Trust 2013-2) shows that the main originator in the transaction, First Republic Bank, has not had a single delinquent loan since 2009.
As previously noted on this publication’s website, the deal—which Moody’s Investors Service also issued a presale report on—had a higher San Francisco concentration than other recent transactions due to its return to using FRB as its main originator. But analysts said they believe FRB’s strong credit characteristics and other factors help offset this, leaving the transaction with credit enhancement levels in line with other recent Sequoia deals.
Sequoia continues to be the one consistent issuer of private-label securitizations backed by recently originated (jumbo) mortgages.