Big banks have been busy trying to repair themselves, and make money, in this post-financial-crisis era of more regulation and less economic growth. To better understand the challenges banks face, Dennis Berman, financial editor of The Wall Street Journal, spoke with Brian Moynihan, chairman and chief executive of Bank of America. Edited excerpts of their conversation follow.
WSJ: It felt like banks were more resilient at the beginning of this year. Why isn’t the investing community coming around to that view?
Brian Moynihan: All of these great companies out there, they create things, new things, and our job is to lend them the money, help them raise the capital to help that go on. So when the world believes the economy is not going to grow – and you’ve seen this thing ebb and flow and ebb and flow – and if you think about the estimates of most economists from last fall to what they are now, as that happens, as rates come down, and the prospects for our industry and capital markets come down, the reality is that the trading volumes and stuff have actually been fine.
That doesn’t sound like the dynamic days of yore. It sounds like Daniel Tarullo, the Federal Reserve’s main regulator, would say you should be doing simple banking. Do you agree with him?
There’s nothing simple about taking a major M&A transaction through the market or raising tens of billions of dollars of financing.
The other part of this: all things in moderation. You have to have balance in your company to weather the storms. If you go back and look at what we got wrong, it was when we overreached. Two-thirds of our loans were consumer loans, in a consumer-led economy. So when it went wrong, it took us. Everybody thinks about mortgages getting in trouble. What really got us in trouble was the credit cards and home-equity loans that were supposed to be secured and weren’t. You have to have balance in your portfolios, in your risk, in everything.
Last few years, revenues at Bank of America have been declining…
That’s because we got rid of a lot of stuff that didn’t make sense, and then the interest-rate environment. That will reverse itself, but it’s going to take higher rates.
When you see negative rates, can you even compute that?
Well, we do it today in Europe. It is very hard to imagine saying to one of our 50 million consumers here, “Give us $ 100 and we’ll give you $ 99 back.” I don’t think the US, based on any economic estimates we have or forecast, is facing it.
How do you get Bank of America moving?
More loans, more deposits, working for all these types of clients on fees, and taking costs down. We had costs at $ 82 billion in 2010 and we brought that down to $ 57 billion last year.
Tell us about the regulatory environment.
If you sat back and said, “What was the need out of the financial crisis,” to put stability back in, you had to fix capital, liquidity, range of activities. You had to have a contract with society that said, “If the world ever went in a way that no one expected, and all the stuff you did didn’t work, could you liquidate one of us through bankruptcy or an FDIC proceeding or a proceeding outside bankruptcy”; those were all things we’re putting in. We have worked hard to get all that done.
So, you have a company that’s gone from $ 100 billion liquidity to $ 400 billion; from $ 60 billion to $ 160 billion in tangible common equity over the last 10 years. You built this capital, this liquidity. You brought in a range of activities. Aside from that, because of the way the stress test works, you’ve had to have a conservative nature to everything, because at the end of the day, if you think about any business decision you’re going to make, you have to assume that the business decision is going to go wrong at the worst possible moment, and hold capital as if it went wrong. That’s what the stress test says. It will make you very safe. The question is whether it restricts lending.
We could lend more money if the capital levels were different. But if the point is that we’ll have so much capital we can never fail, this is where we are now. Over time, I think there will be people who look at this and say, “Is the insurance policy too large or too small?” The policy right now is very strong in favour of safety and soundness, and it should be. Over time, I think people will think it through and we’ll see where we get.
You think it will dawn on people that the economy is perhaps being retarded by lack of lending?
Well, if you look at especially small banks right now, if a small bank fails, the FDIC liquidates it. The banking industry has to maintain the FDIC fund. The check goes out, 13% of it from Bank of America, pays for the cost of cleanup. So, the question is, do you need all that regulation for these smaller enterprises, and the answer is no. The big banks, our view is take it away from those banks because you start to see what it can cause.
Over the next 10 or 15 years, people will look back and say, “Did we get it right?” That will require an honest debate about what we want to achieve out of this industry. The issue for us is we have to get far enough away from it that people don’t remember everything that went wrong. Not that they’re going to forget what went wrong; they’re going to think about it in the context of a broader scope.
So you grin and bear it in the meantime?
We made $ 16 billion last year after tax. That’s worth grinning and bearing.
This article was published by The Wall Street Journal