The 2009 Banking Agenda: Interview with Doug Johnson of the American Bankers Association
To reflect on the year behind us and consider the year ahead, we caught up with Doug Johnson, Vice President of Risk Management Policy with the American Bankers Association to discuss:
Doug Johnson serves as Senior Policy Analyst for the American Bankers Association, where his public policy responsibilities include payments system technology and the relationship between technology, privacy, and security. Doug also advises the ABA and its members on a variety of other matters, including social security reform, real estate brokerage, mortgage finance, and public funds. He was responsible for the ABA's recent release of a series of tools to assess information technology risk and safeguard customer information in financial institutions. He is on the advisory board of the Financial Services Information Sharing and Analysis Center and serves on the Financial Services Sector Coordinating Council, which advises the federal bank regulatory agencies on homeland security and critical infrastructure protection issues.
Prior to joining the American Bankers Association, Doug spent ten years as Assistant Director of the Florida Division of Banking, where he oversaw the supervision and regulation of Florida's domestic and international banking industry. During that time, Doug served as an advisor to the U.S. Congressional Office of Technology Assessment, assisting in their study of the use of information technologies for the control of money laundering.
Doug also spent time in Miami as a planning analyst for Royal Trust Bank Group, and as a bank consultant for First Research Corporation. He has Bachelors in Economics from the University of Florida and a Masters in Finance from Florida State University.
TOM FIELD: Hi, this is Tom Field, Editorial Director with Information Security Media Group. We are talking about banking in the year ahead, and I'm privileged to be speaking with Doug Johnson, Vice President of Risk Management Policies with the American Bankers Association. Doug, thank you so much for joining me today.
DOUG JOHNSON: You're welcome Tom. Glad to do it.
FIELD: Just taking a look back at this wild year that we have had, from the ABA's perspective, what do you look at as being the top banking security stories of 2008?
JOHNSON: Wow, big question, obviously it is so hard to choose from because we are in very unusual times. I know that is a significant understatement, but I think that from our perspective the big story is kind of the over-arching fact that we are in unchartered territory.
And so I think the thing which I've seen, and we've seen as a trade association, is we've had to utilize a lot of different resources, both public and private, to attempt to try to rectify the current situation as it relates to the economy in general and the availability of credit, and trying to do that in a way that it is able to bring us back as an economy is a great challenge and I think it is going to be the challenge that continues to be with us for 2009.
FIELD: Given what we've seen Doug in recent times, how would you describe the state of banking today?
JOHNSON: Well I think that one of the things that particularly frustrates our membership, the American Bankers Association, to some degree is the fact that banking as a definition gets written large when people talk about banks, particularly in the media. They tend to lump everything in there, investment banks, etcetera, etcetera, mortgage banks. And from the standpoint of the depository commercial banking industry, we continue to stress that more than 92% of our banks are what is defined by the regulatory agencies as well capitalized. That's the highest definition or level of capital you can have from a regulatory standpoint. And so the majority of financial institution that are members really in large degree stuck to their knitting. They didn't participate in the sub-prime loan market, they were very attuned to the credit needs and still are to the credit needs of their community and didn't go out there on the far edges of some of the more exotic products that we've seen.
So I would describe the overall state of the banking industry today as still good, and I think that one of the things that we need to recognize even in theses challenging times is that while we do have north of 100 institutions presently on the FDIC's problem bank list, and that number is clearly going to grow some, there were over 1,000 financial institutions on the problem bank list back in the period of 1998 through 1992, when we had our last substantial credit cycle. I think that is a good way to compare where we are now to where we were then.
FIELD: You make a good point because we don't apply a lot of historic perspective to this do we?
JOHNSON: That's true.
FIELD: Speaking of historic perspective, we are sort of in historic times now. We've got a new President coming in, a new administration. What would you say are your membership's expectations of this new administration?
JOHNSON: Well I think that there is always a level of cautious optimism when we are talking about a new administration, and I think what we've seen from the President-elect and the individuals that he has chosen to be on his financial team, is a high degree of thoughtfulness associated with those picks and with the words that President-elect Obama has used around those picks. Obviously having someone like Timothy Geithner become the new Treasury Secretary is something that financial institutions generally are very comfortable with from the standpoint that incoming Secretary Geithner has had quite a role in the current efforts to try to stabilize the financial services industry and also has the perspective from the Federal Reserve, which I think is going to be helpful as well.
So I think that cautious optimism continues, but we expect frankly a greater degree of activism, particularly on the consumer front, you know, from the administration. I think that is clear, and he has stated that. So we look forward to working with them on those efforts.
FIELD: So given the regulatory climate, the threat climate and just what we are going through economically right now, what do you see as sort of the top two or three challenges for banking institutions in 2009?
JOHNSON: I think, Tom, that first and foremost is to ensure that first of all the banking customers understand the health of the industry as we talked before, that the vast majority of financial institutions are well capitalized and will continue to serve their customer base. So maintaining that customer confidence is absolutely crucial.
I think a secondary challenge for institutions -- and that is where a trade association like ourselves really comes in -- and that is to understand what the current environment is. I think everyday it is safe to say we see some new wrinkle to the extent of what the federal regulatory initiatives are going to look like. And therefore bank responses have to envision those new changes and the way that the government is trying to address all these issues.
So again, it is the role of the trade association to really help the institutions think through that, and a good example would be just yesterday with the announcement that there is potentially going to be a big role for Freddie and Fannie in terms of trying to lessen the current interest rates that are being offered to new homeowners and how that may actually be transitioning into the existing homeowner market on a refinance basis after we test it in the homes sales environment. And so those things keep changing because we are in difficult times, we are in unchartered territory and I think that continuing to work with the current and the new administration to work through and think thoughtfully about the best ways to correct the current environment is the biggest challenge.
FIELD: So I think we all expect some new banking regulations with the new administration coming in and responding to the times we are in right now. What specific types of regulations do you foresee coming?
JOHNSON: Well I think, Tom, that what we will see is some regulation, which I would call codifying some of the things which are currently being accomplished by the Federal Reserve and by Treasury. I think there may have to be some regulations associated with that.
I think that we are still envisioning the finalization of the Federal Reserve rates as it relates to the mortgage finance market and the consumer protections associated with it. And so we have a very good understanding of what those regulations are going to look like and we fully expect them to be finalized soon in the New Year and we will obviously have to work toward implementing those regulations. Although I think it is safe to say a lot of institutions are already long down, or far down the road in terms of accomplishing that.
I think we also see some regulatory scrutiny in the identity theft/Red Flags area so that is not a new regulation ,but it certainly is the implementation and the determination of compliance with the existing Red Flags regulation so that is something that I know institutions are looking for the New Year.
I think that for larger institutions that the whole concept of capital adequacy is going to continue to be an issue. Obviously we have new data, we have had ten years of substantial economic growth upon which a lot of the capital models were built. Over the last year it is safe to say that we've gotten new data to incorporate within those models, and so I think that institutions going through attempting to become complaint with capital requirements, etcetera, are working hard trying to validate their models based upon that new data. So those are some of the issues I think we see as being top of the mind for a lot of institutions.
FIELD: Doug, what about the regulatory agencies themselves? As you know, Treasury put forth a plan to overhaul regulatory oversight some months ago, and we've got a new administration coming in now, and we hear things about perhaps there should be one "Uber Agency." I mean, there is going to be a lot of discussion about this so what might we expect to see with the regulatory agencies?
JOHNSON: Well, Tom, as you are probably very well aware, the road of regulatory reform is littered with a series of administrative studies over the years. Carter looked at it, the first President Bush looked at it (I wouldn't say very seriously), and I think that the current environment is just frankly different.
We are in an environment where we are going to see some changes to the regulatory agencies and as you put it, there is some thought to developing an Uber Agency, and I think that from our standpoint representing our membership that we need to be very cautious out there in terms of looking at that because there is a movement that could take, I think, a lot of flexibility and creativity out of the regulatory system.
There is a point of view, and I think obviously like most points of view it has some validity that when you have a variety of financial regulatory agencies that an institution might not see clarity and consistency across those institutions but that is what the FFIEC is, you know, the Federal Financial Institution Examination Counsel is for to develop that, and that might slow down the process some.
But I think it is always helpful to have a series of individuals looking at issues from different perspectives, and I would not want to see particularly the state system really frankly taking it on the chin by the development of some uber regulatory agency. I think that the states have been very helpful in terms of providing us what I would call test beds of various of types of regulatory issues and product reforms and stuff like that. I think that is very helpful.
So I do fully expect and I think we can fully expect to see some consolidation of the agencies but we will be working hard to ensure that that consolidation doesn't create a level of solidity that takes away the kind of creativity and flexibility that we've seen in the financial services regulatory environment that I think has been helpful over time.
FIELD: Now Doug one last question for you, for banking institutions that are looking to put 2008 behind them and I think we all are, what advice do you offer for them going into 2009?
JOHNSON: Well, I think that banking institutions first and foremost need to ensure that they are really listening to and attuned to their customer base. In these times there are levels of uncertainty, I should say with the existing customer base, within financial institutions that really in some cases is based on misinformation or lack of information. And to the extent that institutions are properly communicating with their customers, I think that could go a long way toward instilling the kind of customer and consumer confidence that we really need to maintain within the financial services environment for us to really turn this economy around.
I think that clearly credit quality is going to be something that institutions are going to have to be paying a lot of attention to over the course of the next year. I don't think we are out of the woods in terms of the direction that credit quality is going to take. We still have a little ways to go, but I do go back to my former statement that I think most institutions get that, they've always gotten that, and they do understand what their responsibilities are going to be to ensure that they don't impede the credit availability by retrenching too much in terms of putting credit out in the marketplace.
I think from the standpoint of information security and risk management, to try to link the two together is one of the things that the regulatory agencies are going to be looking at is to ensure that in this time of retrenching within the industry and orientation toward credit quality that we don't take our eye off of the larger risk management issues in financial institutions or take our eye off the necessity to ensure that we are properly managing our technology and properly managing the overall risk environment that the institutions have. I know that is a question that institutions, or rather regulators, are interested in, and I am sure that it is going to be one of the first questions that is asked within the examination environment when the examiner does come knocking on a financial institutions door.
FIELD: Doug, well said. I really appreciate your time and your insight today.
JOHNSON: Sure, Tom, glad to do it.
FIELD: We've been talking with Doug Johnson with the American Bankers Association. For Information Security Media Group, I'm Tom Field. Thank you very much.