ABA Banking Journal - February 2008 - (Page 8)

briefing Birth of the Fed Then & Now T oday, with the stumbling economy needing all the help it can get, many eyes are on the Federal Reserve System. Chairman Benjamin Bernanke now holds the hot seat occupied by the likes of Alan Greenspan, Paul Volcker, Arthur Burns, and many more. And that was also the case for bankers in December 1913, when President Woodrow Wilson signed the Fed into life as he approved the Federal Reserve Act. Present at the signing was Representative Carter Glass, frequently called the father of the Fed, and later, as a senator, the father of the Glass-Steagall Act. For many decades since the nation’s founding, the need for something like the Fed had been the subject of controversial debate, and, now, it had been born. It has remained controversial for 95 years. In the January 1914 edition, the ABA opined: “The bill in its entirety is not perfect or what was desired or demanded by the banking and business interests of the country. It has been pronounced, however, by bankers and economists to be from 60 per cent. to 80 per cent. good.” The ABA went on to comment on the legislation in much the same way that association officials comment on newly C-Notes The January 1914 edition suggested that after the Journal of the ABA was read by bank officers, it should “be given to the Paying Teller with instructions that he carefully look over the pictures and autographs of bank crooks; familiarize himself with their doings and strengthen his own position as to the danger of receiving forged checks, and be able to identify these criminals should they present themselves at his cage.” The process of setting up the young Fed’s infrastructure continued, with the February 1914 issue reporting on a traveling series of field hearings that the Reserve Bank Organization Committee held, to determine where the Fed district banks ought to be based. The committee comprised the Treasury Secretary, the Agriculture Secretary, and the Comptroller of the Currency. The number of those banks was expected to be between 8 and 12. Today there are 12 Reserve Banks. Many cities that never saw a Fed district bank—New Orleans, Omaha, Denver, Memphis, and Baltimore among them—were among those proposed. Also in that issue, the association announced that Arthur Reynolds, president of ABA—the top staff position—was “as has been his custom for many years, … taking his winter vacation in Pasadena, Calif.” passed banking bills today: “When the Glass bill was first brought out—and before any action was taken by Congress—it was a crude measure, incomplete, and lacking in many important features and with four fundamental principles that seemed vitally opposed to sound economic principles. Some of these objectionable fundamental features of the bill have been overcome entirely; and others have been so modified that they now appear in much more desirable form.” A little later, however, was a paragraph today’s ABA couldn’t have uttered: “It necessarily follows that in the evolution of a measure of this nature—giving the country a new banking law, where there has been no banking legislation of any account for fifty years—the development of a suitable law demanded time, careful thought, and deliberation.” [Emphasis added.] BJ Snapshot Tier 1 ratios: Stable so far A s metrics go the Tier 1 ratio is one the most important in banking. The ratio takes the amount of Tier 1 capital—typically common and some types of preferred equity plus retained earnings—and expresses it as a percentage of risk-adjusted assets. For a bank to be considered well capitalized the metric must be above 6%. Going below 4% draws immediate reaction from the regulators. In the current environment this metric has been garnering quite a bit of attention as the money center banks have been feeling a significant pinch. Citigroup, for example, has seen its Tier 1 ratio fall from 9.12%, to 8.64% to 7.32% in the third quarters of 2005, 2006 and 2007 respectively. The broad industry trend, however, suggests that while these 2007 Q3 2007 Q2 2007 Q1 2006 Q4 2006 Q3 large banks have had some trouble, publicly traded banks overall have fared rather well. The chart shows that the average Tier 1 ratio is stronger now than it was in 2002 through 2004; the median is only slightly below levels during that time and both are well above the danger zone. The aggregate trend has been one of a pullback in the last five quarters, but over the last five years the ratio has been relatively stable around 9%. Despite this, funding pressures are weighing on operations, and it is conceivable that if the trend continues, the industry could see a reduction in both stock buybacks and dividends as banks retain cash. —John McCune, SNL Financial jmccune@snl.com Past 5 years 2006 YE 2005 YE 2004 YE 2003 YE 2002 YE Tier 1 ratios (%) — publicly traded banks Past 5 quarters Average Median Aggregate Source: SNL Financial 16.10 11.99 8.33 16.16 12.24 8.67 17.08 12.17 8.81 17.45 12.30 9.02 16.94 12.41 9.05 Average Median Aggregate 17.45 12.30 9.02 16.38 12.44 8.84 15.22 12.30 9.12 14.55 12.49 9.66 14.03 12.40 8.90 8 FEBRUARY 2008/ABA BANKING JOURNAL www.ababj.com/subscribe.html http://www.snl.com http://www.ababj.com/subscribe.html

Table of Contents Feed for the Digital Edition of ABA Banking Journal - February 2008

ABA Banking Journal - February 2008 Contents On ABABJ.COM: Have You Visited Our Brand-New Website? Editor's Column "That's Edutainment" Snapshot: Tier 1 Ratios Stable so Far 100th Anniversary: Then and Now ABA Resources ABA Chairman's Position Don't Despair Pass the Aspirin Cover Story: Socially Responsible Banking Profitably - Incoming America's Community Bankers Council Chairwoman, Dorothy Bridges Demonstrates the Way A True "Rags-to-Banker" Story Retail Banking: On the Money Hunt Community Bank Management: The Ugly Truth About Board Relations Does Core Really Matter? Security 2.0: Not Just a New Kettle of Phish A Personal Case of Mal-Serendipity DOD Credit Regs Demand Attention Mailbox Banker's Mart To Advertise/Index of Advertisers The Economy

ABA Banking Journal - February 2008

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