Delaware's banking and financial services industry is attempting to weather an economic storm. A recession, subsequent mergers and acquisitions - including M&T Bank's purchase to Wilmington Trust -and a trend of job losses have shaken what had been a pillar of Delaware's overall economy. At its height, the banking and financial service industry in the state employed about 30 thousand Delawareans. That number has shrunk below 26 thousand and there are fears more jobs could be lost following Bank of America's recent announcement that it intends to trim its workforce.
Governor Jack Markell's administration has sought to assist the sector with tax breaks and allocations from the state's Strategic Fund. Just last week, the state pledged $5.6 million from its Strategic Fund and a Capital Improvements and Equipment Cash Incentive up to $1.5 million to Capital One to add 500 Delaware jobs above the nearly 1600 jobs it will acquire in its purchase of ING Direct USA and the domestic credit card arm of HBSC.
In light of all the news surrounding this sector of Delaware's economy, DFM News asked a trio of observers to assess the state of Delaware's banking and financial services industry and its prospects in the future. Their thoughts, submitted via email, are here:
[caption id="attachment_3638" align="alignnone" width="130" caption="Jim Stewart"]
[caption id="attachment_3635" align="alignnone" width="130" caption="Rashmi Rangan"]
[caption id="attachment_3647" align="alignnone" width="130" caption="Nandita Das"]
In light of the recession, mergers and acquisitions (M&T/Wilmington Trust and Capital One/ING Direct USA and HSBC credit card) and job losses recently, how do you rate the health of the banking and financial services industry in Delaware? How significant does it remain to the health of the state's overall economy?
Although victim of an industry contraction over the last several years, banking sector is a major employer in Delaware and will continue to be for a long time. The larger issue has been the loss of banking corporate headquarters. Over the past 15 years, Delaware has ceased to remain the headquarters for MBNA, First USA, ING Direct, Juniper Bank, and Wilmington Trust. While each of those companies and successor companies remain major Delaware employers, there is a major economic impact of losing a corporate headquarters.
With the loss of a corporate headquarters, communities lose many of the company’s highly paid executives and headquarters staff. This adversely impacts local retailers, non-profits, restaurants, residential real estate, and local and state tax receipts. While many banking employees have remained, Delaware has lost hundreds of higher paying jobs, negatively impacting the local economy.
—Jim Stewart, co-founder and CEO of Epic Research/Previously co-founder/president of Juniper Financial/Barclays
There are compelling reasons for grave concern over the health of the banking and financial services industry in Delaware. Acquisitions and mergers are almost always accompanied by job cutbacks and we have yet to learn what the Capital One/ING Direct merger will mean for Delaware. Sheriff’s sales in Kent and Sussex have seen significant year over year increases. What happens to this inventory of properties owned by Delaware banks? And what do these levels of foreclosure portend for the economic future of these fast growing parts of Delaware? Symptoms of distress are evidenced throughout Delaware, with high unemployment leaving families and individuals vulnerable to high mortgage costs, increasing credit card debt, and the devastating effects of unplanned illnesses and hospitalizations. Moreover, state revenues suffer because taxes don’t get paid and purchases of goods and services decline sharply.
How and when the problems of home foreclosures and unemployment are fixed will determine when the overall health of Delaware’s economy returns to normal. Our economic health has been intertwined with the economic health of our Banking and Financial services industry all our lives. The Community Reinvestment Act of 1977 recognized that unless our Financial System involved ALL markets, we would be at risk of jeopardizing our economic vitality.
—Rashmi Rangan, Executive Director at Delaware Community Reinvestment Action Council, Inc.
The future of banking in Delaware is dependent on many factors – the most important being the economic and the competitive environments.
In general, mergers that lead to market power without proper geographic diversification are a disaster waiting to happen. International and product diversification are some of the requirements for remaining competitive in global arena of the financial markets. The banking industry has gone through a cycle of regulation, deregulation and re-regulation. The industry has a few big players, but “Bigger is Better” may no longer hold much ground, as it brings along serious issues. The health of the banking industry is fairly relevant to the health of Delaware economy. A large number of corporations have their offices in Delaware and employ a large part of the state’s population. Banks have played and will play a big role once the economy stops floundering and consumer sentiment improves.
—Nandita Das, Delaware State University associate professor of finance
Last spring, Governor Markell used part of the budget surplus to create $8.5 million in tax breaks for the banking and financial services sector to help avoid further job erosion. There have also been millions of dollars in Strategic Fund allocations to Citigroup, Discover, and just this week, Capital One in the name of job retention or creation. Are these moves likely to be effective? Do they remain worth the investment considering that DEFAC is painting a more gloomy revenue picture for the coming fiscal year?
Governor Markell earns an A+ for his efforts to attract and retain industry in a historically bad economy. Tax breaks and Strategic Fund allocations are often misunderstood, but are necessary to be competitive. Such incentives are relatively modest investments that in aggregate pay off many times in more jobs, increased tax revenue, and a healthier economy. They are especially important given the less than perfect revenue forecast for next year.
—Jim Stewart, co-founder and CEO of Epic Research / Previously co-founder/president of Juniper Financial/Barclays
From the little I know, I can only say I am hoping for the best. In the fog created by the grant award process, a significant opportunity has been lost. Who will ask the questions that are most relevant to a determination of the benefits these grants bring to Delaware residents and workers? How many Delaware jobs have been saved and for how long? What opportunities for growth by Banks in Delaware will be presented by the Bank’s continued business presence? What else could Delaware have done to retain its competitive edge? These are just a few of the unknowns that are buried from public view when public funds are dispensed secretly for the public good.
Apart from these questions, my reason for hope is premised on the idea that in providing these grants, Delaware has allocated our funds to businesses that will be driven by creativity, innovation, investment, lending, and service. For the banking and financial services industries, this is fertile ground to plow. When financial institutions couple their CRA obligation to lend, invest, and serve the communities where they operate with their proven records of creativity and innovation, all Delawareans benefit.
Events of the last three years have demonstrated banking activities have far reaching consequences for the larger public community. Our financial institutions have (and I will continue to argue that they should commit to doing more) committed to opportunities for lower-income Delawareans to enjoy the full range of financial products and services. When our banks make this investment in all our people it enhances our broader sense of well-being.
—Rashmi Rangan, Executive Director at Delaware Community Reinvestment Action Council, Inc.
Does Capital One have enough capital to weather another bubble? Capital One seems to have done its homework. With an aging population and the lessons learned from the recent financial crisis, the use of credit cards (hopefully) will decrease as the baby-boomers will (are forced to) concentrate on liquidating their assets.
We also need to consider the moral hazard issue resulting from federal safety networks.
Capital One is doing what it needs to do to be more competitive. The question is will the Federal Agency Oversight and other regulatory agencies do their part and make sure that there is proper supervision, even when the economy is doing well. There is a need to balance the cost incurred by banks and other financial institutions as a result of the new regulation and the taxpayer money used to rescue future failures of these mega-banks. Maybe we need to think about putting a cap on the amount that will be used to revive a failing institution.
—Nandita Das, Delaware State University associate professor of finance
How much of what dictates the health of the state's banking and financial services sector beyond the state's control? What external forces/factors are most likely to improve or worsen this industry in Delaware?
Clearly the contraction in the banking industry in Delaware is a reflection of global trends, including not only the earnings issues, but the resulting consolidation. Additionally, Delaware may have suffered disproportionately due to the concentration here of monolines – MBNA, First USA, and Juniper in the credit card sector, and ING Direct in high yield savings. As banking has come under earnings, capital, growth, and funding pressure, monolines have had a difficult time remaining independent and have been acquired by larger commercial banks that are headquartered outside of Delaware.
Keeping an attractive regulatory and political environment is important to a vibrant general business climate. Longer term, there will be opportunities for new entrants to various segments of the industry that Delaware should be well positioned to exploit due to its concentration of banking talent and favorable business climate.
—Jim Stewart, co-founder and CEO of Epic Research/Previously co-founder/presidnet of Juniper Financial/Barclays
The banking industry will not improve until it can take a long, hard, honest look in the mirror. Changing the name of the bank or splurging on cute television commercials can not address the malignancy for which banks deserve the mantle of ownership. People know that when they bought their home they did not act alone. They paid the fee for a licensed appraiser, approved by the bank, who attested to the value they paid for the home. They paid the fee of the licensed attorney that represented them at a settlement that made the transaction seem legitimate and weighty. They answered the questions posed by those pesky bank underwriters concerning their income and how they acquired assets. And then after the loan was approved, it was sold and bundled so more “banking people” could make more money. Just to be safe, the bundles were looked at by rating agencies such as Standard and Poor’s, Moody’s and Fitch, and proclaimed to be sound investments. Finally, to cover the bets on the bundles, insurers such as AIG, confident in the bundle ratings, insured the whole lot. And then like Humpty Dumpty, it all came tumbling down. In short, the homeowner took it on both ends: left holding the bag with an underwater mortgage and paying for the bailout of banks and AIG. We are not stupid.
Now, the banks are not underwater, because the United States government lent its full faith and credit to ensure their survival. And AIG is still in business thanks to a bailout with federal tax dollars. But the homeowners are in trouble and there is very little hope in sight. And where are the banks. Well, they are doing quite nicely thank you. They are giving everyone but Warren Buffet about 1% on savings deposits. Their stocks have recovered to safe levels. Many banks are fighting state attorneys general over nagging questions about “robo signings” used to expedite the removals of homeowners from their residences. I won’t even go into salaries and bonuses.
Why has it been so difficult for banks to face the crisis they planned and carried out to their financial gain and find a way to lend a hand to the beleaguered homeowner? How hard could it be to review all loans on the books and identify those with interest rates that are shameful in today’s market, and once identified, reach out and work with the client? Why have banks been reluctant to offer products that provide some measure of relief to those affected by unemployment and underwater mortgages? Until banks undertake on their own true reform to assist those mired in befuddling circumstances, not by dint of Congressional mandate or executive agency regulation, their overall health will remain precarious.
An old Africa proverb says it best. If you want to go quickly, go alone; if you want to go far, go together. There is much wisdom in this proverb.
—Rashmi Rangan, Executive Director at Delaware Community Reinvestment Action Council, Inc.
Delaware cannot isolate itself from the effects of overall economic downturn in the country or in the global arena. Technology and competition have made the world a small place where one person’s problem is everyone’s headache.
The banking industry is going through a lot of changes; financial institutions are not mute players, but rather play a big role in changing business practices and shaping the landscape of the industry. One of the external factors that could affect the banking industry, not only in Delaware, but across the country, is the growing immigrant population. With an increasing immigrant population, banks need to offer services that meet the needs of this growing base. Their demand for services are markedly different from the wealthy business clients about whom the bank also needs to be concerned, all while minimizing probable losses.
—Nandita Das, Delaware State University associate professor of finance
Are there additional measures the state can or should be taking to maintain or improve the health of this industry in Delaware?
The Markell administration and our congressional delegation are very focused on measures that will maintain Delaware’s prominence in banking and financial services. The focus on education – e.g., winning the Race to the Top competition – should also help insure both an educated workforce and make the state a place that people want to move their families, which will be a positive for all businesses.
—Jim Stewart, co-founder and CEO of Epic Research/Previously co-founder/president of Juniper Financial/Barclays
A race to the bottom is not the solution. The State of Delaware would do well to recognize that CRA covered institutions bring more to the table—innovation, opportunities to leverage their investments, and the potential for returning a rate of investment that includes job creation, business growth, and housing stability.
When banks begin the process of reconciliation with Delaware homeowners, then the State of Delaware should do all it can to continue spiraling progress.
—Rashmi Rangan, Executive Director at Delaware Community Reinvestment Action Council, Inc.
The “Too Big to Fail” Policy is somewhat responsible for the recent financial crisis. It is not clear whether bailing out the big financial institutions with taxpayer money (e.g., TARP) will pay off in the end, due to faulty infrastructure of the banks. Meanwhile, Canada, which has only four large banks, is marching in full-force to compete with American banks. American banks need to revise their strategies to remain competitive; specifically, they need to balance credit risk with the zeal to grow their markets. We also need to also regulate the “shadow-banking system,” which generally operated outside the regulatory radar, and largely contributed to the financial crisis.
The question is, even if we succeed in regulating all businesses that operate within our shores, is it fair to rescue a financial institution under “Too Big to Fail Policy” when some of its operations are located outside the US jurisdiction? Are we (as stakeholders) confident that the Financial Oversight Council will be successful in carrying out their mandate of strict supervision of these Systemically Important Financial Institutions (SIFIs)? History says we should be skeptical. The intent appears to be noble, but its success is questionable.
Having no option of bailing out these large financial conglomerates can be a positive thing, as long as there is strict enforcement of regulation and a lower probability of changing the rules of the game at the eleventh hour to stop adverse impact on the overall economy (systemic risk). What is important is not finding a cure for the (future) failing institutions but rather to understand the ‘cause’ behind the disease (failure) and prevent occurrence of the scenario.
—Dr. Nandita Das, Delaware State University associate professor of finance
