UPDATE: Even After Stress Test, Uneasy Rest Bank CEOs' Heads
May 15 2009 - 4:33PM
Dow Jones News
The completion of the U.S. government's stress test isn't an
"all clear" signal to bank chief executives whose institutions
continue to struggle.
Regulators have said as much, and analysts and lawyers firmly
believe that, in particular, banks that require capital from the
government would have to go through management or board changes, or
both.
The changes may not come about as humiliating public dismissals;
no current banker makes a good poster boy for the financial crisis
in the same way that former General Motors Corp. (GM) Chief
Executive Rick Wagoner represented the auto company's and
industry's ills.
But bank regulators can demand, and have demanded, chief
executive dismissals by the sheer power of their oversight. Such
drastic action requires tangible catalysts - violations of
regulations, for example, a sudden and severe drop in deposits, or
a lack of security and risk controls. Bad management alone is
traditionally not sufficient reason for regulators to remove a
chief executive.
Bank regulators have in the past shown a deliberate approach
rather than sudden action. Take Commerce Bancorp Inc., the bank
that sold itself in 2008 to Toronto-Dominion Bank (TD): Its
founder, Chairman and Chief Executive Vernon Hill was removed via
public regulatory order after years of concerns about the
involvement of his family in providing paid services such as branch
design to the New Jersey bank.
Such corporate governance issues may get revisited. Federal
Deposit Insurance Corp. Chairman Sheila Bair said last week that
her agency, in concert with the Federal Reserve, will be "reviewing
capital plans and corporate governance structures."
Analysts and lawyers believe that at least for now, the threat
of management action mainly stems from the need for government
support. Banks, big or small, that are forced to tap "Treasury for
either additional capital or to convert existing [Troubled Asset
Relief Program] preferred into common stocks or convertible
preferreds are at risk of seeing the government ask for a change in
the board and the executive management team," said Jeff Davis,
director of research, Howe Barnes Hoefer & Arnett Inc.
Treasury Secretary Timothy Geithner said the department "will
evaluate whether existing board and management are strong enough to
restore the firm to viability without government assistance."
According to the Wall Street Journal, regulators have put pressure
on Bank of America Corp. (BAC) to change its board.
But Geithner told reporters that the government would seek
management changes only in "extraordinary" circumstances, where it
takes a significant ownership position. Pressed by reporters to
define significant, he said: "Significant is significant. We do not
want to be in the day-to-day management of these institutions."
White House spokesman Robert Gibbs reiterated that position
Friday.
"I assume those regulators also will make determinations about
not just the suitability of those plans" that bankers are
submitting to improve capital following the Federal Reserve's
stress test, "but whether or not the corporate leadership of those
institutions is right in instituting what has to happen in those
plans."
So bankers might not want to feel too safe, even those seemingly
vetted by the test. "The focus of the stress test was macro, not
management," said Kip A. Weissman, a partner at Luse Gorman
Pomerenk & Schick PC. Regulators' attitude might be "let's get
to management later," he said.
In total, 10 of the 19 stress-tested banks were found wanting in
common equity. Investors and bankers alike collectively exhaled
because many had expected a worse outcome, though bankers have made
clear that there will be more losses from delinquent loans.
Five regional banks - Regions Financial Corp. (RF), Fifth Third
Bancorp (FITB), KeyCorp (KEY), SunTrust Banks Inc. (STI) and PNC
Financial Services Group Inc. (PNC) - need to improve common
equity. SunTrust, KeyCorp and PNC already have announced stock
offerings.
The market for raising capital has improved; investors have
factored in the potential dilution from capital raises and
dismissed fears of nationalization, said Gerard Cassidy, an analyst
with RBC Capital Markets. So government capital may well become
more of an issue for smaller banks.
Cassidy said at least two chief executives at midsized regional
banks are considered secure even if they need government support,
because the banks already went through management changes:
Huntington Bancshares Inc. (HBAN) and TCF Financial Corp.
(TCB).
-By Matthias Rieker, Dow Jones Newswires; 201-938-5936;
matthias.rieker@dowjones.com
(Henry J. Pulizzi and Michael Crittenden contributed to this
story.)