More Profits, More Problems

As an industry, we just made more money than ever before. But it would be wise to see the good news in context.

Late in January, the Federal Deposit Insurance Corp announced that profits at commercial banks and savings institutions collectively reported aggregate net income of $40.3 billion in the fourth quarter of 2013—a record by any measure.  The $5.8 billion recorded marks 16.9 percent spike over the same quarter last year. This is the 17th time in 18 quarters that there have been increased profits. That’s a steady drumbeat of positive numbers since the third quarter of 2009, barely a year a year after the dark days of bank bailouts dominated the headlines. For 2013 overall, the industry took in $155 billion, a 10% jump over 2012 and a lot higher than the $148 billion of 2006, the previous record.

Man Looking at CalendarAnd there’s more. The FDIC insures 6,812 institutions, and more than half of them, 53% had year-over-year growth for the quarter. On the flip side, the 12.2% booking losses is better than the 15% that had a losing quarter in 2012. In fact, the number of banks on the ‘problem list’ was down to 467 at year-end 2013, the lowest number since the financial crisis. In fact, it was 888 in early 2011.

Of course, there is nuance in these numbers. The FDIC notes that a big part of the bottom-line boost can be attributed to an $8.1 billion decline in loan-loss provisions. More specifically, 20% of the profits came from putting away less money to cover future losses—more a sign of accounting maneuvers than good business. On a related note, there was significantly less mortgage activity and lower trading revenue, leading to a year-over-year decline in net operating revenue.

Looking at the big picture, here’s one major takeaway. While lending rose generally, primary mortgage loans fell by $51 billion for the year. That’s a bad sign for economic recovery, and it’s got the critics out: At its annual meeting in January, JPMorgan Chase executives got asked why, since its faring so much better, the company isn’t doing more to help borrowers. In the wake of the FDIC report, expect this question to come up a lot more often, particularly since the mortgage market is expected to fall even faster this year.

To get a (perhaps unfair) sense of the dichotomy, here’s a curious factoid: The FDIC is stepping up its legal efforts against institutions during the financial crisis half a decade ago. Cornerstone Research reports that the agency filed 40 director and officer lawsuits in 2013, the same year that had such stellar results. That’s a 54% jump over the 26 suits filed in 2012.

Much of the litigation revolves around the surge in bank failures in 2009 and 2010. In fact, of the 140 financial institutions that failed in 2009 alone, 64 have settled claims or been taken to court. How all these cases play out could provide an indication of the pressure the industry will face in the days ahead.

Of course, it might be safe to assume that while these banks failed in 2009 and 2010, some of their woes go back further, perhaps to the days when the mortgage market was exploding. Yet here we are again, facing criticism for not giving out enough mortgages.

The news of a boosted bottom line is a good thing, but it’s no more than a start. The financial services industry can never be insulated from the economy at large—it’s too large, too integral and too important. The fact that profits have risen so sharply means there will be more pressure to generate similar cheer for everyone else.

Should Banking Go To Pot?

weed plantBanking and weed: It’s easy to snicker at the very idea. But as the marijuana industry—and that’s exactly what it’s becoming—continues to grow, there will have to be a system in place in handle the finances. That’s where we come in.

The question is, do we want to?

Let’s be clear about the broader issues here. At last count, 20 states and the District of Columbia permit medical cannabis, specifically as therapy to treat a range of diseases and alleviate symptoms. This is a relatively recent phenomenon, although the cannabis plant has been used for this purpose for many thousands of years. On fact, the trend toward the acceptance and even embrace of medical marijuana was happening gradually, but it got a swift kick forward in the 2012 election when two states, Colorado and Washington, voted in favor of legalizing the recreational use of cannabis (a similar effort in Oregon came up short). Not surprisingly, other states are seeing initiatives to follow suit.

It’s still way too early to gauge the effects of the new trend. By the time the law had taken effect in Colorado on Jan. 1, 2014, at least 37 outlets were legally open for business. It was initially reported that overwhelmingly high demand was causing stores in Denver to run out of inventory, but that proved erroneous; while the novelty factor likely drove many consumers to check out the merchandise, there was thankfully no shortage.

However, what all this really means is that there’s quite a bit of money coming in, with more on the way. Most of the companies doing the selling, and perhaps even those in the supply chain—yes, the marijuana supply chain—are presumably small businesses. And just like every other small business, they need a financial services support system. And again, that brings it back to us.

It’s been reported that some of these entrepreneurs are doing business in cold, hard cash lugging bags around even to pay taxes. And of course, as volumes continue to rise, there be more money in more bags—a dangerous scenario by any measure. Of course, banks are heavily regulated by the federal government, which still has laws on the books banning not the sale but even the use of marijuana. Taking in and storing money from pot dealers sounds like the textbook definition of a criminal enterprise.

This isn’t just an inconvenient gap between what’s legal in one place and illegal in another. It’s a chasm the size of the Grand Canyon.

However, the feds have finally stepped up. The U.S. government just issued rules that, for the first time, allows banks to legally provide financial services to state-licensed marijuana businesses. There are still strict penalties against certain infractions: distribution to children, trafficking by cartels, shipping to states where marijuana isn’t legal, and so on. Short of those restrictions, however, financial services providers doing business with these businesses “may not” be prosecuted.

That said, the guidelines—which comes from the Treasury Department’s Financial Crimes Enforcement Network (FinCEN)—basically just signal that banks doing business with pot dealers are in compliance with federal anti-money laundering laws. That clearly falls short of the explicit authorization the industry was hoping for.

In other words, it’s not as if the floodgates have opened. We’ve got a long way to go before the cannabis industry—medical or recreational—is comfortable with us, and vice versa. But the stage is set for the best practices to be established.

The real action may be just a little bit further down the road. For now, most of the debate seems to be focused on whether the entrants in this category can officially open bank accounts and avail of the services, just everyone else.  (Some businesses already have, with innocuous names and without explicitly saying what he business does.) But what happens when aspiring entrepreneurs come to us for startup funds? How do we even assess the viability of a business plan built around a substance that’s technically illegal in most parts of the country?

Let’s acknowledge that if we don’t provide banking services to these businesses, someone else will. This is a textbook case of an industry that has long flourished underground and is slowly coming out, with public support and government sanction. The dealers and suppliers are, in their own way, innovators and entrepreneurs. Where do we fit in?


Image courtesy of Paul/