Tags: Isaac | bank | capital | stronger

Isaac: Banks Strengthen, But Fed's Low Rates Pose a Challenge

Tuesday, 19 Feb 2013 05:40 PM

By Kathleen Walter and Dan Weil

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U.S. banks have improved their finances to the point that their capital positions are better than at any time in more than 40 years, former FDIC Chairman William Isaac tells Newsmax TV in an exclusive interview. However, he adds that the Federal Reserve's ultra-low interest rate policy poses problems for the industry.

“Banks have done really well over the past year, and that's because they have rebuilt their balance sheets,” says Isaac, now senior managing director of FTI Consulting. “Their capital is stronger than it's been in my career [more than 40 years]. They're doing really well.”

The KBW Bank (stock) Index has soared 21.8 percent during the past year.

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But that doesn’t mean banks are on easy street, Isaac says. First, the near-record-low level of interest rates makes it hard for them to make money, he says.

In addition, much of their recent income has stemmed from the release of the plentiful loan-loss reserves they built up during the 2008-09 financial crisis and its aftermath.

Video: Economist Predicts 'Unthinkable' for 2013 

“So when that runs out and when housing cools off a bit, in terms of refinancings, it's going to be a real struggle for these banks to earn the way they have been,” Isaac says.

Still, he's confident that the banks will prosper. “They'll find ways,” he says. “They have a lot of ingenuity.” Overall, the banking industry is stronger than at any time since the financial crisis, Isaac says.

“I'm very pleased with where the U.S. banking system is in terms of its strength.”

Still, banks face two main threats, he maintains. “One is the very harsh and unpredictable regulatory climate and the burden that has been placed on these banks,” Isaac says.

“If you do something wrong, wittingly or unwittingly, and the regulators come in, you can wind up being in a penalty box and not able to compete for a year or two years or three years and really fall behind the competition.”

That obviously makes for a dangerous environment. Bank regulations have created “reputational risk,” Isaac says.

The other threat is the economy in general, along with monetary and fiscal policy, he says. “The banking system can’t be stronger than the U.S. economy, and the U.S. economy cannot be a whole lot stronger than the U.S. banking system,” Isaac says.

He’s especially worried about the Federal Reserve’s easy monetary policy, particularly low interest rates. It can have many “unintended consequences,” Isaac says. “At some point that comes home to roost, and that is a great concern to me.”

It’s possible that the United States will see its credit rating downgraded again, Isaac says. “I hope that doesn't happen. I hope that we can get a Congress and administration working together to solve our problems.”

Indeed, it’s the political system that’s the problem at this point, he says.

“There's nothing wrong with this country that can't be fixed if we get the political system working properly. We are a very strong nation, we're a very strong people, we have great natural resources, we have all sorts of competitive advantages, including our technology.”

Video: Economist Predicts 'Unthinkable' for 2013

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