I am pleased, though not entirely satisfied, to report the results which follow and which reflect an improved, solidly profitable 2010 at M&T. Despite facing significant economic headwinds, we reported positive net income for the thirty-fourth consecutive year, continued to pay our regular quarterly dividends to shareholders, and significantly increased our regulatory and tangible common capital ratios. Net income and earnings per common share were higher than in the prior year for the first time since 2006. That in a year when 157 commercial banks and thrifts failed and many other institutions reported yet another round of losses.
M&T’s diluted earnings per common share last year were $5.69 and net income was $736 million. In 2009, diluted earnings per common share were $2.89 and net income was $380 million. The improved performance was the direct result of a $214 million increase in taxable-equivalent net interest income and a $236 million decrease in the amount we needed to provide for loan losses. Additionally, M&T’s results for 2010 included a net merger-related gain of $16 million (after applicable tax effect), or $.14 per common share. That net gain arose from our agreement with the Federal Deposit Insurance Corporation (“FDIC”) to acquire certain assets and assume the deposits of K Bank, based in Randallstown, Maryland, on November 5, 2010.
In contrast, results for 2009 reflected $36 million of net merger-related expenses (after applicable tax effect), or $.31 of diluted earnings per common share. The net expenses in 2009 were associated with the acquisition of Provident Bankshares Corporation (“Provident”) in May of that year and our agreement with the FDIC to assume all of the deposits and acquire certain assets of Bradford Bank (“Bradford”) three months later.
As in prior years, we also provide supplemental reporting on a “net operating” or “tangible” basis in order to help investors understand the effect of acquisition activity on M&T’s financial results. Net operating results differ from those reported above using generally accepted accounting principles (“GAAP”) in that the after-tax impact of merger-related gains and expenses, as well as the effect of core deposit and other intangible assets — both in the income statement and on the balance sheet — are excluded. Net operating income last year was $755 million, up from $455 million in 2009. Net operating earnings per common share were $5.84 in 2010, increased by 65% from $3.54 in the prior year.
Reflecting slow growth in the economy and tempered loan demand by creditworthy customers, average loans increased only modestly to $51.3 billion in 2010 from $51.0 billion in 2009. Similarly, average earning assets last year were $59.7 billion, little changed from 2009’s $59.6 billion. Average deposits, however, continued to grow, rising seven percent to $48.0 billion from $44.9 billion in 2009. That growth allowed for a paring of more expensive wholesale borrowings and led to taxable-equivalent net interest income of $2.29 billion in 2010 that was up 10% from $2.08 billion in 2009. The resultant net interest margin, or the ratio of taxable-equivalent net interest income to average earning assets, was 3.84% in 2010, an improvement of 35 basis points (hundredths of one percent) from 3.49% in 2009.
Despite continuing weakness in the overall economy, we experienced a significant improvement in our provision for credit losses and net charge-offs of loans. The provision for credit losses — which represents a reduction of our earnings for loan amounts that we anticipate will not be repaid — was $368 million last year. That amount was 39% lower than the $604 million provision recorded in 2009. Net charge-offs — that is, the amount of loans that we actually failed to collect — also dropped significantly. They tallied to $346 million, or .67% of average loans and leases, an improvement of $168 million, or 33%, from 2009 when net charge-offs were $514 million, or 1.01% of then average loan balances.
Although reduced from 2009, nonaccrual loans — the portion of our loan book about which we have the most trepidation — remained persistently high at 2010’s end. Those loans totaled $1.24 billion, or 2.38% of loans outstanding at December 31. A year earlier, nonaccrual loans had been $1.33 billion, or 2.56% of outstanding loans.
Reflecting additions through the loan loss provision and subtractions through net charge-offs, the allowance for credit losses at December 31, 2010 amounted to $903 million, or 1.74% of outstanding loans. At the end of 2009, the allowance had been $878 million, or 1.69% of loans outstanding at the time. As noted in this space last year, changes in GAAP now require that loans acquired through business combinations be initially recorded at estimated fair value, which is based on collectible cash flows that are net of expected credit losses.
Consequently, we do not establish an allowance for credit losses on acquired loans unless our initial projection of expected credit losses associated with those loans proves insufficient. With that in mind, if the impact of loans acquired in 2010 and 2009 that were recorded at fair value is eliminated, the allowance related to outstanding legacy loans (that is, total outstanding loans and leases excluding those obtained in acquisitions subsequent to the January 1, 2009 effective date of the change in GAAP) measured in at 1.82% of such loans. That statistic was little changed from 1.83% at the end of 2009 because we remain cautiously concerned about the overall state of economic conditions and the pace of recovery.
Noninterest income rose to $1.11 billion last year, an increase of six percent from $1.05 billion in 2009. That compilation reflects a mixture of higher revenues from deposit account services (that were partially offset by the impact from new regulations restricting our ability to offer overdraft protection to consumers) and lower mortgage banking revenues resulting from reduced origination volumes, our decision to retain for portfolio a higher proportion of originated loans rather than selling them for an up-front gain, and increased settlements related to M&T’s obligation to repurchase previously sold loans.
Reflected in noninterest income were losses on bank investment securities of $84 million in 2010 and $137 million in 2009. For both years those losses were predominantly due to other-than-temporary impairment charges related to our holdings of private-label residential mortgage-backed securities. Noninterest income in 2010 included a $28 million gain related to the indemnification of K Bank loans acquired from the FDIC. Similarly, noninterest income in 2009 included a gain of $29 million arising from the FDIC’s indemnification of acquired Bradford loans.
Noninterest expenses declined to $1.91 billion in 2010. That compares with $1.98 billion in 2009 when we spent $89 million to integrate Provident and Bradford with M&T. Excluding merger-related expenses and the amortization of core deposit and other intangible assets from both periods so as to provide similarity of content in those figures, noninterest operating expenses of $1.86 billion in 2010 were up just under two percent from $1.83 billion in 2009.
The efficiency ratio, or noninterest operating expenses divided by the sum of taxable-equivalent net interest income and noninterest income (exclusive of gains and losses from bank investment securities and the gains on the K Bank and Bradford transactions), measures how much M&T spends to provide service to customers and to generate revenue. That ratio improved to 53.7% in 2010 from 56.5% in 2009.
2010: MOVING BEYOND THE CRISIS
As gratifying as it is to report the earnings and other results cited above, it is sobering to keep in mind that such relative success came within a context of slow economic growth, high unemployment and little expansion of credit. Indeed, the improvement in our performance as compared to the previous two years does not mean that we are content; our aspirations for ourselves and, especially, the customers and regions we serve, are far from realized. We are mindful, specifically, that we have not yet returned to pre-crisis levels of earnings per share.
Nonetheless, it would be disingenuous not to express pride in the accomplishments of the past year, achievements which represent a distinct contrast with 2009. Last year in this space, I had to report that our net income was sharply down and charge-offs notably up — with no assurance that both trends would not continue. In 2010, they did not.
Indeed, our earnings per share were almost double those of 2009 and exceeded our annual dividend by more than two times, allowing us to build capital. As a result, tangible common equity per share increased by 17.7% to $33.26 while our net operating return on that capital (18.95%) improved. Moreover, the final quarter of 2010 was the 138th consecutive one in which we did not report a loss — a period which, of course, included the financial crisis that began in the fall of 2007. Since that time, our record of continuing to make dividend payments, without a decrease in amount, is matched by only one other commercial bank that was included in the Standard & Poor’s 500 when the financial crisis first emerged.
One would be foolish, indeed, to be blithely confident that the pace of such improvements will inevitably continue. Still, in that regard it is important not only to understand what happened at M&T in 2010 but why it happened — that is, why we were able to prosper and even undertake important new acquisitions.
In our case, adherence to a number of long-held tenets stands out as having played an important role. These include: our conservative underwriting and sound approach to extending credit; our longstanding discipline regarding the management and allocation of our shareholders’ capital; and our commitment to maintaining an efficient operating model that allows us to remain competitive in the communities we serve.
In the simplest sense, the key to the performance of any traditional commercial bank such as M&T is the profitability of the loans it makes. The good news for 2010, and our consequent sense that we have now weathered the worst of the financial crisis, rests on a corporate lending culture of consistent prudence and discipline, rather than one which swings from dramatic loosening of standards during booms — to disproportionate caution during busts. Our performance, in other words, is a validation of the M&T credit culture, one built on knowledge of local markets and borrowers in the regions where we do business.
We maintain regional loan committees, each deeply familiar with their own backyards but always guided by our overall credit standards. Each committee is comprised of a senior credit officer, a regional president, and experienced commercial banking managers who meet on a weekly basis. In New York City, where we have experienced minimal losses over the last three years, the committee is supplemented with outside real estate professionals with long experience as owners and operators in that market. The value of this approach is reflected in the fact that M&T continued to extend credit to its communities consistently through the downturn. At the same time, our charge-offs as a percentage of average loans in 2010 were lowest amongst, and totaled only about one quarter of those experienced by, our large regional and super-regional peer institutions.
Our performance, moreover, equally reflects the belief that the prospects for growth in any financial institution engaged in the business of furthering commerce is explicitly linked to the underlying health of the communities it serves. During a period in which many banks responded to competition by relaxing loan pricing and credit standards we did not, for we had the discipline during the bubble years (2005-2007) to walk away from some lending opportunities, rather than pursuing growth for its own sake. We are, today, realizing the benefits from turning away from the sirens of what seemed like low risk and high reward. Indeed, we take the view that if there is not enough demand from creditworthy customers, it is better for M&T to return capital to shareholders — who may well put it to productive use in sectors of the economy other than the banking industry.
Still, to grow and prosper, banks must do more than realize returns on sound lending past; we must keep our credit window open for new customers and new loans. Our record of prudence and performance has made it possible for M&T to do just that — to continue to do new business, at a time when there was widespread concern about how difficult it was to obtain credit. Over the three-year period since the onset of the financial crisis, we have extended some $52 billion in new credit.
In 2010 alone, we made some 139,000 new loans, totaling $17 billion in value, and representing a five percent increase over the $16 billion in 2009 loan originations. Moreover, some 8,250 of these new loans went to small businesses, which are the backbone of healthy communities. Indeed, of all banks in the country — including the biggest — we ranked sixth, improving from ninth a year ago, in the number of Small Business Administration (SBA) loans originated, notwithstanding the fact that we do business in just seven states and the District of Columbia. We were the number one SBA lender in Buffalo, Rochester, Syracuse, Binghamton, Baltimore, Washington, D.C. and Philadelphia.
The level of net income which we have reported depends not only on credit quality and net interest income, but also on our ongoing attention to the control of expenses. In this regard, our results reflected, too, an improvement in the measure of operating costs required to produce each dollar of revenue earned known as the efficiency ratio — which fell from 56.5 cents to 53.7 cents. In the aggregate, our increase in productivity allowed us to provide banking services to the businesses and communities which we serve more competitively and proved to cushion our investors from the full force of the economic downturn.
Let me underscore that the results noted above — as regards credit quality, prudent capital allocation and management, and efficiency — should not be understood narrowly as the result of responses to the financial crisis and its aftermath. Rather, they are the product of our long-established way of doing business — of a culture which has led to a consistently positive financial performance over more than a generation. In turn, that culture is attributable to a workplace which inspires the loyalty of the experienced workforce which is central to our success.
Indeed, the typical M&T employee has been with the Bank slightly over 10 years — which is more than twice as long as the average for firms like ours. Moreover, some 70 percent of our 13,365 employees own shares of our stock. In the aggregate, M&T’s directors, management and employees own or control some 21 percent of M&T — an investment which gives them a stake in performance not just for one quarter or one year but for the long run.
The approach described above, in essence the mistakes that we avoided, laid the foundation for four transactions completed in the last two years at a reasonable price and smoothly integrated by an experienced workforce. Taken together, Provident, Bradford, K Bank and Ideal Savings have brought us to the point where our Mid-Atlantic presence includes leading market positions in terms of number of branches, deposit share, middle-market lending, and extension of loans to small businesses. In short, our position in the Mid-Atlantic now mirrors, in most respects, our presence in our legacy markets in Upstate New York.
All of this began with our entrance into the Mid-Atlantic through our purchase of Allfirst Financial Inc. from Allied Irish Banks (“AIB”) in 2003. It would be an oversight on my part, were I not to acknowledge the orderly divestiture, this past November, of nearly a quarter of M&T shares outstanding, which had been acquired by AIB as part of our purchase of its Allfirst subsidiary. Unfortunately, in the wake of the banking crisis which had hit banks in Ireland particularly hard, our partner was forced, under duress, to dispose of its M&T shares, putting to an end a long and productive relationship.
It was the relative financial health of M&T along with our previous track record of successful acquisitions which positioned us to undertake the second largest partnership in M&T’s history this past November: the pending merger with the $10.4 billion Wilmington Trust Corporation, headquartered in Delaware, a long-established institution with its own storied history and loyal customer base. It is a combination which holds, in my view, exceptional promise for our current customers and for those whom we will now have the opportunity to serve in Delaware. In key ways, this transaction, due to be completed by mid-year 2011, fits the profile of many of our previous and ultimately successful acquisitions. We will add a customer base and network of branches (48) in a region contiguous to those we already serve — and in which we will, in one stroke, have the leading market share and become the largest retail bank in the state of Delaware.
At the same time that the acquisition of Wilmington Trust fits the pattern and criteria of our previous acquisitions, it is also distinctive. As the financial press was quick to note, Wilmington’s historic role in wealth management and corporate client services, and the fees such a role generates, is a business which complements, rather than competes, with our own strengths. Wilmington brings with it a highly regarded team of professionals, who have honed and refined their expertise with over a century of service to their clients. Indeed, at the time of the acquisition’s announcement, Wilmington’s $58.4 billion in assets under management actually exceeded those of M&T ($21.9 billion), even as its level of deposits ($8.3 billion) was far lower than ours ($48.7 billion).
In fact, upon completion of the acquisition, wealth management and corporate client services will represent the largest source of the combined company’s fee income. Such is the value of Wilmington’s reputation in this area that we plan to depart from past practice and retain the Wilmington name for this line of business. It’s our hope and expectation, moreover, that the complementary strengths of M&T and Wilmington will allow for deeper penetration into the customer base of each.
Our acquisition of Wilmington Trust is not, in all likelihood, one which we could have even contemplated in normal times. These have not been normal times, however. I said publicly at the time our partnership was announced that the strategic fit between the two banks is unusually compelling. This remains my strong belief.
REGULATION AND THE STATE OF THE BANKING INDUSTRY
Saying that we at M&T feel that we have put the worst effects of the financial crisis behind us should not be understood as meaning that the financial services industry broadly defined has returned to a safe and sustainable condition — one in which it plays its traditional central role of providing the oxygen of credit to American commerce. One cannot be that sanguine about matters when looking back on a two-year period in which 297 U.S. banks and thrifts were forced out of business.
It is true that our system of deposit insurance and regulatory oversight ensures that such failures can be handled in an orderly fashion. I cannot help but note, however, that, even as the financial crisis slowly recedes, our overall financial services industry continues to be characterized by attributes which contributed to that crisis — characteristics which distinguish it from traditional banking, which impose burdens on those banks (such as M&T) that pursue a traditional approach and which pose significant risks to the long-term health of the American economy.
Specifically, I am concerned about a powerful combination of factors: increased concentration in the financial services sector, where profits are driven by how well one trades rather than the prudent extension of credit that furthers commerce; a resulting outsized-compensation system which disproportionately draws talents away not just from traditional banking but other professions crucial to economic growth; a government regulatory regime which both enables what I have described as this “virtual casino” to continue, notwithstanding its role in precipitating the financial crisis — and which, by not recognizing the difference between Main Street and Wall Street banks, financially burdens the “real economy.”
This story begins with one of increased concentration. Banking, traditionally, has been a community and regionally based enterprise in the United States, one which relied on local knowledge to guide that crucial process of gathering and safeguarding customer deposits and in turn extending credit for enterprise and commerce. Done well, this intermediation ensures that those deposits are deployed into a diversified pool of investments and provides American households with liquidity and a return on their savings. Over the past generation, however, the profile of the financial services industry has changed dramatically.
In 1990, the largest six financial institutions accounted for nine percent of all U.S. domestic deposits and 14 percent of all banking assets. As of September 30, 2010, the six biggest banks accounted for fully 35 percent of such deposits and 53 percent of banking assets. Concentration, of course, inevitably raises the concern — so vividly realized in the fall of 2008 — that poor decisions at such outsized institutions can lead to “systemic risk.” In essence, the aggregation of risks in the hands of so few has the potential to impact the fortunes of so many. But, moreover, even absent an immediate crisis, the business model and practices of the major players in this reconfigured financial services industry pose significant problems for the American economy.
This historic change has led to a sharp distinction between the largest banks and smaller, traditional ones, as to their sources of income. Specifically, the largest bank holding companies have come to rely on a much broader and complex range of activities, in exchange for the prospect that higher returns might be realized. These activities include trading in all shapes and forms of derivatives, credit default swaps, mortgage-backed securities and other even more complex and exotic instruments (often associated with high amounts of leverage) — for which the collapse in value played the key role in precipitating the 2008 crisis.
It is an understatement to say that trading-based income is important to the largest financial services companies. In 2009, the six largest bank holding companies had combined trading revenues of $59.7 billion and pre-tax income of just $51.4 billion. In 2010, the story is similar. The top six made $75.7 billion in pretax income aided with $56.1 billion of trading revenues. Trading revenues are not only of considerable importance to the pre-tax earnings of these institutions — but serve to markedly distinguish them from traditional commercial banks, which are not typically involved in such endeavors.
To put these numbers in perspective, the trading revenues of these six institutions during those two years represented 92.8% and 93.1% of such revenues at all American banks. Indeed, during those two periods, the combined trading revenues of just four of the six banks amount to more than the total income, before taxes, of the rest of the entire U.S. banking system. The fact that an employee of an investment bank was apparently willing to engage in the theft of a software program designed to provide trading advantage, and that his employer felt it important to pursue legal action as a result, reflects the central importance of trading to these organizations.
Wall Street banks are not only central to such markets; a good case can be made that they came to exist in the first place in large part because of the desires and creativity of Wall Street itself. The development of these securities required, after all, enormous amounts of talent and capital, such that few firms can command. Indeed, according to "The New York Times", there are only five U.S.–based banks that meet the requirements to become a member of the exclusive clearinghouses involved in enabling such derivative markets to function.
These trading exchanges have been created ostensibly to provide cheaper, more effective financing for the overall economy. In fact, one can make a case that trading indirectly contributes to economic growth by facilitating more efficient financial markets. However, unlike traditional commerce, where success is defined by the creation of new industries and jobs through entrepreneurship and innovation, too often the core function of trading is redistribution of wealth to those who have a trading advantage, be it talent or capital, from those who trade out of compulsion (e.g. distressed entities) or trade with limited knowledge of the instruments being traded.
That such activity is being conducted by bank holding companies which enjoy government protection represents a profound departure from the traditional banking model — that in which lenders and creditors knew and had to trust one another and built relationships meant to serve our capital allocation needs.
But this is less to comment on the merits or demerits of such trading than to emphasize that those financial services institutions which engage in and rely on it are fundamentally different than traditional banks — and that the public should not view them as indistinguishable and government should not regulate and support them as if they were.
To categorize such institutions as of the same species as traditional commercial banks is akin to describing dinosaurs as simple reptiles — it is true but profoundly misleading. In fact, there are a number of reasons to be concerned that their growth is already leading to collateral damage of traditional banks — and, by extension, to the overall economy. Consider, for instance, the role that trading-oriented financial services firms play in making possible outsized compensation packages which have proven so unpopular with the public. Specifically, the rapid or even instantaneous recognition of huge trading profits have helped to build a system of bonus-based compensation, keyed to near-term results and out of proportion to anything in the past.
In 1929, in the wake of the most devastating financial crisis in U.S. history, compensation for employees in all sectors of the financial services industry was just 1.5 times that of the average non-farm U.S. worker. By the 1940s, that same ratio of wages narrowed to just 1.0-1.2 — and remained in that range until 1980. A major change, however, has occurred from 1980 onward, as select sectors of the financial services industry have witnessed a dramatic increase in annual compensation — and pulled away from other parts of the American economy.
By 2009, employees in the securities and investments sector, which includes investment banks, securities brokerages and commodity dealers, earned 3.4 times as much as an average U.S. worker. Indeed, the average 2009 investment banking compensation at four of the top six banks was at least 6.0 times that of an average American worker. Compare this to employees in the credit intermediaries sector, which includes commercial banks like M&T, who earned just 1.2 times the average non-farm employee, a level virtually unchanged from 1980 and below that of 1929.
When one compares trading-oriented financial services firms to other well-educated and well-compensated professionals, the picture remains similar. Consider the following: in the letter to shareholders in the 1990 M&T Annual Report, I expressed the view that executive compensation at seven of the country’s largest banking enterprises, what were then being called “money center banks,” had grown disproportionately. Specifically, I compared the numbers involved to those of the starting salaries of newly minted Harvard Business School (HBS) graduates.
At that time, based on data from 1989, chief executives at these top bank holding companies earned $2.8 million on average or 49 times that earned by a HBS graduate ($57,000) and 97 times the U.S. median household income ($28,906). By 2007, those ratios had changed dramatically. The top six bank holding company CEOs were earning an average of $26 million, or 192 times the starting HBS compensation ($135,000) and fully 516 times the U.S. median household income ($50,233).
Needless to say, something is out of kilter when the top bank holding company CEOs are being paid at such a great multiple of median household income — and, indeed, 2.3 times the average total CEO compensation ($11.2 million) of the top Fortune 50 non-bank companies. Beyond these numbers themselves, it is worth raising a common-sense question here. Should the chief executives of financial services firms logically earn more than those in the general commercial economy that they are supposed to serve, through efficient capital allocation?
Might we not, rather, expect that if capital is put to good use, management of those firms producing goods and services and thus providing greater value for the overall economy should logically be compensated higher than those bank executives assisting them? Indeed, only a generation earlier, in 1969, the compensation for those two groups was similar — $270,000 for bank executives and $276,000 for Fortune 50 non-bank CEOs.
This is not to suggest that trading in general should be limited or that remuneration to those who trade should be capped. There appears to be ample opportunity for personal financial gain, for example in unregulated industries such as hedge funds, which do not enjoy government support and where the 25 highest paid executives earned $25.3 billion collectively, or an average of $1 billion per person, in 2009. Leaving aside whether one should be able to generate so much wealth in such a short period of time, it is of greater concern when we allow the creation of a business model, predicated on wealth transfer rather than wealth creation, to have access to government protection and resources and thus linked their risk profile to that of traditional banks.
To emphasize: we should not be inherently concerned when successful business leaders are well compensated. But to take activities that are purely capitalistic endeavors and bring them into a regulated environment under the umbrella of insured protections is simply not prudent. Would it not be better to let those engaged in such activities live and die by the pursuit of their fortunes rather than impose a burden on the whole economy. The so-called Volcker rule, meant to disentangle the trading of big financial institutions from their more traditional commercial banking operations, represents a start toward disassembling this unsafe business model. But the problem is deeper and broader.
In all the current discussion about increased regulatory oversight regarding the prevention of future crises, too little attention has been paid to downstream effects, namely the economic burden borne by traditional commercial banks like M&T, and in turn the customers we serve. In this context, readers of this Message know that I have, for some time, been concerned about the extent of banking regulation and the cost of complying with it.
In 2007, for instance, I noted that fully $71 million of M&T’s expenses, or 7.4 percent of pre-tax income, were the result of regulatory compliance, including our obligations to report to such authorities as the Federal Reserve, the Office of the Comptroller of the Currency, U.S. Department of Housing and Urban Development, Financial Industry Regulatory Authority, U.S. Securities and Exchange Commission and state banking examiners. Since then, these costs have increased substantially; our latest analysis indicates that they have grown some 25.6 percent and now total $89.7 million.
In addition, M&T has had to absorb a new, larger set of costs imposed in the wake of and as a result of the financial crisis. Notably, M&T’s assessment paid to the FDIC — responsible for protecting depositors in the wake of bank failures — has grown from just $6.7 million in 2008 to $79.3 million for 2010.
We have also seen the development of post-crisis limitations on previously significant sources of revenue — the result of the undifferentiating public and legislative backlash against “banks,” whether on Wall Street or on Main Street. For example, the imposition of new regulations regarding overdraft fees (Regulation E) will result in a reduction in revenue of some $75 million on an annualized basis. Had they been fully effective during 2010, added together, these compliance and new regulatory developments would have amounted to over $244 million and represented 22.3 percent of our 2010 pre-tax income. Other pending actions, such as the so-called Durbin amendment with its price controls on debit card interchange fees, are difficult to quantify at this point in time.
However, this combination of increased costs and foregone revenues, coupled with undoubtedly higher capital and liquidity requirements which will result from the Basel III international banking standards, will lead inevitably to a higher cost of credit for bank customers. In fact, the recent proposal to designate all U.S. bank holding companies with more than $50 billion in assets as “Systemically Important” and the implication that they should be subject to higher capital standards regardless of the riskiness of the underlying activities in which they engage has likely already led to increases in our cost of extending credit. In other words, those who will pay for the sins that sparked the financial crisis will be the small business owners, entrepreneurs, innovators, and individuals who rely on Main Street banks like M&T.
When framed this way, one would hope that neither the White House nor the Congress would endorse such a policy — yet this is the net effect of regulations and costs imposed on traditional credit intermediaries in the wake of the financial crisis.
Nor is a foreseeable higher cost of providing credit the only way in which vital components of the “real economy” are eroded by policies and practices which favor and, indeed, provide government protection, for the too-big-to-fail financial services institutions. We should not be surprised to find that an industry which compensates its employees nearly three and a half times as much as the average American would lure talent away from such crucial fields as science, medicine, and engineering. In fact, the compensation differential relative to other sectors has widened from a generation ago.
In 1980, those with engineering degrees were paid 15 to 25 percent more than finance professionals with comparable education. By 2005, finance professionals with advanced degrees earned 30 to 40 percent more than engineers. It is no surprise then that nearly 25 percent of new employment-seeking graduates of the Massachusetts Institute of Technology and the California Institute of Technology (MIT and Caltech) chose jobs in the financial sector during 2004-2009. When those with engineering and scientific acumen at the highest levels are drawn, instead, to the capital markets, one fears that innovations — and, indeed, new industries — may be stillborn, as a result.
Such, I fear, are the bitter fruits of that which I have described above: a financial services industry unmoored from its traditional role in the commercial economy; a regulatory regime which protects outsized compensation just for sheer trading; a failure to distinguish between such activity and traditional banking, as well a failure to recognize that the activity of an institution, not its form, should be the proper focus of regulation. (Put another way, not all bank holding companies are created equal.) Surely this is not a “system” we would plan; it has grown up over time and has come to distort our labor and capital markets — and puts our economy at great risk.
Left on its current course, financial “reform” may do little to prevent or stem a future crisis nor relieve the regulatory burden on the “real economy.” Wall Street has spawned a culture where fortunes are created overnight and the people who work there are paid out of proportion to the rest of society. The temptation of easy riches has already taken many of the best and brightest away from professions for which they were trained and into which they would have entered.
The inability to differentiate between Wall Street and Main Street by Washington, as well as by the public at large, has hurt the image of Main Street banks and increased their cost of operations. One has to question whether we haven’t created the makings of the next financial crisis or, indeed, disrupted the balance in our society between rich and poor. Is this an issue any less important than the wars in Afghanistan and Iraq, the trouble with the Euro, the crises in the Middle East, the debt load of the U.S. itself, or the imbalance of trade with China?
Far too often, in the pursuit of financial reforms, we see those in leadership positions — whether in the public or private sector — putting narrow interests first, seeking either the votes of an aroused base or the profits which come with special advantages. We must seek to curb these tendencies. It is always good to report, as I have once again been able to do, that M&T is doing well. It is much to be preferred, however, for M&T to thrive as part of a thriving America. That is what we must hope for — and work to achieve.
This past year saw the departure of Colm E. Doherty, the former AIB Group Managing Director, from our Board of Directors. He had served as a director of M&T Bank Corporation and M&T Bank since September 20, 2005 until June 9, 2010, just prior to the conclusion of M&T’s relationship with Allied Irish Banks noted above. We thank Colm for his service and wish him, and all those at AIB with whom we had the privilege of working, well.
Robert G. Wilmers
Chairman of the Board
and Chief Executive Officer February 18, 2011