Federal Tax Changes Helped Prevent Even One Bank Failure
By Catherine Lackner
For the first time since 2006 (and only the third time since 1933), no US bank failed last year. Observers cite many reasons, chief among federal tax reforms that make banking more profitable.
“Banks had a great year, and tax reform played a substantial role in that,” said J.C. de Ona, Centennial Bank president for Miami-Dade County. “They have more capital and are paying lower taxes, so that adds to the bottom line.”
Some have also benefited from increases to the prime rate that the Federal Reserve Bank has enacted, he said. “Banks that have variable rate loans on their books became more profitable because the margins were better. And overall loan growth is up.
“I wouldn’t say it’s the new normal, exactly, because there may be years ahead that are not as rosy,” Mr. de Ona said. “But banks are much healthier than in the past.”
While he said observers are watching for signs of slowdown, this year got off to a good start, he said. “The industry is healthy and there probably won’t be a downturn this year. Things are good.”
Tax reform gets most of the credit for the banking industry’s robust health, with most of the benefits flowing toward the big national banks, said Harold (Hal) Lewis,
co-founder and co-managing partner of the Pathman Lewis law practice.
“It’s primarily the changes in the tax code, and also some lessening in federal oversight. The benefits flow to all banks, but the tax cuts helped the JPMorgans of the world enormously.”
The current administration promised to repeal Obama-era measures to subject the banking industry to more oversight. “There’s talk of changes, but there will probably be some back-pedaling. All things need to be tested over time.”
Smaller banks will be the winners if some of the more onerous oversight measures are loosened, he said. “Smaller banks and community banks feel the effects of the regulations much more than the big banks do,” Mr. Lewis said. “Compliance is very daunting for them, and it affects their ability to grow and be profitable.”
“Having no bank failures in a year isn’t a one-off; it’s happened twice before,” said Andrew (Drew) Demers, partner in the Weiss Serota Helfman Cole & Bierman law firm. “But it’s not common, either.”
Most of the bank failures in recent memory came between 2007 and 2012, and most of those were associated with lack of oversight, he said. “Some banks had a high concentration of loans in one sector; they were overly weighted in residential real estate.” But because of more stringent oversight after The Great Recession, “we should expect fewer bank failures in the next few years.”
Banks are more diversified now, Mr. Demers added. “Regulators are more attuned to it. There are watchful eyes making sure banks are solvent and there aren’t a lot of problem loans.”
A strong economy also helps banks, he said. “Consumer spending is high, people feel good about the economy, and banks are thriving.”