One on One with John Garvey, Head of U.S. Banking & Capital Markets at PricewaterhouseCoopers
Wednesday, May 27, 2009
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SUSIE GHARIB: Some good news, for a change for the nation's banks. The FDIC says overall bank earnings turned positive in the first quarter of this year, after massive losses at the end of last year. Still, 21 banks failed between January and March. Three hundred and five banks are now on the agency's problem list and it admits there will be more failures. The Feds are working on a plan to help banks sell troubled assets. But FDIC Chairman Sheila Bair says the companies may not need as much help now.
SHEILA BAIR, CHAIRMAN, FDIC: The good news is that banks have been able to raise a lot of new capital, even before taking more aggressive steps to cleanse their balance sheets. So the incentives are sell maybe less, but that's for good reasons because they've been able to raise new capital. So there are still some issues that they're working through.
SUSIE GHARIB: Joining us now with more analysis of the health of the banking sector, John Garvey, the head of U.S. banking and capital markets at PricewaterhouseCoopers. Hi John.
JOHN GARVEY, HEAD OF U.S. BANKING & CAPITAL MARKETS, PRICEWATERHOUSECOOPERS: Hi.
GHARIB: Let me begin just by asking your opinion, your description of the health of the banking sector.
GARVEY: Well we definitely see some improvement in terms of the underlying profitability, some stabilization in the economy which is obviously good and then the loan losses and the like are starting to, while still high historically, starting to stabilize. So this is all very good news for the banking sector.
GHARIB: But the head of the FDIC Sheila Bair also admitted that troubled loans continue to pile up on bank books. How serious is that?
GARVEY: I think the concentration has been on the largest banks, the top 19 or so and now they're moving into the community banks and the like. And there's still a lot of work to do there from a clean up perspective and stabilization.
GHARIB: Now you and your firm have proposed a solution to get out of this banking mess using sovereign bad banks to use your words. How would that work and why is that needed?
GARVEY: Well, I think there are two points to the research and our paper. We basically show that conclusively a government run bad bank which takes the assets from the other banks, the bad assets, toxic assets and works them out and leaves good banks to encouraging lending and resume normal operations is the policy choice that has worked time and time again. In the current structure, we also see the opportunity for the government to guarantee some of these toxic assets and encourage investors to buy those assets directly from the banks, thereby cleaning the balance sheet and avoiding some of the bad bank scenarios that others have had to engage in in the past.
GHARIB: What about the Treasury's plan for these public/private partnerships that would also buy these toxic assets and get them off of banks' books? Do you think that that would work? How is that different from what you're proposing?
GARVEY: Well, it could be incorporated within the Treasury's plan. Right now, there are no, you have to get a willing buyer and a willing seller. So I think they're working on getting investors interested in buying the troubled assets. They now have to focus on getting the banks to sell those troubled assets and without incentives like creating tradable guarantees for those assets, it's going to be tough for the banks to want to sell those assets because they feel that they're undervalued today.
GHARIB: Now, I know that you have a lot of your clients are large banks and you also advise the government. What do they think of your proposal?
GARVEY: Well I think everyone is very, very encouraging of bringing these ideas to the forefront. These ideas have been discussed with our clients, with the various government agencies and I think they've contributed to the policy debate to date and will continue to contribute to the policy debate going forward. And I think that's the intention of our paper, really, to do that.
GHARIB: Now banks have been through the stress test. They're now raising new capital. What else do they need to do? Do they need to do more?
GARVEY: Well, I think ultimately the paper shows that until the banks are cleansed of these toxic assets, normal lending and banking functions cannot proceed at the level that's necessary to support the economy. So we think there still needs to be more done to remove those troubled assets from bank balance sheets.
GHARIB: What is the status of lending right now whether you're talking about directed to consumers or to businesses?
GARVEY: Well, everyone is in, you know, capital conservation mode and they're very careful about their lending. I think there's been a tightening of standards across the board. So lending is still proceeding - - lending is still declining and credit is still declining, credit availability and the like and will continue to decline until this troubled asset, you know, issue is resolved.
GHARIB: So we still have a ways to go. Thank you so much for coming on the program.
GARVEY: Thank you.
GHARIB: My guest tonight, John Garvey of PricewaterhouseCoopers.
