Artisan Unfiltered #8: Banking News and the Future of Regulation - Featuring IBA CEO Randy Hultgren

“Better legislation, not more legislation.” Just one of the points Artisan Advisors’ Jim Adkins and Dave Larson raised when they sat down with IBA President and former US Congressman Randy Hultgren, to discuss the recent bank seizures, the repercussions for the banking industry and where we go from here.

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[00:00:20] Jim Adkins: Welcome to Artisan Unfiltered. I am Jim Adkins of Artisan Advisors, along with Dave Larson. Joining us today is Randy Hultgren president of the Illinois Bankers Association, and a former member of the US House of Representatives from Illinois. Welcome, Randy. Thanks for coming

[00:00:35] Randy Hultgren: Thanks guys. Great to be with you. Thank you so much.

[00:00:38] Jim Adkins: Uh, today we're gonna have a discussion, a little bit of a twofold discussion.

We're gonna discuss some recent events in the banking industry, and then we're gonna discuss where the industry goes from. So just to kind of jump into the pool here, uh, Randy, I know that we received a number of calls, uh, when SVB and, uh, Signature failed. of clients wanted to know our opinions and, and what we thought about it.

What were your, what were your members telling you during that period of time when they failed?

[00:01:06] Randy Hultgren: Well, that's a great question. Uh, you know, it has been a busy couple weeks. Uh, I think the biggest concerns questions that we had was understanding what, what happened, what was really going on out at Silicon Valley Bank. What, what happened with Signature Bank in New York? You know, one of the other challenges for us is we've got banks in Illinois with similar names of some of them.

Uh, we've got a Signature Bank in Chicago that just does great work. We've got Republic Bank, so just clarification that these are absolutely different entities that the Illinois banks are strong. That they're doing absolutely the right things. They've got the right, uh, diversity and, uh, risk management, all of these different things in place.

So, uh, you know, our banks are doing well, but also was out in DC like that next couple days after the news came out. And that was an interesting time to talk to our elected officials. I think, uh, normally we only have 10 or 15 minutes with a lot of our members of Congress and they really stuck with us.

We had. Up, up, you know, 45 minutes an hour with some of our different representatives who serve on financial services bankers, letting them know how the banks in Illinois are really doing. So, uh, I think frustrating of a process. It also was a really important process to talk through.

[00:02:23] Jim Adkins: What follow up question to that is, you know, what, what were they saying? What were our members saying? The Illinois Bankers Association members saying about the deposit guarantee situation. I mean, I would imagine they had strong, strong opinions about that.

[00:02:37] Randy Hultgren: They did. Yeah. So just, again, it depends on the bank, uh, and the banker. Uh, you know, mid-size banks had come out with a letter, uh, initially saying they thought that all deposits ought to be insured. I think there were some of our smaller community banks that were frustrated by, you know, they were glad again that banking was safe, that the things were taken to kind of get, get us through that weekend, get us through that Monday and Tuesday, right after the crisis.

But I also think, uh, they're a little bit frustrated of. Being on the hook, uh, you know, with, uh, with the assessments and things like that to have to pay for huge depositors out in California where it seemed like there's some real problems and questions there. So, you know, I think there's differences of opinion right now.

It's one of the things I've talked about down with, um, in Arkansas right now, talking to the Arkansas Bankers Association. But again, figuring out, uh, from the state banking associa, What are, what are some ideas? You know, I think our members of Congress are open to listening to us, uh, having served there. I know there's this reaction that if something bad happens, we feel like we have to do something, we gotta pass the law, something's gotta be done, uh, to rectify that.

And I, our hope was, uh, take a breath. Let's really look at this situation. Let's find out what really. And then if there are things that we need to do changes, we can talk about it. But you know, the worst thing is to react where you have unintended consequences that come out when we react sometimes. So, uh, I think our bankers are different perspectives, but also agreeing that we're stronger together if we can come together, if we can have a common voice, there's, there's a positive.

[00:04:12] Jim Adkins: Right. Dave, I know you have some strong opinions about these things. What do you,

[00:04:18] Dave Larson: Yeah, well, I think I would, I would echo absolutely echo what Randy just said is, you know, move slowly and carefully so you don't cause an even worse problem. I mean, as you look, you know, this is gonna take some time for everybody to, to, to work through. And then a lot of people are looking at the failures, but.

First and foremost, this was a risk management failure. You know, this was really a, you know, obviously it's known for going down on, you know, on liquidity issue, but before liquidity came, the, the aggressive duration that they had had taken on with their bond portfolio, and then obviously the rapid growth, the deposit base. And, and, and then we learned that in the last nine months there wasn't a risk, um, you know, risk manager, even senior risk manager executive in place at the bank. And so with, you know, supervision, we've, we've had stress testing, we have, um, you know, well founded every bank of basic committee banks do stress testing and have alco committees and functioning, um, liquidity management policies and tools.

And, and those just appear to be very much set aside. And I think that really needs to be understood that the. What, what happened here and why, you know, and so obviously we wanna run, prevent it, but, but we, there's nothing, there's no surprise here as you look at it, that, of what, what actually occurred.

It's a question of why, why did it occur? And give, given the supervision we have and the tools of the regulators and the management teams. So, um,

[00:05:38] Jim Adkins: Yeah. I, I, I, you know, we've been involved, Dave, you, you know this, you've been involved too. We've been involved in hundreds of bank exams, uh, not only as bankers, you know, everyday bankers. When we were actually. Running banks, but also as advisors at, uh, at the firm here. And, you know, the rules are there, the guidance is there.

You know, I don't think, you know, can we always make religion legislation better? Sure, yes. You know, we want better legislation versus more legislation. That's what I'm saying. And I, I think a lot of what we have is good, but it seems like sometimes. Either, you know, sub management team's not paying attention, and our friends, the regulators are not holding their attention as they should and things get away from us.

And, but I'm not a proponent of adding pages and pages of. More legislation, I think we're, we have some very strong legislation, but if you don't enforce it, then you have issues and it's a two-part thing. Management's got to do it their part and the regulators got to do their part. And that's, you know, kind of the way I.

[00:06:51] Dave Larson: I I would add to that, Jim, too, if there was one piece here that was missing, you know, having studied this a bit, you know, the, the risk-based capital standards, you can basically hold treasuries and bonds with the 0% capital, and there, there was no duration risk component in the capital standards. And, and in, in this case here too, because this was a well capitalized bank. But they still, they're still required to look at sensitivity analysis and the risk to capital. And it didn't just happen overnight, it did happen rapidly. I think there was complacency that rates were gonna be leveled forever. Uh, you know, the fed clearly has been in an easy mode for a long time, but the point that they took on that duration, risk, basic models would, would've told them what could happen if rates went up, and how that would impact their, their capital.

And that's something we all, we all know about is, particularly community bankers. Most community bankers are very aware, I think, and careful about duration in their portfolios. Uh, but it, it clearly got away from them. The management team at.

[00:07:54] Jim Adkins: You know, Randy, I, you know, tapping into your legislative background. I always think about this. Do the, do the people up on the hill, do they understand how different banks are, you know, bank of America versus, uh, bank of, uh, you know, small town USA? Do they understand that? A knee, knee-jerk reaction at the high level of things?

At the, at the systematic. Uh, important bank level, how that affects, you know, mom and pop bank down in a small town USA. Do they have a good sense of how different institutions are?

[00:08:34] Randy Hultgren: Some do, although I would say some don't, you know, some don't have a good sense of, uh, the breadth of banking. You know, I think almost to a person, and there might be a few outliers in Congress, uh, senate, uh, especially maybe some house members who would just assume that we only had a handful of banks. Uh, in America, but I think the vast, vast, vast majority of elected officials appreciate the system we have in this reality that it's unique.

There's nothing else like what we've got in the world. And this doesn't happen by accident. You know, good bank banking policy is crafted. It's, you know, uh, as you both have said, you know, we look at things, uh, as times change and certainly this merit's examination what happened. I mean, a lot of money was lost.

Uh, it was scary for a couple days. There's lessons to be learned, but as I've said, uh, there's this, um, natural reaction that elected officials have, and I would say especially members of Congress, have that, uh, something bad happened. So we need to pass a law. Uh, and no, that's not always the case. Maybe, maybe something needs to be done.

But it might be too, that this was purely an outlier. Maybe there was, you know, the regulation was already there, but it wasn't properly enforced. Let's get the facts first. And that's really what we were telling our members of Congress when we were out in DC a couple weeks ago, is we want to learn from this.

We want to grow, uh, we want to be better. There's no industry. In the world, I would argue certainly in America that is so, uh, regulated as banking and we're good with that. You know, we, we want that, we want that confidence from customers, from communities. But, uh, there's a point too where you, uh, overregulation ends up hurting customers because it takes away options, you know, you drive.

It becomes more and more difficult for a small community bank to be able to stay. In that community, serving that community with the cost of compliance. Uh, and it is significant. And the smaller you are, the bigger percentage of your resources go to compliance. The bigger banks, you know, have got literally, uh, whole teams focused on that and they, you know, have a, a model.

If that works. But you know, again, there's just such an important value of, of banks, of all sizes, recognizing that this is a good thing that we've got in this nation for families. To be able to make a decision of who do we want to bank with? Who, who, what, what entity best fits our needs as a family, uh, for us to be able to pursue our dreams.

It's one of the things I talk about all the time of, I love it about banking and it's something, a part of my own story. Grew up in a small, uh, family business, a family funeral home, and it was a local banker that made it possible for my folks to buy that funeral home when I was in grade school, changed my life.

I'm convinced I would not have served in Congress. But for that community banker that made it possible for my parents to be able to buy that funeral home, family still owns it, still runs it literally thousands and thousands of families have been served by our family. Um, but it also, it just raised opportunity for me and so many other people.

So that story replicates itself literally thousands of times a day of bankers, uh, helping people pursue their dreams. But when we lose community banks, when we lose this opportunity of options, It ultimately hurts consumers. And again, that's, that's our message of, uh, two elected officials, two regulators, is be careful.

Uh, again, this, this system is precious of banking that we've got. Is it perfect? No, but it's really good. Uh, and it's very regulated and we're growing, we're learning. Let's, uh, take a breath. Let's learn. And, uh, we can target. If something needs to be tweaked, let's talk about it. But do it in a way that isn't going to drive, uh, more banks out of the ability to serve their, their consumer, their customers, their communities.

[00:12:23] Jim Adkins: Right. I mean the community bank. Community banking is shrinking, has been shrinking. In 85, we probably had, I don't know the exact number, 15,000 charters we're down to below 5,000. Now, I don't know what the exact number, 4,800 something like that. This is not good for the country. Um, what Randy, what can be done to encourage more community banks, more startups? You know, this was an issue. This, these failures were an issue of concentration. Uh, right. I mean, you know, this concentration in, uh, uninsured deposits and, and things of that nature. Concentration in, uh, bonds, long bonds that they shouldn't have had. You know, you look at the top 15 banks in the country, they control 75% of the deposits of our country.

The top 15. The top five control, I think 56%. It's weird, I guess, that regulators are always talking to the community banks and the small regionals about, Hey, you've gotta watch your concentrations. When our com, our whole system is concentrated in a high degree. So what can we do to encourage more startups, more formations?

 [00:13:47] Randy Hultgren: I, I agree with you a hundred percent. You know, I think it starts with, uh, the conversation of, uh, recognizing the value and importance of community banks and the fact that trajectory right now is the wrong direction. Very, very few banks have started in the last 10 years. You know, I think in Illinois it's like less than a handful, uh, you know, one, two or three de Novo banks in the last decade.

That's unacceptable when we've seen so many banks that. Are getting bought up so many banks that are closing their doors. So it's a challenge, you know, and there are things you can do, you know, I think it is, it's recognizing this is important to us. So what steps do we need to take to encourage people to start up new banks?

Uh, and I think it is recognizing that, you know, giving some flexibility, uh, with some of the, um, the, the capital requirements, some of the. Uh, some of the, um, supervision and oversight to, to have some windows of time for them to be able to get up and going while still doing it very safely. Uh, so a lot of it is having the conversation, recognizing how important it is, recognizing that if we don't do anything, we're going the wrong direction.

We really are pushing towards this concentration that when you didn't dig into it, no one wants. And I really do think even the, the bigger banks want to have this breadth of opportunity that, uh, banks of all size bring to them. So, uh, and, and reality is banks build. Expertise. You know, certain banks wanna focus on certain types of clientele, certain customers, certain types of lendings, certain types of, uh, work that they do that they become very good at and get known at, uh, and, you know, not as good necessarily of the family.

You know, kids, uh, opening up their first account. Those kind of things that are really important for us, uh, still having that in the community and. Being the first to give back. I, I mentioned I'm down in Arkansas right now. Uh, they've just gone through some brutal weather. Mississippi, same thing. Been talking to my colleagues over in Mississippi and Arkansas and it's the bankers who are really the first ones to step up and say, Hey, let's raise some money to help these families.

Uh, it's community bankers that are the first ones to run to the scene when something tragic has happened and we lose out as communities. Uh, We lose these community banks. I still, you know, I don't, I don't have statistics, but I feel like I've seen it enough traveling around my old district, traveling around Illinois, that when a community bank leaves that community, you know, and it's the last community bank that's gone, it's just a, a matter of time when that community is gonna really struggle to stay afloat.

That there still is this cornerstone aspect of a community bank to a small local community.

[00:16:27] Dave Larson: I, I, you know, I couldn't agree more, Randy. I was, I saw a figure recently from the aba. I'm sure you know it well. But you know, in contrast to, uh, to Jim's comment about the concentration of assets, uh, with the larger banks, 60, I think it said 60% of all small business loans are made by community banks and, and 80% of the farms.

And, and I think there's a, you obviously do a wonderful job and great work in getting, telling the story. It seems to me, in contrast to the, the, the failures recently, it's an opportunity for community banks to distinguish themselves that they have that story to tell they're local they're, they're conservatively man, they're local lenders.

They understand and know their customers, they know their communities and areas where they do business. They, they, you know, they, they've been there. They, they've lasted a long time. They're not rapid growth stories. Uh, mostly all insured deposits. They're really a, you know, a safe haven. Uh, and, and it's, it's, it's, I'm sure you're working with everybody to try to get that story out so everybody just don't, doesn't lump banks into, Hey, banks are all risky.

See what happened to these guys. And, and they're all the same. And it's, it, it's absolutely not the case.

[00:17:32] Randy Hultgren: Yeah, Dave, that's a great point. And I really do feel like as challenging as these last couple of weeks have been, I also think it's been really affirming for our members to be able to tell that story. You know, when customers have called and asked questions for our banks to be able to talk through, uh, who they are.

How, how they are made up, you know, the processes that they go through to make sure they're doing the right things. Just how vastly different structure wise they are from a Silicon Valley bank, you know, that had 92, 90 4% uninsured deposits where ours, you know, are just. A fraction of that. Uh, and even then, you know, they almost always have several contingency plans of things.

If there is, uh, some percentage of uninsured deposits, uh, they've got a plan in place to make sure that those deposits are protected. So, uh, as challenging as it's been for our bankers, I also think it's been a great opportunity for them to highlight their uniqueness and their commitment to community and, uh, that they're doing the right things that, um, Literally last couple weeks, along with talking to customers, they've been looking at themselves and saying, are we who we thought we were?

And to a, a banker, I'm hearing, yes. Uh, you know, what we're, we've made the right choices, we've been intentional, and we're in a good spot. I will say, you know, one thing that we do have to think about and talk about is, uh, as times change, uh, new challenges come up. You know, this, uh, the power of social media still is concerning to me of how a couple loud voices.

Consent, panic, uh, and, uh, we, we need to figure that out Again, laying the groundwork ahead of time of confidence that, uh, Individuals have in their community bank knowing that it's strong, knowing that it's solid, that they won't be swayed by something that flashes, you know, across their, their phone or their computer.

So, uh, we're gonna have to figure that out. That's a concern. You know, the other thing is love the convenience of ease of being able to, you know, electronic transfer. But you know, that was another thing that's, uh, startling the amount of money, uh, that flowed outta Silicon Valley Bank in a matter of 24, 48 hours, something like that.

Like tens of billions of dollars, uh, in, um, overnight on a weekend. Uh, you know, so those are, those are different challenges that, uh, we haven't, you know, the. Mr. Potter from, it's a Wonderful Life, you know, didn't have a, a Twitter account. Uh, and so, you know, it's, this is a different time. And so we just need to be aware of this, uh, paying it forward by telling our story, uh, building confidence, letting people know that, uh, Their institution is strong.

Uh, it's making the right choices. It absolutely is complying with regulation. Uh, we're not under-regulated. I would argue we're overregulated, but we're, uh, uh, we're appropriately regulated. But it's, uh, you know, just this adding on, piling on that really becomes so difficult and, um, counterproductive for a lot of smaller institutions.

You know, the other side of this we don't talk about very much. Uh, especially for smaller banks, they have to pull people away from customer service, uh, people, uh, away from helping customers with accounts to be able to comply with all the regulation. Again. You know what we need to do that we want, uh, confidence, we want our, our banks to be safe, but, uh, there is a cost that customers pay, uh, by.

Especially in a smaller institution where there's just not, there's limited resources and talent is a challenge for all banks right now to be able to find great people, to be able to serve customers. Uh, so, you know, it's more people are being called to do more things within a community bank.

[00:21:06] Jim Adkins: You know, you made a good point on the speed of how quickly the money left SVB and, and, um, signature Bank. Um, You know, Dave, you had some, you and I were talking about, um, this, you know, this latest banking debacle and comparing it back to the Great Recession and how different it was in terms of the pressures and the reasons for failure.

And, and you know, back, like we were saying, Dave, back in the day, it wasn't this liquidity. You wanna rehash some of what you talked.

[00:21:42] Dave Larson: Yeah. You know, it's interesting too. I was talking to a colleague who's been in the business a long time, really respect him, and he said, and I think this phrase has been quoted elsewhere, so forgive me if I don't give proper credit to someone, but, uh, credit means. And liquidity kills. And so what In, in the great recession, we saw the credit, you know, the, the, the mortgage backed security losses, the real estate credit down crushed bank, you know, hit the bank's hard on the, on the credit side.

The regulators were then able to take action. Before liquidity killed banks. You know, they, they came in and this was, you know, rough time. And by the way, there's a, it's wasn't always done fairly because they also, they, the big banks, uh, larger banks are, you know, they got tarp then, but the smaller banks were liquidated.

But all, all vast majority of them were without any loss to any deposit, uninsured, depositors. And there weren't that many uninsured depositors. Uh, the exception being Indie Mac. Uh, which, uh, which was, was the, as still to, to today, the, the largest, uh, uh, failure, uh, cost history, uh, I guess Washington Mutual might be enlarged.

Uh, so yeah. And, but in this case, they went, they, they skipped, there wasn't a, a credit issue. It was a, you know, the lost bond losses. That was a bank run. And they went right to liquidity, to liquidity crisis. And they've sell the regular. Never, you never want to get there. You want to be able to close the bank and say, here's a new owner.

Everybody's covered. They're operating on opening Monday and, and so on, and there's a cost of fund of x In this case, we saw them close the bank with, well, for within 36 hours, it pretty much came, came apart. They closed the bank and said, uh, we don't have a plan and we don't know how much you're gonna get paid,

[00:23:29] Jim Adkins: Right.

[00:23:29] Dave Larson: don't worry about

[00:23:31] Jim Adkins: Yeah. I mean in, in the Great recession there was stages of death, right? There was, you know, banks started hemorrhaging, uh, in terms of past dues, and then all of a sudden those translated to. Uh, loan, um, uh, loan, uh, losses, loan reserves, and then that's translated to reserves. And then, you know, it was a process, you know, and it took a while.

And we were at that point helping a lot of banks, you know, with that process and, and trying to, you know, make the situation better. Like you said, Dave, this, there was no processor. We jumped the line. I mean, it was like, From, you know, A to Z and with nothing in between. And, and that's, that's the real, real scary part about how quickly, uh, this situation went down to me.

It just didn't follow the, the blueprint that we thought was the blueprint back in 2000 8, 9 10.

[00:24:24] Dave Larson: Yeah.

Right. That's an interesting point of comparison too. I, you know, I like, I like numbers, so I'll share a couple here, but, cause I was looking at some of the research, it's really interesting to look back between 2008 and 2013, 500 banks failed, got a cost of 73 billion Mac was the largest of the component of that amount of that lost 20 billion with, with Silicon Valley and Signature.

We took out 300 billion in two days at a cost of 22 billion. So we took out just in a weekend, 30% of the cost of the, of the failures of the great Recession. You know, it's, it's just stunning to think about, about the, the difference there.

[00:25:04] Jim Adkins: Yeah. Yeah. No, that,

[00:25:05] Dave Larson: and that it, you know, and, and yet it's a, it's a different animal because the, the, these were the large, the large banks didn't fail.

Large few mean was mutual. There was some, but by and large, they got, they got. And in this case, they're, they're, I think the, the regulators just didn't, didn't see it coming. They kind of operated well, we, we closed a lot of banks in the past. It was never a problem. But you didn't close them where uninsured deposits were exposed.

[00:25:30] Jim Adkins: Right. That's right. Right. Hey, Randy, you were, uh, were you in Congress when do you, were there when Dodd Frank was there? Of course, you were right.

[00:25:38] Randy Hultgren: No, I came actually right after it. So it was, uh, yeah, so honestly it was, uh, part of the reason I ran, uh, was, uh, I was serving on our state legislature. I was in the state senate, uh, and was on our, uh, financial institutions committee in the, the state senate, uh, and actually working for a bond firm in Chicago.

Uh, and, um, yeah, just, uh, got so frustrated. By Dodd-Frank, and we just came off a, a mayor's election in Chicago, but uh, back then our mayor was, uh, Rahm Emanuel. Uh, and you know, and, and then he obviously worked in the White House, but, uh, you know, it had famously said he can't waste a good crisis. And that's kind of how I felt, unfortunately, was, uh, it was a, it was a horrible crisis, but, uh, I felt like there was a lot of policy that was thrown into Dodd-Frank that, that unfairly hurt community banks. I think there's some really important things, some necessary things, some good things certainly in that. But, uh, and we're seeing some of that again, uh, in this discussion where there's people who want to use this crisis for agenda pushing purposes. And we've gotta be really careful on both sides of just saying, Hey, Let's not do that.

Uh, let's, let's get the facts and then let's make decisions that are gonna be best for, uh, our communities going forward, for our families going forward. One thing I would just say too, just of, uh, appreciative of Artisan Advisors and others, just of, um, yeah, I think it's really important. I say this all the time to my bankers, is.

These are tough times, but you're not alone. Uh, you know, there's oth, there's people there who would love to help, who have good ideas, who are, uh, very engaged, you know, uh, have a historic view. Dave appreciates so much, uh, the history you've already brought to this. But, um, you know, I think that is important for bankers and boards of banks to know that, uh, there's, there's.

People out there that are willing to help 'em navigate through some of these challenging days. Uh, just again, to the, uh, to be strong, to be able to be there for many, many, many years to come. So encouraging bankers. Reach out for help, reach out for advice. Reach out to people who, uh, have been through this, uh, who understand banking, who want you to succeed, uh, and are gonna help you out, avoid any kind of challenges or pitfalls and open up opportunities for you to be more successful.

[00:27:56] Jim Adkins: I mean, I agree. Uh, and also, you know, uh, coming back your way, Um, supporting the IBA and your banking organizations is critical because back to Dodd-Frank, they came out with Dodd-Frank, and it had, it was, you know, just all over the place and it was geared to these big banks and all this stuff. And then the community, the, the banking organizations and the banking local community bankers railed, you know, they said, wait a minute, you are painting us with the wrong brush.

And so then they came back. Uh, I think it might have been two years later. I'm not sure, Randy, but they came back with some, some major changes as it relates as Dodd-Frank related to small, uh, community banking. Am I right on that?

[00:28:42] Randy Hultgren: yeah. I mean, it took a little bit longer. So honestly, it was one of the big purposes reasons why I decided to run. Um, and, uh, grateful. Uh, I was served on the financial services committee, a continued focus of ours while I was there was. Reform to Dodd-Frank. Let's keep the stuff that works, keep the stuff that makes sense, but let's talk about and, uh, maybe try and undo some of the stuff that really doesn't make sense or unduly burdens community banks who were never part of the problem, never caused, uh, the risk to the system, uh, that was there.

Let's recognize that not every bank is. Equal, uh, in their profile, in their risk profile, in their investments, and, you know, how they operate their bank. So, uh, we passed really good, strong reform to Dodd-Frank out of the house. My, my frustration, uh, as a house member, uh, always felt like Senate never could quite do as much as we could in the house.

So it came back, uh, not quite as strong, but, uh, Senate Bill 2155 was really good reform. Uh, you know, it frustrates me that there's some big voices out in DC saying that's the problem. Absolutely not. That couldn't be further from the truth. You know, not too many years ago that would've been called, uh, just technical cleanup.

Uh, that's really what, uh, 2155 was, was technical cleanup of, uh, something rushed through Dodd-Frank. Shoving it through to get it passed as quickly as they possibly could. There were some problems and, and misses and so we were going back to, to make it work better. But there's people out there that want to again, uh, have an agenda and wanna push certain things.

So, uh, but it took us a while. I would say. Um, it was affirming. I got to serve eight years and I think it was, uh, in my last term that we finally, I got to vote on Senate bill 2155. Uh, it's kind of funny how. Our last day of votes, we, uh, get ready. We've got all our stuff ready, we go and vote, and then everybody kind of rushes out to get to the airport.

Uh, that it was one of these last votes of the week. So I was rushing to get out and then it hit me as I was walking down the steps from the capitol. Did I really vote? Did I really push the right button? Did I vote no? And I meant to vote yes. So I, I stopped in my tracks. I walked back up, went in. I had voted yes, uh, but I also just kind of savored it. is pretty cool. Uh, you know, this was a big reason why I decided to run for Congress. Uh, it was something that I was engaged in and involved in, you know, this idea of representative government of the people, by the people. For the people it works. Uh, you know, I actually got to, uh, run for, uh, office because I was passionate about something, have an impact on it, and ultimately get to vote and have something passed that became law.

To me that was a, a little affirmation, uh, that it's still important, the system still works. Uh, you know, there still is, uh, that Mr. Smith goes to Washington every once in a while where you actually can, uh, uh, have an impact on something that you care about.

[00:31:29] Jim Adkins: Right. Well looking forward more. I know we kind of looked at, looked behind, but, uh, of course it wasn't that distant ago. It was only three weeks ago. It seems like it was months ago that all this happened going forward. Ha ha. Have you has the IBA I don't if this is a great question or not. Hopefully, uh, has the IBA staked out any kind of position when it comes to FDIC limit?

Not.

a position paper being drawn up? Are you, do you have any thoughts on that? Are you still kind of getting your mind around what you know, your organization's opinion of that?

[00:32:05] Randy Hultgren: Well, we're, we're definitely working on it. So, uh, we're focused every single day on working on it. Uh, you know, the challenge is, uh, and I was talking to one of my bankers yesterday, had a great, great conversation, uh, with one of our bankers, uh, who's like, we gotta do something right now. And I agree, but I also understand the process, um, that, uh, we need to be thoughtful.

The worst thing would be if bankers are splintered. Uh, you know that we've got, uh, a quarter of us who think this, a quarter of us who think this, a quarter of us who think this. I just know Congress enough just to say, uh, Hey, you guys keep arguing about this. Let us know when you got it figured out. We're just gonna do our own thing.

So I think it's really important, uh, to act. You know, quickly, but not in a rush, you know? So it's, uh, let's be focused on this. And so that's the process we're in right now of give us your ideas, what could work, how can we tie in, um, recognition of safety and security, and also tie in. Some institutions that are choosing to be a little more risky, uh, you know, that ought, they pay more.

Is there something we could do there? I get the sense also, uh, we al always have to think about what's, what's possible. Uh, I just think, you know, ensuring every deposit, I just don't see that happening. I don't see there being an appetite out in Washington DC to ensure every deposit. Uh, I've heard, uh, chairman McHenry, uh, talking about that from financial services already, of saying, you know, that's, that's not the direction we wanna go either we.

You know, maybe we need to continue to talk about what's the right level for F D I C insurance or are there backup programs that we could have that would fit with that. But, you know, I, I think, um, from elected officials point of view, they also want, um, incentive for BA banks to be making good decisions.

You know, that if there's this, uh, cart blanche of every deposit's gonna be covered, uh, you know, then I don't know that would happen, but there might be some. Oddity banks out there that might say, Hey, let's roll the dice. Let's go a little riskier on stuff because our deposits are gonna be covered anyhow.

So that idea of some moral hazard of making good choices, really caring about risk management, really caring about diversity of portfolios and deposits and lending. All of these types of things are good for banking. Uh, and so. So anyhow, I, I think we've gotta be thinking about what's possible. Um, and then in the next weeks we've gotta be coming up with good ideas and coming together.

I think, uh, you know, if there is, the reality is, uh, some of the headlines have gone other places in the last couple days. Uh, you know, some of the, uh, other news, uh, out there, which maybe is good. Uh, you know, that the focus is off of banks. So it gives us a chance to come up with some other good ideas and hopefully build a strong.

Voice, one voice coming from banking of saying, uh, if a change needs to happen, this is how it ought to take place.

[00:34:55] Jim Adkins: Dave, what do you, you know, you have strong views on risk management. You're, you've been a risk manager most of your career. You understand that going forward. What, what are some of the risk management issues that are now? Um, I don't know if they've, they've probably always been there, but they're obviously more important now.

And, and what would you encourage. As they're managing their balance sheets to take a hard look at or a second look at.

[00:35:22] Dave Larson: Well, I think it's, it's obviously great. Great question, Jim. And I think clearly what still stuns me about about these these two recent failures is just that nobody saw it coming. I mean, nobody, and yet, They did not just happen in 36 hours. It happened over, you know, over several years of, of a growth number.

Factors got with a rapid growth, aggressive investment strategy and so on, and the regulators were supposedly talking with them and so on. So I always go back to then, you know, so it's risk, risk management is, is all about, you know, the right, the combination, right of policies that, uh, that to start with really are policies and tolerance for. And down obviously to controls. You know, critical policies are of no use without controls. And then obviously reporting effective reporting, uh, so that the right people, whether it's the management team, the board, um, shareholders are all getting the right information. To understand what the risk is, how it's being managed, and how it's, um, whether that's, and then metrics, whether it's, so that's within the limits, the tolerance limits that have been set for the bank.

Uh, one thing I think that the, the, the enemy of risk management is, or more hazard, really is complacency. When you haven't had to deal with the risk for a long time, tends to be off everybody's mind. And so Silicon Valley Bank fed, you know, greatest Fed easing in history. Nobody's worried about higher rates.

Uh, and, and just forgets what can happen to long duration assets when rates change. And, but cause I'm, I, every bank has a little, uh, model that says, okay, if rates go up 300 basis points, what happens to portfolio and so on. And we did those for years and years and years in my world. And. No one, it was kind of a yawning session, right?

Cause oh my God, it's rates zero. How could they go up a hundred, 200 basis points? Oh, never have it did. And so I think, you know, next, you know, areas to watch out. I would certainly be focusing on credit risk. I think credit risk has a similar profile where we've, we've gone many, many years with, with below normal losses, virtually zero loss.

Even amazingly through the whole Covid recession, uh, again, cause of all the things that were done to, to provide capital. So I, I think I would absolutely be looking at your, your risk management processes and your, your, your people who are in charge of that and controls and make certain that everything is, is, is working and being monitored because.

That clearly that that was, and I'm not picking on Silicon Valley, but that was a major factor that was, did not happen, somehow did not happen. And so, um, you gotta make sure you have the right policies and controls in place, and that you're getting good information.

[00:37:57] Jim Adkins: Right.

[00:37:58] Dave Larson: Well, that's credit risk, uh, compliance, risk, uh, liquidity risk, those are all areas, every bankers, every, everybody understands what those mean, what they are.

Uh, and, uh, but you gotta get, you have to get above the trees. And then I, and then, and as always evolving to whatever environment you're in. I mean, very clearly right now there's, there's, in particularly with these, with these failures, I think in, in the, uh, rising rates, a lot of concern about commercial real estate.

And I, and, and community banks have a good chunk of the commercial real estate, uh, in, in their portfolios. Uh, and so I think it's definitely area where people want to get on top of it, um, and understand, you know, what, what they have. And how it's performing and um, and make sure that they're getting good real-time information on that performance.

[00:38:42] Jim Adkins: Well, I,

[00:38:43] Randy Hultgren: can I jump in real quick, Jim, on something?

[00:38:44] Jim Adkins: yeah, go ahead.

[00:38:45] Randy Hultgren: 1, 1 of the risks that I talk about, uh, that, uh, I, I absolutely agree with the risk that you talked about Dave, but another one is legislative risk. Uh, yeah. And that's a hard thing for bankers to, to wrap their, um, arms around of bad legislation. You know, how is that going to impact them, uh, reactionary legislation?

And again, that's where I think it's so important. Uh, That bankers are coming up with good ideas, coming up with plans. If we can, if we can do that, come together and then recognize again, our elected of officials work for us. Uh, let's reach out to them. Let's talk to them. Let's make sure they're hearing from us so that we can manage legislative risk as well coming out of a crisis like this.

[00:39:26] Dave Larson: Well, that's.

[00:39:27] Jim Adkins: Yeah. I, I, I think a bank, the banking system is, you know, the old stool, right? You've got three, three legs. You know, it's, it's the right regulation, it's the right, you know, industry management. And I think that consumer has responsibility here, right? So, I, I, I'm not for unlimited, um, deposit insurance. I.

It's dangerous. I think everybody, those three groups there have an equal responsibility for the banking system. You know, I should be worried, I should be concerned or not, not concerned. I should be interested in the shape, uh, quality of my bank. What is it are? Do they make money? Do they run right? You know, what are they rated?

You know, that should be very important to depositors and customers. And, you know, uh, so I, I, I think that it's more than just management and the regulators. I think as a society we need to know and make sure that we're banking with the right banks and, uh, I don't think we need to take that away from anybody.

[00:40:30] Randy Hultgren: Hmm.

[00:40:31] Dave Larson: Well, kind of goes full circle to what a lot of the work, Randy, that you're doing, which is telling the story not just to regulators, uh, or to DC or to legislators, but also for the community banks to tell the story themselves about how they're different, how they're, they're, just because they're not, you know, 500 billion doesn't mean they can't be a good place to, to have your money or deposits.

[00:40:51] Randy Hultgren: That's

[00:40:51] Jim Adkins: So, Randy, what can, what can our, you know, you have a lot of resources. I'm, you know, a tremendous amount of resources. Available to your members. By the way, if you're not, if you're an institution or, or a, um, uh, um, participant in the industry, an advisor or something like that. You should be. If you're not a member of the I B A, you should be because it's, it's such a worthwhile organization.

Randy. Um, what are some of the resources that are available? I know, and in addition to that also, if you would like to give us an idea of some of the important events that are coming up for the I B A over the next few.

[00:41:33] Randy Hultgren: appreciate that so much and, uh, we're grateful, a wonderful partnership and kind of circles back again, uh, what I was saying earlier is that, uh, It's, it's a team. It's certainly the IBA, but also, uh, our partners, uh, members, associate members working together for this industry that we love. And so many of us have stories where it's changed our lives, uh, given us just a very fulfilling career, but also the ability to help a ton of people pursue their dreams.

So this is important. So, uh, Important resources. One thing an ask I would have is I do think these next couple weeks are key for ideas. Uh, I talked with the other, uh, state banking association executives. Every week, sometimes a couple times a week. Uh, it's a good place to kind of gather information. Uh, we also talk with national entities of communicating with, uh, ABA and I C B A and um, CBA and some different banking associations on the national level.

But, you know, the state banking associations have a really direct connection to. Banks, uh, in our district closest relationship, but also making sure our banks have relationships with elected officials. So we feel like we do have some responsibility as bringing together some ideas of what do we learn from this?

What can we propose, uh, to our elected officials, if anything, of how to go forward with this? So let us know those ideas. I think in the next couple weeks, that's really important. And then we've gotta figure out ways to get on the same page that, uh, when our message is splintered. Uh, it is not as effective and it's more likely it's gonna be written off.

So, uh, let us know your ideas there. A couple things coming up for us. Uh, we always have, you know, just great education resources, training. Um, we also have fantastic lawyers, uh, who help with compliance. So if, if anybody's struggling with the question or things like that, I honestly believe we've got three of the best banking attorneys in the country that work for the Illinois Bankers Association.

So let us know on that. And then we're super excited. Uh, we've got our, uh, annual convention. That's coming up this June. Uh, it's June, uh, 21st, 22nd, 23rd. It's in Chicago at the Fairmont. We're also really excited. We're trying something new. Uh, we're gonna be joining with the Ohio Bankers League, uh, to be able to do a joint convention together.

So we're really excited to have Ohio bankers coming over to Chicago, joining with us again, uh, so much, um, opportunity to build friendships, build relationships, but learn from each other. What's working, what's not working, and how can. Together more effectively for the good of this great industry.

[00:44:04] Jim Adkins: Great. Dave, any parting comments?

[00:44:09] Dave Larson: I, I, you know, it's, it's, uh, in interesting times. It's still early, and it's great to see Randy, how engaged you guys are really, and being thoughtful and thinking it all through. Organizing. I think that the industry needs to, a voice is so important. It is early. Uh, you know, we, but guess what makes this business so interesting?

Because we never know exactly where it's gonna go, but, um, it's business's all efforts are worthwhile. So great to see everyone come together to keep legacy moving forward.

[00:44:38] Jim Adkins: Great. Well, looks like we're out of time. I want to thank Randy for being, uh, uh, Dave and my guest today. Uh, if

[00:44:45] Dave Larson: My pleasure.

[00:44:46] Jim Adkins: you could always reach out to Randy. Randy, your, your web address, is it just simply illinois.bank?

[00:44:52] Randy Hultgren: Yeah, Illinois Bank, so our hol, Illinois Bank or just Illinois Bank. Um, and, uh, so it's super easy to find us really great resources. We've got a new website that's, uh, super accessible, so look us up if you've got questions on events or, uh, specific questions or ideas, you know, of, uh, what we can bring to elected officials that, uh, is palatable to banking.

Um, and just helps us through challenges that we've gone.

[00:45:16] Jim Adkins: Right. And, uh, always, uh, if you have questions on anything, you can reach out to Dave or me. Uh, our uh, uh, email address is our artisan advisors.com. So with that, uh, again, thank you Randy. Thank you Dave and uh, everybody. Have a great day.

[00:45:32] Randy Hultgren: guys.

[00:45:33] Dave Larson: Thank you, Jim. Thank you Randy, so

much appreciate. 

[00:45:35] Randy Hultgren: Jim. Good with you.