PNC Financial Services is the middle child of banking.
Its operations are too vanilla to be compared to Wall Street giants, yet PNC faces similar regulatory scrutiny -- born of its brethren's bad behavior. And while PNC might run like a community bank, the $300 billion outfit is too large to catch any of the breaks those smaller banks get.
Against this backdrop, the Pittsburgh-based "super-regional" bank has been trying to distinguish its place in a post-crisis world where size means everything. PNC is the seventh-largest bank in the country, with a branch network that extends from Pennsylvania to Missouri. It has all of the trappings of a traditional bank -- checking accounts, mortgages and business lending -- with a few added features, such as wealth management and a stake in BlackRock, the world's largest asset manager.
Taken as a whole, PNC's business is a lot simpler than the multinational investment outfits at the head of the megabank line. And the bank is at least five acquisitions away from coming close to any of those trillion-dollar firms.
So, how does PNC fit into the anti-too-big-to-fail regulatory landscape? Check out what PNC chief executive Bill Demchak had to say on this and more when he recently sat down with several news organizations in Washington.
How does PNC define itself?
What we really are is a Main Street bank. It sounds pretty simple. But we're basically a bank that takes deposits, lends money, helps clients move money around through the payment system and helps them manage their wealth and retirement resources. We're not somebody who is a big proprietary trader. We're not in 56 countries. We don't store aluminum in some unlabeled warehouse in the middle of the country. We don't have dark pools and other things that I don'e even know what they are. We're a pretty basic bank.
When you hear the debate about too big to fail or too complex to manage -- we have 98 percent of our assets inside the bank as opposed to the holding company. Our legal structure is very simple. We're not cross-border with lots of legal entities stretching across oceans that could become complex in resolution. And our size, in terms of having $300 billion in assets, the size has almost nothing to do with the complexity of what we do. I could be half the size I am or twice the size I am: The basic inherent risk or structure of what we do doesn't change.
The regulators struggle with trying to find a definition of when is something large and when is something complex. So you see they put out the supplemental leverage ratio, and they put a $700 billion threshold on it. But did they choose the $700 billion because of the size or because it happened to fit a population of banks that were more complex than people smaller than that?
We have lots of these lines in the regulatory environment. We have the $700 billion line there. We have the global [systemically important financial institutions] line, which largely hits the same number. We have the $250 billion line for advanced approach in Basel. You have a $50 billion line, which seems to be the banks that don't have to be inside the stress test. It's somewhat random how they choose and what the line actually means. Are they going after size? Are they going after complexity? Are they going after systemic risk? Because, depending who you talk to, you get a different answer on that.
Regulators have said they don't care about size as much as complexity. But do you worry that if you get any larger, the simplicity of your business won't matter?
They are correct in saying ultimately size does matter. Even the simplest institution, if it had 25 percent of the nation's deposits, becomes systemically important. I don't think you have to get that large, but there is some line, and I think [regulators] struggle to define it. By the way, I'm sympathetic to them. I don't know how I'd define it other than individually understanding the bank and making a determination.
Now that various capital rules have come out, what do you consider to be the most onerous?
One of the ones we've been fairly vocal about is the [liquidity coverage ratio] proposal (that rule requires big banks to set aside assets that they can quickly turn into cash to survive a crisis). We happen to, along with U.S. Bank and Capital One, fall above the $250 billion line, so therefore we'd be subject to 100 percent compliance on LCR. The next guy down is at 70 percent -- Fifth Third or Key Corp, that does exactly the same business that we do. The line was drawn in a way that doesn't make sense at least in terms of the differentiation between the firms.
You're not allowed to rely at all on the discount window. Yet we have a balance sheet of discount-window eligible assets that would easily fund at least some portion of our LCR requirement, were we allowed to do it. For a bank that has the majority of its assets in the bank and not the holding company-- so our assets are discount-window eligible-- that is material in terms of liquidity.
If I was an investment bank in New York, most of my assets would be in the holding company because it's a broker-dealer subsidiary. The discount window can't help that. We've been pretty vocal about why the Federal Reserve system and the discount window was set up to allow this inherent leverage in the banking system of your lending-long-and-borrowing-short effect. That's what keeps our economy going. Inside of the current LCR, they are basically saying that no longer counts. They are almost doing away with that window.
The implications of that aren't terribly well understood. If you look at the deposits at the Fed from the banking system -- last I looked it was $2.5 trillion --- and everybody is writing about why aren't the banks lending. Well, we're lending, but the LCR requires us to have the $2.5 trillion at deposit at the Fed. Now think about the other side of what the Fed is doing, buying Treasuries and mortgages. So they own $4 trillion in Treasuries and mortgages. The theory being that you're going to introduce money back into the money supply, so you're easing. But in practice what they're doing, they put that out, and it comes right back to them through the LCR requirement. So you've effectively slowed the velocity of money. It's not clear to me that the monetary policy and the supervisory policy are in sync on the implications of that.
What did you think of this latest round of stress testing?
It progressively got more difficult in terms of the documentation they want, the governance they want you to go through as it relates to communicating with your board, validating numbers, the sophistication of the models and the back testing of the models. We've kept up. It's a lot of work. And we're not perfect. We had no objection to our plan, but we, as well as everyone else, got a lot of feedback on things we need to do better next year.
One of the things I think you'll start seeing enter the popular press and equity conferences is we spend a lot of time talking about what's your tier 1 common ratio ( a measure of balance sheet strength). Ours was 9.2 percent at the end of the fouth quarter. Other people's were higher. So they would say they are better capitalized. Well, the ratio that matters is the one that is after the stress because that takes into account the riskiness of your balance sheet. If you looked at the loss content -- how much did the capital ratio drop during the stress test -- other than the two big processing banks, State Street and Bank of New York , who really don't have risky assets, we dropped the least.
It's an interesting exercise. There's good parts of it that you learn from, and there's other stuff. I think our filing was 17,000 pages long.
Do you feel you have a handle on it now?
[Regulators'] expectations increase every year. They're kind of clear on what they're looking for, so it's not necessarily a mystery to us that we need to do better on model-validation back testing. We knew that ourselves.
They always throw a loop in there. This year, they came back with feedback that they thought we needed to grow our balance sheet through the stress because when they looked at prior periods of stress, banks' balance sheets grew. And, in the stress, all the banks like us modeled that our balance sheet would shrink. Well, they grew historically because they only measured the surviving banks who did acquisitions. So PNC doubled because we bought National City, not because we actually grew loans. If you look at their numbers versus our numbers, that's largely the difference.