Jim Aramanda, TCH: You’ve often told the story, including in your recent shareholder letter, about how you started your career as a teller and how that experience taught you the critical importance of trust in the banking industry. Can you play through what you saw firsthand as a young person starting out in banking and why trust is, in fact, so essential to what banks do?
Richard Davis, U.S. Bancorp: I’m remembering it more now than ever. When I was a teller, I saw that when people approached you for transactions such as cashing checks or getting money, that was pretty straightforward. But the minute they started asking questions about anything else regarding their financial circumstances, I realized that people probably know less about the opportunities and options for their financial management than anything else in their life. People have to routinely touch their finances and yet I saw that people often don’t get really good financial guidance. I’ve told the story of how being a banker is an “accidental occupation.” Most people didn’t start out as a kid to be a banker, but we ended up loving banking and feeling there is a real mission to it. If you want to be a doctor, you go through your whole life, you perfect your craft, and then you help people get through life. Oddly enough, bankers can do the same sort of thing. So I realized that trust was essential because customers would literally look at you and ask, “What do I do now?”
Every employee in the bank benefits from their experience by knowing what a bank really does. Unless you know how it all fits together, you can’t possibly be as efficient and effective at your job.
As a young person, I realized it wasn’t important to have the answer to every question, but it was important to know which expert at the bank could satisfy those questions. For me, it started that way by realizing how many questions I couldn’t answer, but that it was also important to connect customers to a trusted source.
Aramanda: You’ve been running U.S. Bank for a decade. What did you do to ensure that that fundamental building block of trust made its way throughout the entire business, and what did you do to ensure that everybody understood their obligations built around trust to the bank’s customers?
Davis: There’s a book called All I Really Need to Know I Learned in Kindergarten. In my career, much of my early learning, I feel like I learned on the teller line. If you know the kindergarten book, it talks about how you learn the basic fundamentals of being fair, sharing, taking a nap when you’re tired, eating well, and using eye contact. There’s a lot to be said for the basic, but critical, concept that every employee in the bank benefits from their experience of what a bank really does. Unless you know how it all fits together, you can’t possibly be as efficient and effective at your job. Thinking back – this was the ’70s – I would ask everyone in the branch all sorts of questions: Why is it we do this? If everyone’s taking money out of the bank, then who’s making money? The answer to those kinds of basic questions was routinely, “Stop asking questions, and do your job.”
I was informed by that experience and, to this day, every time we have a large group call or a gathering of employees, starting with me, we practice using phraseology that’s in layman’s terms. We talk up to the employees. We express to them that there’s more to what they’re doing than they see, and we tell them how it fits together. I promise you, they’re entirely more effective in their job if they understand how it fits into the bigger picture. So, I’ve been spending 41 years helping tell the story of what we all do in its entirety as opposed to the pieces that don’t necessarily look like they come together.
Aramanda: You’ve reminded me of business culture in the ’70s – a very different time back then, and not for the better. But you’re right: treat your employees like you would your kids. You want to make sure they get a great education and are continually getting smarter.
Davis: By the way, there is an additional challenge today in that probably 60% of bank employees have never worked in an environment that didn’t include low-interest rates. That number is probably higher on the front line. So think of the number of people who don’t understand that the current ultra-low-rate environment isn’t normal. When I was a branch manager in the ’80s a customer would walk up to my desk and say, “I was sent over here from the teller line because I have $10,000 I just got from my grandmother, and I don’t know what to do with it. So I can put it in a checking account at 0%, and I guess you have a savings account at 3%, but they were telling me something about a CD that has some time commitment to it, paying at something like 4%. But then the lady over there says she sells mutual funds and annuities, and if I don’t care about the FDIC insurance, I can have 5%. So, what am I supposed to do?”
I remember those conversations. I knew exactly how the waterfall of risk and reward and time and money worked. No banker has practiced that conversation in 10 years. After a few more interest rate increases, we are actually going to have savers that start caring about what they make on their savings, whereas, up to this point, they haven’t had that option. Likewise, people paying the minimum payment on their credit card or their adjustable rate mortgage are going to start worrying that they might not be able to make those payments. So all of a sudden the world just kind of tips like a teeter-totter all at once. I project that we’re about 150 to 200 basis points away from that tipping point when reactions start to go the other way, but no one has practiced that on the front line in any bank in the last decade.
Aramanda: Interesting. We’re obviously all focused on the larger economic impacts of a normalized rate environment, but that’s some great perspective on the implications of institutions, including banks, not having worked in a more traditional yield curve for a good number of years now.
Davis: Just to drive this home, Jim, what was the rate on your first home? Do you remember?
Aramanda: Oh, yes, it was 18%, 19% in the Carter years.
Davis: Mine was 13.75%. If you tell anybody that today, they literally glaze over like you’re just making that up, but then you also tell them there were CDs at 8% and they don’t believe that either.
Aramanda: Still focusing on the theme of trust, you have also served as a spokesman for the industry, including during your tenure as Chairman of The Clearing House, in the years following the financial crisis. We know that the experience of the crisis weakened trust in banking. What have we done as an industry to remedy that and why should people have renewed trust in banks today?
Davis: I would tie this answer to the previous answer and just say the banks need to get out in front when it comes to trust by really spending critical time on financial literacy – both for the greater good of the American people and of their own employees. For instance, on circumstances like interest rates changing directions, banks can be and need to be guides and stewards for our customers.
So, I do think one of the ways we can improve our reputation at this time, particularly as rates start to move and people start to adjust to a new interest rate world, is that we get ahead of it and educate them on their own personal circumstances. I think banks should get much more aggressive on financial literacy in general.
Aramanda: Good counsel. Your tenure as CEO was during the most tumultuous period in banking since the Great Depression. The banking industry has been through a massive overhaul of banking regulation, and we have had a GDP that has never gotten above 2%. Yet you were still able to grow U.S. Bank into the country’s largest super-regional. How were you able to do this? What were the biggest drivers of the success?
Davis: Being lucky and smart is good. And being smart enough to know when you’re lucky is also good. I say that because we went into the recession as a strong, large regional bank. We came out stronger in part because of things we hadn’t done leading into the downturn. The reason I say it’s partly luck is we never really sat around the table and said, “wow, subprime is bad business,” or “single-signature mortgages are a really bad idea,” or “auto loans at the lowest level of quality are going to bite you later.” We really never had those conversations, but we also never left our basic template of what we believed you should do to run a strong bank, which is what we call “CPR.” We’ve had this phrase for my 10 years running U.S. Bank: consistent, predictable, repeatable.
If things weren’t consistent and predictable and repeatable, we passed. So, subprime would have failed our test in 2004 because we knew it wouldn’t last forever, it wasn’t a consistent business, and we didn’t intend to repeat it forever, and you can do the same about anything else I’ve talked about. In hindsight, we never got sloppy and never left our basic tenets in order to grab a quick benefit because, simply put, we just didn’t think it was smart to put the shareholders through that kind of whipsaw where all of a sudden you have three great quarters but then the good stuff’s gone. We were smart enough to not lose our way, but we were lucky enough to not have done it in the first place and not to be tempted along the way.
When I first took over as CEO of U.S. Bank in ’06 and ’07, when the world was growing strongly, people would say, I just don’t understand why you guys don’t grow loans nearly as much as everybody else. I remember one analyst had said, “You know another large regional bank is growing their loans at three times the speed you guys are. Are they three times better than you?” And I said, “I don’t know what they’re doing. I know I’ve lost some people to them because they are making more loans. I suspect they know what they’re doing. I’ll never speak ill of a peer, but we don’t know how to do that and so we’re just not going to do it.” I give that example because it’s so profound. When the financial crisis hit, we became a flight to quality – a place for people to work and people to bring their money. During the downturn, we took in all kinds of deposits, so we grew quickly. Flight to quality is the gift that gives back to you again and again and again because, as a result of that, our cost of funds were lower. We could compete on price without having to compete on quality. We were smart enough not to break our stride with our original plan, sticking to it, and then playing it as a benefit in the middle of the recession to pick up some FDIC assets and to grow organically.
Aramanda: Looking to the present, the tide does seem to be turning in terms of the economy. Do you feel that confidence and optimism are up?
Davis: If you look at the National Federation of Independent Business Small Business Confidence Index, it has been over 105 for three months in a row. It is real. Optimism is as real as it could be, except it hasn’t shown up on the balance sheet – yet. About a year ago, people were just uncertain about everything, including the election.
Banks can get out in front when it comes to trust by really spending critical time on financial literacy – both for the greater good of the American people and of their own employees.
Now people have certainty about the intent of this administration, but they don’t know exactly what tax policy, health care, trade agreements, and regulatory reform will actually mean. Until any of them are more clear, people are going to be positive, hoping for the best and waiting. But it is entirely different than to be negative, uncertain, and fearful and still not taking action. I think we’re now disposed toward the positive side, but we just aren’t seeing the tangible results of this yet.
Aramanda: You have made the case about how ultra-low interest rates may be holding back the economy. Also, talk about the challenges of operating your bank in the low interest rate environment that we’ve had.
Davis: It’s arithmetic. Banks throughout history have always done better when rates move in either direction. So, moving rates are good because you have the inefficiency of rates moving on fixed and variable assets and liabilities; but basically, when rates move, it’s generally positive for banks. Higher rates also inspire some increase in consumer activity. People are motivated to move when they know rates are about to increase. Equally, we’ve gone way too long with people knowing that they’re unable to get any income from their hard-earned savings. So, back to my earlier point, I think at 150 to 200 basis points from here, we start seeing that teeter-totter flip and people will start to see benefits in saving and costs in being debtors. But that’s actually a net positive because you get a whole other part of the economy now participating in an optimistic sense.
Aramanda: On the other hand, there’ll be maybe less lending or some defaults that come along with that. Also, I think you also made the case that the low interest rate environment has been artificially propping up a lot of stocks.
Davis: Yes, if interest rates are virtually zero, you have no alternative to the stock market. People have every reason to invest in the equities market under the hope that the returns are better than 0% interest rates. Ergo, one can take a little more risk on the principle if they have a dividend that they can offset all the way to zero. So, it did, I think, help the stock market greatly. I think as rates start to get to that tipping point, it will moderate the stock market a bit because people will have other alternatives.
Aramanda: While running U.S. Bank, you were very involved with Dodd-Frank, including through your role as Chairman of The Clearing House, your participation on the Federal Advisory Council, and through other avenues. How have policymakers and regulators done in terms of enhancing the stability of the financial system while not impeding banks from serving their critical role in the economy?
Davis: If you go back to the source of regulation, there’s no conspiracy here. The politicians are voted into office with a job to protect their constituents, and the regulators are usually placed into office to protect the country when something goes wrong. In the breakdown 10 years ago, the politicians pointed directly to the regulators and said something went wrong on your watch, it can’t happen again.
And so, what would you do as a regulator? A regulator is going to build in new regulation to make sure a crisis like the one we experienced can’t happen again. So the pendulum swings back, and it makes total sense. The regulator has to get it right this time, and it’s classic methodology to over-swing, to get everything you possibly can to reduce the risk, and that’s the place we’ve been for a while. Over-swinging is not a bad thing if you know the intent is to bring it back at some point. What we haven’t heard or known is whether there was intent, until last November, to come back from where the regulations are now.
We don’t disagree that we need to temper some of the things that banks did, but by and large, the industry has made very good progress. We should keep the things that are working and probably moderate those that aren’t. So you think of the President saying that for every one new regulation you add, you need to get rid of two – that’s the pendulum swinging back. Speaking for myself, most of the things that banks have taken on as new regulations since the downturn have been positive for the safety and soundness of the industry. We would continue most of it anyway, even if regulators said we didn’t have to.
There are some things on the regulatory front that would be helpful. For starters, we would all benefit if the uncertainty around rules were diminished so there would be less of a chance for us to be surprised, and we would know what the rules are so that we can succeed in getting it right the first time. Secondly, I would implore the regulators to have more courage and state to the American people that we do, in fact, have a stronger and safer industry. Banks have been doing what we need to be doing, we have implemented many improvements, and the American people should feel better about the safety of the financial system. Yes, an Armageddon scenario could happen, but for all intents and purposes, people should feel better that our banks are stronger than they’ve ever been, stronger than anyone else’s. It would be remarkable if that would be acknowledged.
Another area for consideration would be that the CFPB should become an endorsement agency and not an enforcement agency. For instance, I like to think of restaurants in California. Have you ever noticed there that there’s a letter grade A on the window? Have you ever seen a B restaurant? No, of course not, because there are no B’s. You either get an A or you’re out of business. If the CFPB would say here are the rules to be recognized as an A-quality bank in the form of customer protection and customer safety and soundness, and you have two years to get there, we would all work extremely hard to never, ever fall below the requirements. That process is so much more productive than wondering if there is an enforcement action in the future.
Aramanda: Let’s talk about FinTech. How do you feel about the OCC moving toward a special charter, and do you think banks themselves are doing enough and providing enhancements and innovation to meet customers’ needs?
Davis: The banks have really got this one right. The banks have figured out two things in the last very short couple of years. FinTech does not need to be a foe; it can be a partner. We all need to be able to learn much more quickly and be more responsive to customer demands for new technology than we ever were. It’s very important that we find the best of both worlds where FinTech might be great at procuring customers and communicating with prospects, but banks still have the 150-year experience of how to underwrite and how to make certain levels of risk management decisions that will protect all parties. Two years ago, the FinTechs thought they were going to take us to task. Today, I think they would say that they’re better partnered with the banks. So I think we’ve all learned quickly. I think we’ve all greatly diminished the rumors of the demise of both of us and are going to find ourselves partnering quite well.
Aramanda: Where do you see our industry in 10 years?
Davis: The banking industry is in the best position it has been in for a generation, and banking has this remarkably good forecast ahead of it. There are four things that I would like to touch on. The first one is that interest rates are moving again. Rates are moving at small 25 basis-point increments with a certain amount of telegraphing. We know how to manage that. We understand that there’s some frequency to it, and that’s very positive for banks.
The second thing is the yield curve. As the yield curve steepens when rates move up because it’s presumed the economy is stronger, all those presumptions that need to be in place, a steeper yield curve is remarkable because time equals money again, and we’re a risk-based industry. So the longer money is out either to our customers or into us, the more value it has and as the curve steepens. It becomes quite helpful to banks’ income statements.
No. 3 is financial reform, and we have nothing on the immediate horizon but we now have a group of people coming together with the intent to reduce financial regulation. So, I think financial reform is going to be net positive for our industry. I think we should all be very thoughtful and expect it will take a little more time. For anything to be that good and to be that thoughtful, it needs to take longer. From Dodd-Frank to Durbin to Volcker, whatever you want to call it, we should allow it to take longer and I think it will be net positive because the intentions of this administration are to bring that reform in a positive way.
So, rates going up, the yield curve steepening, future regulatory reform – it’s fantastic. The fourth item is a stronger economy. If we get a stronger economy, which we haven’t had for a long time, it will be remarkable. A stronger economy will trump Nos. 1, 2, and 3. The economy itself would change the outcome for banks more than anything because it’s systemic, it is momentum based, it’s across the board. Ultimately, a bank is and always will be what it has on its balance sheet, which is everybody else’s “stuff.” Everything a bank has is either somebody’s deposits or somebody else’s obligation to pay us back. That’s all we have. So when the economy is doing well, all those are bigger and stronger.
It is as good as it probably has been in a generation. It’s going to be a good time to be an investor in the banks and a great time to be a customer of a bank. It’ll be a good time to be an employee of a bank as well. Banks will use big data and customer insights more than most industries for the benefit of our customers and employees to do a better job. There will be some job losses but not so much as in other industries – you can add that to the list of good things coming. But I’ll tell you, I couldn’t feel more positive about where we are.