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"Building a Better Banking System for America"

Chief Executives' Club of Boston, Boston College, Boston
April 26, 2012
Written by Ed Clark.

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Thank you Wyc. I'm delighted to be back in Boston.

This is a very special city for me and my family. I spent some great years at Harvard. But I don't want organizers of this speaker series to hold that against me. I was lucky enough to marry a Boston College graduate.

Now you might know TD as "America's Most Convenient Bank" – which we are. But we are more than that. We are one of the largest financial institutions in the world with total assets of $775 billion. By market capitalization, TD is the 7th largest bank based in North America and Europe.

In 2011, our total adjusted earnings of $6.3 billion represented 20 percent growth from the prior year.

Today we employ more than 85,000 people. Almost a third of our team is based in the United States.

Here, in the Bay State, Mark Crandall and his team are doing an incredible job.

We are the 4th largest bank by deposits. We employ more than 2,300. We operate more than 150 stores from Barnstable to Berkshire counties. And we plan to add five more stores this year.

Wyc has mentioned our great growth story.

Our shareholders have benefited hugely from it.

Since 2002 – a date I like to use since it is when I started as CEO - TD's share price has increased more than 2.5 times, driven by compound annual earnings growth of 18 percent and compound annual earnings growth per share of 14 percent. We delivered the best total shareholder return among the largest North American banks – American or Canadian.

As a result of the financial crisis, a lot has changed.

Tough times have helped us stand out from the competition.

In 2007, nine major banks on the New York Stock Exchange were rated Triple A by Moody's.

Today, there is only one – TD.

Since 2007, our shares have gained close to 40 percent – the best of any of the major Canadian banks – and significantly higher than any of the top 10 banks in the US, the best of which had a share price decline of 12 percent.

Not only did we continue to pay out a dividend through the financial crisis and downturn, the Board has increased our dividend three times over the past two years – twice in 2011 -- a powerful statement about the Board's confidence in future earnings.

I want to talk to you about a couple of things today.

First, the economic recovery, and more specifically, what direction I think it's taking over the medium-term.

And second, bank reform, which is not only critical to the long-term prosperity of every American but also for much of the world.

Let's first take a step back and look at how we got here today.

The world has been through quite a journey. It's hard to believe it has been about five years since the financial crisis emerged.

In the decade preceding it, we had "apparent" growth in the US fueled by low interest rates, low taxes, combined with big government spending and large deficits.

Additionally, loose regulation in the housing markets and active pressure by politicians and government agencies to promote housing ownership produced a classic asset bubble.

At the same time, the relaxation of financial regulation and a complete lack of self-discipline created a set of financial institutions that ballooned in size and shifted their business model from serving the customer to speculating. What's more, they lacked the capital and liquidity to underpin the risks they took.

In Europe, the creation of the Euro produced similar conditions. Countries in Southern Europe got a free pass – borrow at German rates, run large deficits, create a housing boom – with no market constraints on their actions. European regulators appeared to see their role as supporting national champions – not restraining excesses.

We all know the end result – a financial crisis that wiped out personal savings, and left governments around the world heavily in debt. It also destroyed a lot of public trust in governments and the financial industry.

The reaction from governments – particularly led by their central banks -- was decisive and directionally correct in the initial stages.

Washington's immediate response to the weakness in its banks was impressive. Their stress tests and recapitalization programs went a long way in restoring market confidence in the financial system. By being tough and transparent, the US took advantage of its great capital market system to rapidly recapitalize its banks. Europe would be in better shape today if it had done the same thing.

Still we have suffered a balance sheet recession from which there will be only a slow recovery. History shows there's no codeine-laced antibiotic to quickly cure this patient. It takes time to recuperate. And it will involve some ups and downs.

Global imbalances remain. China has shown some willingness to appreciate its currency but only slowly. This shifts the burden of adjustments on to the US. Given the magnitude of the shifts required, this will take time.

Things feel better than they did six months ago but it's not clear the fundamentals have changed.

The European Central Bank's liquidity injection eased the sovereign debt crisis but the tail risk has just been punted forward. Half the euro-zone is in recession. Growth is anemic in the rest of the region. Slow growth is going to make it even harder for governments to address their fiscal problems. And just as the challenges of Greece appear to be subsiding, a dreaded sequel appears to be emerging in Spain.

Bottom line: the Euro is probably a flawed construct, but unwinding it has enormous complexity. Regional imbalances have to be cured without devaluations and that's a very hard thing to do.

Moreover the current austerity drive – while necessary to deal with the sovereign debt issues – absent any other measures, risks confining Europe to a long period of negligible growth.

Things look better in North America.

The US survived a major ratings downgrade last summer and a dysfunctional debate around raising the debt ceiling. The economy is gaining some traction. The private sector is creating jobs. Consumer and business sentiment is improving. And while housing prices continue to weaken, there are indications that suggest they are close to bottoming out. All of this is very encouraging. It underscores the incredible resilience of the US economy.

But, the Fed is still planning to keep rates on hold until 2014, which tells you something about how much slack they see in the economy. And GDP growth is set to take a big hit from the expiry of a variety of tax incentives in 2013, unless the policy environment becomes more constructive. That seems unlikely in an election year.

In Canada, America's largest trading partner, we had a very strong employment report in March. That's good news for the income side of the ledger. However household debt levels are at record highs. And while we don't see a major bubble in the housing market, we recognize that credit growth is going to slow. That's a good thing for the long-term health of the Canadian economy but it will put some downward pressure on consumer spending over the next few years. Add to the equation Canada's high dollar, and growth will look a lot like what we'll see in the US.

Put it all together, and what does it mean?

Don't expect a snap back recovery. The best we can hope for is a consistent steady recovery and paced structural reforms to deal with the critical underlying structural issues.

This is not a perfect scenario. But it is an environment where well-run companies, including financial institutions, can continue to perform.

Obviously the financial crisis was the catalyst to bank reform. No one wants to see banks blow up again.

We've made substantial progress in building a stronger and safer financial system.

But there remains a significant tension between bank leaders and policymakers on whether we have the right mix of policies.

Common purpose begins on common ground.

So let me suggest three basic principles which I hope we can agree on, and which in turn, help shape future reform.

First, governments should never have to bail out a bank or other player in the financial industry.

Second, banks should proactively support the principle of reforms and suggest more effective means to implement them.

And third, bank leaders should champion their industry's return back to a focus on what I call 'old fashioned banking' -- activities that help grow their country and communities.

Let's take a closer look at the first principle. Banks must have a capital structure that makes sure taxpayers and depositors are not on the hook if a bank fails. That's what a capitalist system is designed to do: let the shareholders and bondholders assume the risks and rewards of private enterprise.

The good news is that major countries agreed on a new set of rules to strengthen capital and liquidity requirements.

Called Basel III, these tougher rules will also drive much of the speculation game out of the banks' securities arms.

Chairman Bernanke described Basel III as "essential" for the stability of the financial system. I agree.

While there are lots of small changes that we would have preferred, as a package, TD supports these requirements. In fact we've already met them.

Unfortunately there are bank leaders who want these requirements reduced or further stretched out. They see these reforms as a threat to their existing business models.

I'd argue that's the very thing that we want to achieve. There was too much non-value added activity in the banking system.

Provided there's a level playing field, and by that I mean common standards of quality and level of capital, the new capital levels should cause a shift in business models and re-pricing so that products carry their true costs.

I'm sympathetic to those who worry if the system will be a true level playing field. That is what we should focus on -- not reducing the standards. And so I'm encouraged that the Financial Stability Board is looking at the critical issue of consistency of implementation.

Resistance to Basel III raises, in my mind, an even greater issue. It's an open invitation for regulators to add more rules to protect the system. This thrust is further driven by populist sentiment to micro-manage the banking sector.

That's led to reforms that go well beyond the core issues and, in turn, exacerbate America's rules-based system – a system that values process over principles.

Bankers and regulators are increasingly encouraged to check boxes – fulfill requirements – rather than figure out what they should be doing to strengthen the financial system.

What makes this worrisome is the atmosphere this creates.

In effect bankers are given a free pass on doing what's right because of the detailed prescriptive rules. Organizations get focused on meeting rules. As long as it fits, do it. But what if it fits and it's not appropriate? That should be the true test.

These changes also increase real risk because they take energy away from the things that really matter in protecting consumers.

For instance, Board of Directors should be asking questions about strategy and the real risks the firm is taking. Instead they are bogged down fulfilling compliance requirements.

Adopting Basel III would help assure governments that they won't be exposed to unnecessary risk ever again. Over time this should also encourage law makers to take a step back and separate the regulatory wheat from the chaff; in effect making the banking system more effective and efficient.

This would include both better coordination between US and other international bodies and less competition between US agencies. The financial crisis made clear that globalization is no longer a concept but is a reality. Looking at the financial system as a whole matters more than ever. Regulatory competition – either within the US – or between national regulators is in no one's interest.

For consumers, there's another reason to be concerned about the direction of bank reform.

To the extent that Congress passes populist laws that either reduces the revenue banks can charge or increase costs, over time, banks will look for other ways to replace those lost profits for their shareholders. Again, that is what the capitalist system is designed to do.

And so, it's often the consumer that bares the brunt of micro-regulations through higher costs and fees. We all know examples of this.

But are higher consumer costs the price we must pay for a stronger and safer system?

Absolutely not.

There's no proof that a prescriptive regulatory system like the one you find in the US is any safer than any other system.

Compare the American system to the Canadian one. Canadian regulators use a risk-based approach aligned to a set of principles. They impose tough capital standards and mortgage rules. Banks hold mortgages on their balance sheets – so they have skin in the game.

The principle approach creates an atmosphere where bank leaders understand that it's their role and responsibility to protect the long term interests of their institutions, its customers, employees and shareholders. No excuses. If you get a bank in trouble you cannot hide behind the claim that you were acting within the rules. A lot of credit goes to Julie Dickson, Canada's primary bank regulator, for championing this model in Canada and around the world.

The Canadian system is not perfect. Leading up to and during the financial crisis bankers and regulators made errors, missed things and had losses. But that's how principles based regulation works; the players are given enough latitude that they can make judgments about risks. Yes they might make mistakes. But if the capital and liquidity rules are set right, and Basel III does this, the resulting losses from those mistakes won't be large enough to bring the bank or system down.

Indeed Canada – without prescriptive rules -- weathered the global storm better than most other western countries.

Ironically, Canadian regulators are now under pressure to change their model. Regulators around the world are looking for ways to make sure there is a level playing field in the global banking system. This has cast a spotlight on systems such as Canada's that don't impose prescriptive, detailed rules on how a bank runs its business.

We're confident that our chief regulator will resist these pressures.

Now let's turn to the second principle -- supporting effective change that puts the onus on bankers to do the right thing

Bankers should acknowledge and support some of the principles behind the proposed bank reforms and suggest more effective ways to achieve them. It's about being pragmatic not dogmatic.

Let's take the Volcker rule. Volcker's core argument that many in the industry lost their way is undoubtedly correct. While there are many great banks in the US that stuck to their knitting – many did not. Instead they began looking at clients as counterparties with a buyer beware attitude.

Unfortunately regulators over-reached in writing the regulations to implement Volcker -- turning a simple principle into a legal labyrinth. The Fed has thankfully responded to the many comments it received by postponing its implementation date.

Still the spirit of the rule is right. Banks shouldn't be hedge funds. Their mission should be to do things which add value to the economy. They should not put the tax payer at risk. If you want to speculate – do so in an institution which everyone will allow to collapse and let the shareholder and creditors pay the price. Don't become a bank.

But we don't need countless pages of regulation to get this shift.

As I mentioned earlier the new Basel III rules will drive many of these activities out of the banks.

Bankers should then look at the businesses or activities that survive Basel III, and say to regulators, which ones concern you from a safety and soundness perspective, and then start working together to address their concerns. We shouldn't try for perfection. What we want is to shift the focus of activity from betting – betting against your client or competitor – to helping your client.

Success relies on striking productive working partnerships between the industry and its regulators, enabling both parties to agree in principle on what needs to be done, and on the least intrusive way in making it happen.

The third principle calls on bankers to return the industry to old fashioned banking.

That's banking built around the customer – meeting their needs – having long term relationships. It covers the service spectrum from personal banking, small business and commercial, wealth management and corporate banking.

And it promotes the great tradition of a bank's securities arm that helps businesses grow through acquisitions and raising financing.

Indeed, the heart of TD's strategy is to be an old fashioned bank.

We view our clients as long term partners. If we look after their interests – TD will do alright in the long run.

Not every one thinks that way. Many bankers love to be your bank when you don't need them. And don't want to be your bank when you do need them.

We take the opposite view.

Throughout the crisis and downturn, TD was the only top 10 bank in the US to grow its lending, quarter after quarter. Good business; good partnership; good for the economy.

TD only takes on risk that we understand and can manage. We don't compete on risk-taking, but we do compete on risk management. This means we avoid the big blow-ups and can be strong when needed.

Well before the financial crisis, we drove into the Bank some key but simple principles.

If something seems too good to be true, it probably is and we won't do it or sell it. We'll walk away from opportunities.

And because of that, we don't make bad loans in good times so we can make good loans in bad times.

Our disciplined approach has meant making some tough decisions. Like refusing to do sub-prime mortgages in the US.

Most of these decisions meant giving up short-term profits. But we knew they were the right things to do for us, our customers and our shareholders.

And as it turned out, we avoided the losses that other banks incurred and this let us grow rapidly and take profitable market share

We also work hard at living up to our reputation as America's Most Convenient Bank.

That means competing on service. We are open longer than our competitors in all of our markets. We offer 7 day banking.

We're always on the hunt for more convenient locations. As other banks shrunk their footprint last year, we opened 37 stores in the US. We expect to do about the same this year.

Being convenient also means making it easier for our customers. Look at checking fees. A lot of banks make their disclosure policies complicated – requiring customers to sift through hundreds of pages of legalese. We use a one-page form recommended by The Pew Charitable Trust that's simple to read and understand.

Finally, we know our long term success depends on the well-being of those around us.

That's why we actively champion diversity and equal opportunity in American society. For the third consecutive year, the Human Rights Campaign Foundation has recognized TD as one the best places to work for Lesbian Gay Bisexual Transgender equality.

We invest millions of dollars in affordable housing initiatives.

Our financial literacy program – run by our employees -- has benefited close to one million American students.

In Massachusetts, TD Charitable Foundation awarded close to $1.5 million in grants in the last year.

And as part of our efforts to green urban centres, employees organize tree planting days that help make communities in Boston more livable.

This is part of our larger commitment to be an environmental leader. We were the first major bank in North America to be carbon neutral and we are now launching a major initiative to reduce our paper consumption and protect forest habitat.

At the end of the day, good old fashioned banking is about creating wealth and prosperity for our customers and communities.

Let me sum up.

The global economy looks and feels better compared to last summer. This is especially true in North America. But fundamental challenges remain. We can't expect this recovery to unleash pent up demand from consumers. The recovery may have traction. But the recovery will be slow moving, and may have some stops and starts along the way. A sound banking system is critical to the recovery and our longer term prospects.

America has an opportunity to build a better banking system. Banks should carry enough capital and liquidity so that they never have to rely on government in a crisis again.

Americans need an efficient and effective regulatory regime which puts the onus on bankers to do the right thing. Micro-regulations have a corrosive effect on the system. Consumers pay more. Banks are forced to dedicate more resources in areas that don't necessarily make their institutions any safer. Surely we can reduce risk and red tape at the same time.

Banks should focus on activities that help people save, invest, buy homes and cars; help businesses raise money, make acquisitions and grow.

For all this to happen perspectives need to change and positions need to shift. No small feat.

But America has always risen to tough challenges. That's part of this country's great winning formula.

And that's why I'm optimistic that we can find the common ground to move forward with common purpose. Indeed we must for the good of the industry, and more importantly for the good of the country.

TD has huge faith in America.

Yes, it's been a tough downturn. Yes, it will be a long recovery. But America will recover. It will remain the most important economy in the world.

Why is America so exceptional? Because Americans invent, innovate and build things. They dream about a better tomorrow for their families and your communities.

Our Bank's future is bound to this energy and spirit -- and we're proud of it.

We will keep investing in America. Standing by Americans. Creating real value in the greatest economy in the world.

Thank you.


Executive Headshot :  Ed Clark
Ed Clark
Group President and Chief Executive Officer
TD Bank Group

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