A Conversation With Brian Moynihan

A Conversation With Brian Moynihan

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from CEO Speaker Series

Brian Moynihan discusses U.S. and global markets, the global financial system in 2017, and how the banking industry is helping to drive the real economy.

The CEO Speaker Series is one way that CFR seeks to integrate perspectives from the business community into ongoing dialogues on pressing policy issues.

HAASS: Well, good morning and welcome to the Council on Foreign Relations. And today we have one of our CEO Speaker Series, and the CEO is obviously Brian Moynihan of Bank of America. We’re going to talk for a few minutes on the record. So you’ve heard your Miranda rights: anything you say can and will—(laughter)—be used against you. And then we’ll open it up to questions from our assembled members.

Brian has been heading up Bank of America for, what, just over a half-dozen years?

MOYNIHAN: Seven years now.

HAASS: Seven years, just over a half-dozen, and inherited a difficult situation and I think has made extraordinary progress. And we’re really pleased to have him here today.

So, again, as I said, I’ll ask a few questions and then I’ll turn to you, because we’ve got a lot of financial expertise in the room.

Let’s just start off big picture—then we’ll get to granular, if you will—which is, here we are. We’re in the first week—it’s hard to imagine it’s still the first week—of the new administration. What do you see the situation they’re inheriting? The inaugural address was quite negative. Some would use the word “dystopic.” I hadn’t used that word used as often in the last—for the last 65 years as I heard it used in the last week. But anyhow, what’s your take on the markets, the economy? How do things look from your suite?

MOYNIHAN: So I think—so let’s talk about sort of facts. If you think about the U.S. economy in—coming through ’16, it continued to—consumers continued to spend more during the course of the year. Housing was constructive, and you know, the economy, you know, ebbed and flowed, but only grew at—it’ll end up somewhere at 1 ½-ish percent when they finalize it. Next, the projections go to 2 (percent), which is growth. But you got to remember it came from 2 (percent) down to 1 ½ (percent).

HAASS: Right.

MOYNIHAN: And so how has that happened? And that happens a lot because people feel better, and so what you’re seeing is consumer confidence shoot up after the election, you saw business confidence shoot up, all in anticipation of things were going to happen. And, you know, in less than a week you’re seeing things happen. And I think, you know, the signatures of various executive orders are things happening, and so I think that consumer confidence and the business confidence are being met with action, and now we have to see how that’ll play out.

So our view as a company is the U.S. economy is on very sound footing, is growing well, will absorb the interest rate increases which are—and things like that, and continue to proceed. And so that’s the U.S. story. And I think, you know, as the largest economy in the world, that’s a very important question.

And when you get to the other parts of the world, you know, just being in Davos last week, and the rest of the world is, you know, I’d say confused, doesn’t know what to think, doesn’t understand this. And so, you know, the Americans were popular in Davos not because of any other factor other than everybody thought we had some special insight as to exactly what happened. And if we all had special insight as to exactly how the election came out, I think we’d have gotten—you know, there would have been better predictions going into the elections.

HAASS: You mentioned the rest of the world. All I know is every time the IMF comes out with a statement about global economic growth, they then three months later or six months later dial it down, and six months after that dial it down again. So, besides the rest of the world being somewhat confused, what’s your sense of how the—I realize it’s hard to generalize and it’s a netting out, but when you look at things, I mean, you’ve got high spots like India, you got China doing what it’s doing, but then you’ve got Europe, Japan, and others, extremely modest. What’s your take?

MOYNIHAN: Well, so starting with the—you know, sort of the facts, the research team— Candace Browning-Platt, and with six years in a row with the best research team in the world, so they know what they’re doing—they’re at 3.1, 3.2 percent for the rest—the total global growth next year. The good news is Europe is solid. You know, it’s starting to grow again.

Interestingly enough, Ms. Lagarde at Davos said this is the first time they haven’t actually brought down their estimates in a while, which—

HAASS: Really? I apologize. (Chuckles.)

MOYNIHAN: Which is interesting, because she pointed out exactly what you said, Richard, which is every year they’ve been downgrading. And by the way, remember, at the—in the fall of ’15 heading into ’16, the view was 2 ½ percent growth in the U.S., and it downgraded all year. And then come—you know, everybody says rates are—the 10-year bond at 250 basis points, 2.5 percent, oh—or 2.4 percent—oh my God, it’s way up. It was at that in the fall of ’15; it just went way down. So our view is the rest of the world grows solid.

I think, you know, it’s dependent, really on two things—maybe three things. One is Europe has to grow, and it’s in the positive when we see the data coming out of there. And then India and China will drive the rest. And, you know, China just released its year-end figures, and 6 percent and change. They are—they are willing to accept a slower economy to do it the right way, but that’s still a big economy growing at a pretty fast rate. And then India, which was the news of the world, you know, a year ago, 18 months ago, with Prime Minister Modi being very aggressive in driving it, you know, there’s some puts and takes there, but it is on very solid footing, and so the view is that will grow. And if those—you know, the four of us grow, the rest of it will come behind us.

HAASS: Let me—let me drill down a little bit on two of those.

One is Europe. You said, you know, Europe’s poised to do OK. But what is your take, though, on—I mean, you’ve got the Dutch elections, the French elections, the German elections. You’ve got rising populism/nationalism. Brexit, hard to see exactly what the timeline is given the most recent British court decision, but we know the general direction of things. You have the uncertainty about what Russia’s going to do. You still have refugee issues, all the questions about the EU, the friction between monetary and fiscal policy. Why is it you see any reasons for confidence in Europe?

MOYNIHAN: Oh, after you get done with that, how could you have confidence? But I’m not sure any of that’s different than it was a year ago, and it did grow.

And so the interesting thing is, when I—we sat down, you know, sort of the middle of ’15, and then as you went through ’15, every time you had a discussion, Richard, exactly what you pointed out: the election—the unpredictability of the election cycle or referenda cycle—Brexit and Italy vote—you’d sit there in advance of that and say, if this happens, you know, there’s going to be a real issue. If Brexit vote goes to exit, it’s going to cause markets to melt down. If Italy does this, it’s going to happen. If the French primaries come out this way, it’s going to happen. If the U.S. election—you pick. The reality is all those things happened and the markets kept bulling through.

HAASS: Quite resilient.

MOYNIHAN: And so the question is, A, you know, I won’t get into a scientific study of polling and whether it works anymore, because that’s a question that is interesting and people would debate for a good time, because how did they miss those; but, B, though, is the view that there would be some Armageddon on the other side of stuff I think is more emotional, based on people—what they want the outcome to be than it is on the facts. And so Brexit is a—you know, a five-year or six-year process. It’s not going to change the fourth quarter of 2016 or third quarter. It’s just—you know, and by the way, it’ll be disruptive, it’ll be interesting, and the world will adjust and the world will go on. But, you know, everybody thinks these things are like tomorrow morning the market’s going to melt down. There are things that make that happen. We saw some of that in 2008 and 2007. These things are, you know, changes which are glacially slow.

And so beneath all that, the real question: Is our population’s spending a little bit more? You know, is productivity holding its own or getting better? And there’s great debate about that. Those are what’s really going on. And that kind of, you know, pushed through these instantaneous sort of shocks to the system. But it is fascinating how quickly the markets just pull back, breathe for a second, think about Brexit. That night it goes futures down, get through the day, it comes out fine. The election, 800 points down in the Dow futures; when the election things were clear by 2:30 in the morning, goes back to 250 the next day, ends up differently. So the market’s sort of saying, OK, life goes on. And that’s the power of just, you know, stability in all these—all these big economies, frankly.

HAASS: Just one last question on Brexit. Will it make any difference for Bank of America, your sense of the changing role of London? I don’t know if it’s hard, soft, or in between Brexit, but obviously it’ll be a different relationship. Does that have any consequences for you?

MOYNIHAN: I mean, we’ve had five or—5,000, 6,000 teammates in London. And what’s there and what can be there under the rules, that stuff is still to be told.

So what we’ve advocated for with Prime Minister May last week, the big banks, give us an implementation period for stability’s sake. Go to your point: we don’t want to disrupt things unneedingly. We’re not saying—it’s up to the two political bodies to figure out what the rules are and make—they’ve made the decision. The role of the banking system is to make sure there’s stability on the other side of it so markets can function and the economy can, you know, run, and you know, people can borrow, and—et cetera. And so we’re saying that, by giving us an implementation period, we can keep more stability.

But it’s a massive change. I think that between all of us we probably—you know, 5,000, 6,000, 10,000—you know, there’s always different employee levels—that are real people and real human beings. They’ve got to make decisions, and all that will be a lot of work. You know, and so you’d rather have less work than more work, but the reality is we’ll get through it.

HAASS: One other cloud or at least—I’ll be slightly more neutral, though I see it as a cloud—is growing protectionism. New president was explicit about it in his inaugural address, literally talking about hiring American and the like, only buying American. He comes out in front of—in support of the pipeline yesterday, and again mandates that it’s U.S. steel. He kills off TPP, reopening NAFTA. Are you worried about the overhang of at a minimum protectionism, and possibly something of a trade war?

MOYNIHAN: Well, that’s the—yeah, what you’ve laid out is the issue on the table, and we don’t know until people—you know, it was kind of an interesting juxtaposition to have the president of—Xi of China, Xi Jinping, quote the Gettysburg Address and talk about globalization being this force of a river that can’t be put back in the ponds and streams, or whatever the analogy he used. At the same time, you had—

HAASS: It’s better in the original Mandarin. (Laughter.)

MOYNIHAN: In the—so if you think about that juxtaposition, it’s kind of an interesting sort of thing for people like yourself who study this stuff and think about it and are very versed in it.

When you come back to more of a pragmatic thing that I’m forced into, running big businesses, you know, if you’re a mid-sized company in the United States, you are a global company. This is not a theory. So we have companies, you know, that—I sat at dinner one night with two clients, and both of them had operations all over Europe because they’re tied to McDonald’s franchise and producing stuff for them. I know that when they—their father—when they started the business, their parents started, they had no idea that they’d be doing business in a place like Poland and manufacturing stuff. And these are not huge companies. They’re global companies. And so the idea that you can, you know, put a—you know, get too protectionist in the reality of the way the world works now is interesting.

The question of what are the terms, I think that’s the debate on the table. And so it’s going to—and I think President Trump has been clear that he’s—you know, he thinks we have to negotiate better for the interest of America, and we’ll see that play out. But I don’t—I think the fundamental forces of globalization—leave aside the word that’s being bandied about—the fundamental forces of business—of integration of supply chains, demand cycles, where you can produce stuff, the flow of capital—those things are hard to change.

HAASS: I want to put a few other issues on the table, Brian, and then we’ll open it up. One is regulatory issues. You know, most historians looking back, or people in your world, would say we were probably somewhat underregulated before the financial crisis. And then Dodd-Frank and other things came along, and I think a lot of people in your business would say perhaps the pendulum swung too far; we’re slightly overregulated. Where would you like things to come out?

MOYNIHAN: Well, I have two pieces of this, you know, one as a major company. And, you know, if we could reflect back on what went right and wrong in the crisis and leading up to the crisis, at the end of the day the industry, you had three or four fundamental problems. One is the industry didn’t have enough capital for the amount of leverage inside the core banking system, but more importantly inside the other types of financial institutions. The liquidity wasn’t there sufficient to stop the run that started in ’06 into early ’07 and kept going. And then the third is the scope of activities had gotten wider than what I think our company should do, and we’ve narrowed them. And then the fourth is—and this is the regulatory tent was very limited by type of entity as opposed to what people did. So you could have a mortgage lender and a mortgage lender making mortgage loans to consumers; one was regulated highly and one wasn’t. So you had this problem of the tent.

And so, frankly, the regulatory scheme has corrected all that. And, you know, and we’re—you know, our industry—you know, as a leader of various trade groups and my peers, you know, we’re fine with all that because, you know, at the end of the day we didn’t have enough capital. At the end of the day, that threatened things. At the end of the day, it made the situation which people call a financial crisis, which actually was an economic crisis, it made it worse because the financial institutions couldn’t do their role to stabilize.

And so, you know, increasing the capital levels, increasing liquidity levels and stuff. So, just to think about us, we had about $70 billion of tangible common equity going in. We have 160 (billion dollars) now. We had $100 billion of liquidity. We have 500 (billion dollars) now. If you put us together with Merrill, the balance sheet was probably $2.7 trillion. It’s 2.2 (trillion dollars) now. And so, if you do all that math, that’s pretty good.

Now the question is, has it gone too far? And is—do we have an extra 20 billion (dollars) of capital? Which doesn’t sound like a lot, but that’s $200 billion in loans we could make, and that would be very minor differences. And so that’s the debate on those things, did it go too far.

The other side of it—as a person who, through the FDIC fund, is a contributor of, I don’t know, 10 to 15 percent of all the money that goes in there—it’s of high interest to me to make sure the regulation’s sound and people stay within it, because guess what? We pay for the cleanup. And so what people don’t realize is that the FDIC is government-guaranteed, but it’s a collective fund that we all put into. We pay, you know, a billion and a half (dollars) or more into the thing. And so it’s my highest and best interest if the industry’s regulated well because under the new regime people like Merrill and Lehman and people like that that weren’t FDIC covered now are part of the scheme, and so we have to pay for all that stuff. And so, you know, we believe in it.

It’s just a question of getting the balance right this many years after being able to study it, and getting that balance back in synch. And I personally believe it went too far because you have—you had too many people deciding I like this issue or that issue, where we can bring it back a little bit and really accomplish the core purpose of adequate liquidity, adequate capital, adequate stress testing, adequate scope of activities, and I think we’ll be fine.

HAASS: How much is—have you added up how much it costs you to basically comply with regulation?

MOYNIHAN: I mean, I can rattle off statistics, but you know, we have 5,000 people in our risk organization, you know, a thousand people in our legal organization, a couple thousand people in our—(inaudible)—organization, yadda, yadda, yadda. So you make that all and you can come up with numbers.

But the reality is, the responsibility to operate our company under our responsible growth mantra is all 208,000 people’s job because, you know, the lesson learned in some of these things is not what your risk team did, it’s what your frontline team did. People didn’t—people didn’t go in to do a securitization and structure it the way they did thinking that they were doing—you know, they just made mistakes of judgment. So it’s the frontline people you actually got to get to understand what the range or scope of activities. And if you—say you’re the CEO of a large enterprise. You want a lot of protection around that. You want a first line, second line, third line of defense.

So I don’t mind the investment in the risk infrastructure, because guess who ends up getting the most benefit? It’s me, you know, at the top of the house, or my management team, because they’re out working. But the reality is, when people say how much does it cost, the cost is to make sure the frontline understands it, and then being willing to walk away from things. And that is the hardest part of getting risk right.

HAASS: Do you feel that in some ways, though, you’re at a competitive disadvantage because you’re in the formal banking system? You have the greatest regulatory burden. And, as you suggested, there are other institutions that are doing some pretty similar things that aren’t operating with nearly as much regulatory oversight?

MOYNIHAN: And I—and I think that’s the tent question. And I think the tent got pretty broad, and then what you’ve seen it chipped away in is not any interest of the people who are FDIC-insured—bank holding companies registered with the Federal Reserve—to let that tent be open. If you go back and look—and people confuse it now, with history—you know, whether it was Countrywide, whether it was the other subprime-type lenders, whether it was the non-regulated securities firms, whether it was the mutual funds industry—which had runs on it and stuff like that—there was a lot that went on outside the industry. And so keeping people in the tent—and that’s one of my worries. So the so-called shadow banking system is a worry.

HAASS: You mentioned Countrywide, which obviously connects to the whole mortgage business. Do we still need—and if so, why—Freddie Mae—I mean, Freddie Mac and Fannie Mae? Why do we still have those agencies?

MOYNIHAN: Well, it’s a pretty simple equation. The total mortgage debt outstanding—let’s say 10 trillion (dollars), to make it simple—the total deposit base in the industry is 10 trillion (dollars), 12 trillion (dollars), something like that. So, if we used all our deposits to make mortgage loans, we couldn’t do anything else. And so there would be no commercial loans, no credit-card loans. And so the answer is the—and so then you say, who’s going to finance the mortgage debt of the United States borrower? And if you think about who’s going to finance that, that’s people that are going to have excess cash. And who are those people? Outside the United States. And the last thing I’d try to figure out, if Richard Haass or Brian Moynihan’s going to make good on a mortgage, the guarantee provides access to that amount of capital, whether it’s through our investors in the United States or global investors. And so I think the idea of a government guarantee for the real tail risk of mortgage allows the bonds.

There is going to be great discussion about where that guarantee—if you look into core underwriting, you know, if—the difference between 80 percent loan-to-value and 90 percent loan-to-value and 95 percent are stark and are still stark after the crisis. So, if we stay 80 (percent) to 90 (percent), the risk is a fair trade for the American public, I think. If you get up higher, you start to get into things. And so we try to stay away from it. We don’t need them because, basically, the amount—we do $20 billion of mortgage a quarter, and you know, we can pull them on our balance sheet. But that’s probably unique to our business model, and some of my other peers. And so I think they’re needed for the population.

So, when people think about housing, you know, I think the basic issue—and if you talk to the presidents over the years and the people who ran the different things, the question of incenting homeownership is actually a trickier execution when you have less population growth. In other words, you know, because are housing prices really going to grow if the population’s only growing at a half a percent? Leave aside all the policies and everything embedded in that. You got to be careful. And so, you know—and so the idea of incenting homeownership may not be all it’s cracked up to be. On the other hand, it’s a good thing, too. And so you got to be careful about how far you push it. And if you go back and ask the presidents who were there for the various buildup of these things, a lot of them question whether they pushed too hard on the theory of the great American Dream. They’re forgetting how much leverage is involved in getting there, and that’s an interesting question.

And I think that’s the debate we got to have about housing policy. It’s got to follow population. It’s got to follow fundamental economics, not be a leader to drive someplace.

That being said, housing has a lot of room to run left in his economy because housing formation is still growing. You know, there’s still a lot of housing that has to be refurbished. So there’s—it’s a good contributor to the economy. It can be a better contributor. It has been growing back into itself with fits and starts. And so—but the reality is, from Fannie/Freddie, you got to decide what you want to do about housing before you decide what they’re going to be.

HAASS: If you were to have a session with the new president—and have you met with him, by the way, yet?

MOYNIHAN: I have not met with him personally.

HAASS: Then I assume it’s a question of when and not if, either individually or collectively, you will be asked to come by Trump Tower or the White House. What is it you—at the risk of—here were are in public. (Laughter.) But what would you—what is it you want to see? What is it that you think he could do for the economy from where you sit that would really make a positive difference? What is it he really needs to avoid doing?

MOYNIHAN: I think, from the economy, the idea of creating the environment for growth and an environment for optimism for America, business, is a very good idea, and he’s out there leading it and driving it. So I think keep up that.

HAASS: You mean things like infrastructure spending, lowering tax rates?

MOYNIHAN: Lowering tax rates, you know, whatever the—reduce regulation for businesses and things like that.

I think that’s—the second thing if we got to figure out our tax code. We have two basic issues—the repatriation question and the fundamental tax code question—which is causing behavior that is strange.

And then the third thing is I think—and this is where there’s going to be a lot of tension, and you’re starting to see it surface—what are we going to do about the fiscal situation in the United States in terms of deficits? Are we going to spend a little bit to start the engine again, or are we going to not spend it? That’s a good debate going on among—

HAASS: Did you see the stories in today’s paper about the projection of debt is essentially off the charts?

MOYNIHAN: Right. And so the question is, is are you afraid of that or not? And so—because that feeds into what you can do on tax reform or what you can do on infrastructure.

And so I think, you know, the four or five issues of investment in America, infrastructure, research, things like that—tax reform, repatriation—and then continuing the regulatory alignment question. And, you know, he’s hard at it, and I think that the idea is to keep encouraging that, to have that fair cost-benefit analysis of what we’re doing, while we keep making progress on core issues.

HAASS: Let me just raise one last set of issues, then I’ll open it up, which is things cyber. And I wanted to raise it in two ways.

One is jobs. Today’s FT has an interesting article about the advance of AI, and basically saying that for the banking sector millions—thousands and thousands of jobs are likely to disappear as AI. Is that the sort of—is that—is that in your future?

MOYNIHAN: Yeah. I mean, it’s in our past, too; in other words, that we at the—when I became CEO at Bank of America, we had 288,000 teammates, and now we have 208,000, and a lot of that’s through applied technology. And so artificial intelligence is just the buzzword for applying technology to process. And, yes, the capabilities are getting better, the ability to gather vast amounts. So it’s a real thing.

So, interestingly enough, you know, Klaus Schwab and the team at the—at the World Economic Forum, you know, the theme was—and I was one of the chairs—and the theme was responsive and responsible leadership. And it’s interesting because it aligns with us: we have—the way we drive the company is what we call responsible growth. But in that theme, you know, this issue of the Fourth Industrial Revolution and how you deal with the outtakes of that, I work with a lot of CEOs in various cities and governments. The question of not ignoring that this is going on, but the reality of the ability to have machines do more work is not new. It’s been going on since the Industrial Revolution. The question is, we’ve got to get better at retraining on the other side of it and positioning people into the jobs of the future. And so, at the same time we’re saying all of this horrible thing’s taking place and people are losing their jobs to AI, people can’t fill the jobs that they have.

And that’s one of the—one of the constraints on American growth is actually qualified workers. And “qualified” sounds so bad, but it’s really people have the amount of computer skills it needs to work on a factory floor. The welders that aren’t there because construction went down, is coming back. The truck drivers in some areas because of the pull towards the fracking business will actually create a stress in truck drivers around the country. Again, it was relieved when the fracking business—so we need to retrain.

And so the question is, we can admire the problem about automation, AI. It’s not new. It happened in the auto industry. You know, I mean, we can just say, oh, it’s a problem, or we can sit there and, say, get serious about how do we, you know, look forward and train people into the next round of the economy. And I think you can absorb lots of people.

There’s a great intellectual debate between the people who do this of, you know, will the jobs be destroyed at a faster pace than you can absorb the people. You know, we’ll figure it out, but I’d leave it to ingenuity to figure those things out. But the route is what you can’t do is deny that you need to start doing it today.

HAASS: To what extent do you wait for trained people to come in? Because, you know, you advertise—say you have a job opening. To what extent are you increasingly in the education and training business yourself now?

MOYNIHAN: We have been for years. So we—you know, we’ll—you know, we—the wealth management business, for example, at Merrill and U.S. Trust, you know, they’ll hire people and train them. We’ll do that in the retail system. You know, so we—you know, we do that in the commercial banking system. We hired 2,000 kids from school last year—brand new, coming in, you know, all these businesses, the auditors, financial people. And so we have the FMAP training, the financial management—you know, this program. We have the traditional investment banking, capital markets programs. We have a commercial banking program. We are hugely in the education business.

We need to hire 20-odd thousand people just to maintain neutral headcount because the turnover rate—

HAASS: You’re losing 10 percent a year?

MOYNIHAN: Yeah. There’s two different types. The professional jobs are way below 4 (percent) or 5 (percent), and then in the other jobs—because, you know, we train people and there’s opportunity and the nature of them—they tend to move. And so, you know, those people are all getting jobs somewhere else. They’re not leaving us to—stuff. So it’s pretty amazing. So we are a training ground for America. And so a question that was—you know, we’re only training in a narrow scope of job skills, and there’s a whole nother scope that America needs that we got to figure out how to get people trained to do.

HAASS: Last cyber question and last question overall, which is the other side of the coin, which is defense and security. You know, we just had the experience with Russia and our political process. We had North Korea and Sony, Iran going after Aramco. When you look at Bank of America, as opposed to when you got there, what’s going on now that’s fundamentally different? And how much are you still worried, despite everything you’ve done? How much does this keep you up at night?

MOYNIHAN: Well, it’s something that you have to take extremely seriously, and we do. And so if you think—just simply, when I became CEO—this was, you know, so 2010 January—this was kind of out there and kind of emerging, and now we—you know, it’s basically a half-billion dollars a year plus in spending just directly on the programs, from probably 100 million (dollars) back then or something. And we’ll spend whatever it takes.

And so, interestingly enough, in the world I live in we’re working expenses down and working headcount and, you know, all that type of stuff. This group, you know, if they need it, they go get it. So—

HAASS: That would be the one thing our budgets have in common: that’s the fastest-growing part of them.

MOYNIHAN: And so, now, you flip that. So why do we got to be careful? And so you have insider threat. You know, the lesson there is some of the things that have gone on that you see in the public domain. You have external threats. You have state-sponsored external threats. You have people trying to steal money external threats. And then you have, you know, the shutdown threat and all this stuff. So you’re just defending yourself against that.

But in the end of the day, a way to think about this is that we have 4,600 branches now. We used to have 6,100 branches. On our mobile phone every day, the equivalent of 900 branches’ activity takes place. So, if you corrupted the idea—that people didn’t trust the systems that send the information to us, the security of their phone, you pick it—you’d have to put out 900 branches with, you know, 27,000, 30,000 more people out there—3(,000) to 4,000 more people, excuse me—you know, 10,000 people; eight, nine a branch, something like that. So think about that, 8(,000) or 10,000 people, and you have to do it almost instantaneously. You can imagine that’s difficult, right? And so if people don’t trust the system and the security.

So it’s interesting enough as, you know, the banking system is pretty secure, but the question is who’s storing information that causes damage. And one of the issues is, when you hear about the compromises at the retailers, they were storing information that, you know—that cause us to—you know, we spent tens of millions of dollars replacing all the cards. We need to come to a holistic view, and that’s where these new devices are actually critical.

So why is Samsung Pay, Apple Pay, et cetera, why are the chip cards important? Chip cards are up to 30, 40 percent of the transactions now and driving at it, because they’re encrypted, and that just lowers your risk of where the information’s stored. It’s not—you know, it’s not difficult science. It’s actually getting people to retool the systems to use them. And if we can do that, then we lower the real risk of you being pestered by us to go get your credit card replaced or debit card because some person you charged at lost the information. So that’s sort of—we can kill that off by just working at it.

But the real question, then: what’s left is just defense, and then the second thing that’s left is education of consumers about how they conduct business in the great world out there. And the amount of people we have that, you know, are willing to give people cash ahead of getting a car—you know, the title transfer—is amazing. And they come to us and say: I did this on Craigslist, and say can you fix this? And you say, you just gave the person cash; what are we supposed to do? And it’s just people have thought about this differently, and they need to—we need to get everybody to understand that when you give that money over, you’re done, and so you better make sure that car is there and you better make sure it’s the right car. And we’ve trained people thinking, well, I’ll just go back and figure it out later, and they’re dealing with people they’ve never met before in their life. So it’s that kind of fraud has got to be dealt with. It’s not cybersecurity, but the cyber gives them an ability to do it on a scale that they could never do.

HAASS: OK. Just tried to put a lot of issues out there. I didn’t get to all, I expect, so let’s open it up to you all for the serious questions. Wait for a microphone, let us know who you are, and be succinct, please.

Sir. We got microphones coming from both directions.

Q: Thank you very much. Mahesh Kotecha. Thank you very much for a tour de force.

And on the issue of regulation, you sounded more sanguine about the existing regulations than the administration, which is talking about 75 percent cut in regulation. Are you inclined to see 75 percent cut in Dodd-Frank, or even more? And, if so, what’s your wish list of what to cut and what not to?

HAASS: And do you want the Dodd or the Frank? (Laughter.)

MOYNIHAN: Seeing that I live in Massachusetts—(laughter)—Barney was my congressman.

Don’t hold me to this exactly, but I think—I think the total number of words on the Volcker Rule, so-called, is like 190 or something like that. There are five regulatory agencies, maybe six, who are sending out thousands of reports for every trader as to whether they—the activity they did met the reasonably near-term estimated demand, or something like—some tortured acronym they use.

When we started at Bank of America, we basically got out of proprietary trading in 2010 because I just don’t think it’s a wise use of our capital. So when we were making a market, it’s because X wants to sell and the market’s not really there, and so we know what the flows are. But back-testing that you sort of say: Do you really need all that, or can you make this simpler? And that’s the kind of question that the big banks are into, is how much it costs.

We’re not disagreeing that we shouldn’t be building up big warehouses of stuff with big principal risk with duration to it. But the other rules get to you far before. The capital rule makes it so expensive that you would never do it. You know, so when you hear a lot of us talk, it’s about how do we pull back the—for lack of a better term, the cost of compliance as opposed to the actual underlying principle. But they’ve gone far away.

And so I think small banks and stuff, you know, we visit our pox on their house and all this stuff has worked on them. So we’ve been advocates—back to Congressman Hensarling’s view of getting rid of that rate, we’ve been advocates of the big banks, you know, as a group saying, yes, let them out, because we just—we’re going to clean them up. There’s only so much trouble they can get into if they’re a $20 billion institution. Regulate them from the OCC and other perspectives as to how they distribute their portfolios, then we’ll clean it up. But they’re not going to—so there’s ideas like that that we’ve been more advocates for, is how do you trim.

If you are the—you know, if you’re sitting with this basic obligation to make sure that the FDIC fund restores after a crisis, you also want to make sure people have capital and liquidity, and plus a disruption attached to it. So we’re—you know, we’re not going—the question—an analogy I’ve used before is, under our capital requirements in this, you think of us as running a shirt business, and we got to make shirts. And so we got to make shirts of X. Right now, our—we need seven factories to make that shirt—those shirts as a matter of production. They make us have three extra factories in case someday somebody may need an extra shirt. And I’m—my argument’s not that maybe we don’t need that because we’ve learned that when capital gets stressed you got to have more than you think, but maybe one extra factory is enough, or maybe two extra factories is enough. But do you really need three? And then the way you count what your 10 factories are is a whole different set of things. Each one of those factories for us would be $200 billion of loans that we could make with the same capital base, with the same responsible growth risk.

Our charge-off’s at an all-time low in our company’s history. The oil and gas stuff that came up last year went away—came and went in 12 months. So it’s not like we’re taking a lot more risk, it’s just we don’t have the capacity to lend that we could have, and the competition created from that by us and around the industry. So that’s the debate we’re into.

So is that 75 percent of the rules? I don’t know. For small banks, maybe. For us, probably less. It’s just a plain fact that big banks are going to have more regulation. That’s fine with us. But let’s try to discuss what the—at risk.

One other thing is think competitors around the world. Our risk-weighted assets—the total risk-weighted assets at some of the big European banks, 400, 500 billion (dollars). Ours are 1.6 trillion (dollars). Their balance sheet’s the same size, in some cases bigger than ours. I don’t care how you count, that can’t be right. And so we’ve got to get to global—if people are going to operate in global markets, we’ve got to have some minimum set of standards because, again, we clean up the global mess, too. And so that’s why we’re trying to get balanced regulation as opposed to just eradication.

HAASS: I have a big idea for you: Instead of giving people a toaster when they open up an account, give them a shirt. (Laughter.)

MOYNIHAN: We do that too.

HAASS: Michelle (sp)?

Q: Thanks for doing this.

One of the criticisms of financial reform was that the fulcrum of a potential future crisis had simply shifted. You guys have to have a lot more capital. Derivatives now have to clear through the clearinghouses. There were concerns raised by BlackRock on The Wall Street Journal editorial page that they don’t have enough capital. Has that been—are you assuaged of those concerns? Has that changed?

MOYNIHAN: There are two aspects of that. One is a capital question. And if their systems are operating well, and they’re rebalancing and the—you know, the—you know, the netting positions, and they’re very accurate, and everything’s right—you know, I don’t—whether they have enough capital is almost a relative question, because as long as they’re operating right and they’re really settling and really putting up, you have to worry about your counterparty exposure to the clearinghouse. The real question is then, do they have the capabilities to protect themselves from something going wrong in that case?

And they’re not big operating budgets. And so, you know, if you start thinking about the 3 billion (dollars) we spend on technology a year and the half-billion or more we spend on cyber, and things like that, and then think about those enterprises total operating budgets—and, by the way, you got to remember that JP or Wells and, you know, Goldman, Morgan Stanley are spending like amounts, and start thinking about that. So we’re now trying to figure out how to make sure they stay secure, because I’m not sure—I think we’re getting more and more comfortable that you bought all the risk, and it’s a great intellectual question, what if one goes down? The question is, how do you make sure it never happens? And that’s really what you got to go after, and then how do you keep a separate set of records if it did?

And then so teams in those companies are working at it hard, but I think we probably are very worried about the concentration risk, but it’s more of an operational concentration than a risk concentration, because I think we’re figuring our way through these things. And if they’re doing it right, it stops all the debate about do I have the collateral, don’t I have the collateral, do I have the valuation, don’t I have the valuation. And that actually makes business easier. And if you’re in a flow business, that’s fine with you, you know, because a lot of time back in the crisis you had good arguments about people—I say it’s worth 10, you say it’s worth 12 we’re going to fight for a while, slow the whole process. This takes all the mystery out of it. So there’s a value to it. It’s just a question of how you’ve concentrated the operational risk and the credit risk, so to speak. But the credit risk you can actually start to think through. The operational risk is very difficult.

HAASS: As I listen to you, is it implicit in what you’re saying, Brian, that we need, I guess, something—Basel IV—that we basically now need to think about a way of smoothing out or adding greater consistency to our regulatory policy?

MOYNIHAN: I don’t think you need anything new. I think you just need to get the—talking about the global question—you just need a more common view of what capital is and isn’t and how it works and stuff. And I think that’s—but that’s what—and, to me, you don’t need to—first, we got to agree with the Hippocratic Oath here. So we can’t—we got to stop doing harm, and let’s adjust this. But the second thing is the rules are there on the European sector. The tough thing about Europe, frankly, is the capital markets and the capability of restructuring these things is just slower because it’s a lot of different institutions, a lot of different regulations, a lot of different social mores that these were built to support.

So, you know, the famous Italian situation that keeps going on and on, we forget that that bank is 600 years old. So it has these traditions that—you know, we’re 240 years old. So we’ve been around a while too, but—you know, so it’s just different. So we got to be a little careful in applying the American experience into things like that because of disruption and the nature. We don’t need Basel IV. We just need to apply the rules more fairly—more straightforwardly that exist today.

HAASS: OK.

Q: Mario Platero with Il Sole 24 Ore.

I wanted to ask you, going back to Europe—you’ve been talking about Europe, and Richard mentioned about London and Brexit—do you have contingency plans to move your headquarters? Have you studied some scenarios, you know, also to please the other European countries? And back to the European banking crisis—you sort of mentioned it—but what do you think a good way out could be? I mean, you know, not just Monte dei Paschi di Siena, but also German banks—local German banks that somehow have managed to be out of some of their responsibilities. Thank you.

MOYNIHAN: I think the thing that makes America kind of unique is the investor pools of capital and the capital markets, and the ability to have the economy held by people who, you know, effectively don’t have a guaranteed liability structure. So if the asset base of a mutual fund drops by 20 percent, we all don’t like it in our 401(k), but it’s not that we get 100 cents, a dollar back when the asset values drop to 80. You know, that basic transmission of the economy into the broad investment and long-term investor base is fairly unique. It exists is these other countries, but it’s just not there.

And so you got to pool more private capital. The EU was trying to make it aggregated across the EU. It never—it’s still a little bit bouncy on that basis. You got to pool the aggregate capital. You got to let the free flow of capital. And then that allows your banks to lay off the economy and be more in the business of handling the loans, which aren’t very easy to do that with consumers, and then the rest of the lending practice can go to—you know, term debt and stuff—can go deeper into capital structures. That’s the key issue.

And then—and the savings vehicles will move around and stuff. So, to me, that’s the key difference. And I think they need to push for that. Everything’s that’s going on now is causing that to be pulled back. You know, this aggregation of these two markets, worry about the difference between markets, lack of, you know, regulation that’s consistent. And they’re working on all this, but in some respects you need to do this first before you got 30 years into this. And that’s one of the difficulties of backtracking and figuring it out, with the history they’ve had.

So that’s Europe. I think it’s just fundamentally—and, by the way, Brazil, Latin—you know, Brazil, China, India—and all these countries have to give depth to their capital markets to allow the economy to move to long-term investors who can take a view of risk that may be wrong or right, but doesn’t require a fixed liability structure behind it to work. You know, on the—you know, just—so I think it’s hard. You got 20-odd countries got to agree to everything. It’s like giving the state of Rhode Island a veto about everything that happens in the United States. It would be an interesting outcome. You know, that’s the reality of Europe. And so they got work to do.

And so I don’t mean to be—I’m not trying to be critical. I’m just saying, I can understand how hard it is. And yet—you know, yet they got to get on with it, because if they really want to have the free flow of capital and the vitality of their financial system, they’re—you know, they need to get these rules fixed.

HAASS: But the trends are probably the opposite.

MOYNIHAN: That’s exactly right. I’m saying, you know, now, the contingency plans for Brexit, absolutely. We had them before the vote was taken. I’d put it in a simple nutshell. Prime Minister May made it clear that there’s revisiting what the population wanted. We’re doing it, you know, last Tuesday, or whatever it was. And so, you know, that—in a vote and everything and Parliament, all that—the Supreme Court and all that stuff, that’s kind of all through. So the only question now is how much time you have to adjust to whatever set of rules. And so the implementation period, I would advocate that they need to think three, four years to that, to allow people to adjust, to make this a more natural thing. Otherwise, you’re going to start making decisions which may be reversed. And, you know, you don’t want to move a function and then move it again.

And so that’s—the contingency plan basically is to have the ability up to do securities business and banking inside the EU and inside the U.K. That most of us have, or are going to have quickly. And so I don’t think that’s a big issue. So you have a fallback position. The question is, can we get enough time to do it the right way, so we cause less disruption. And I hope that in the political, you know, atmosphere that is obviously, you know, sometimes. And you’re here to get a little more—as a reality, if they’re going to have to do something big, gets in there, they start to hear people saying, we got to make this work, I hope that that spirit allows our institutions and my colleagues to have time to implement this the right way and not cause disruption.

HAASS: You may get your wish if they can’t—it’s highly unlikely it’s all done within two years, so you’ll have some version of an extension or transition.

MOYNIHAN: The problem is I won’t know the rules till the end of that, and then I need to do it after.

HAASS: Yeah. You need time after that.

MOYNIHAN: And so the question is—so what we’re saying is, you know, figure out what you’re going to do for the next couple years, give us a set of rules, and then give us four years to implement. Not that we’re going to retrade it and try to go backwards, but then we can figure out what’s going on. And it’s—so we have lots of contingency plans. Lots of places that—where nice to bankers—suddenly are coming to talk to us and be very nice to us and ask us to come there. (Laughter.)

HAASS: Is that disorienting?

MOYNIHAN: It is, quite. (Laughter.) But, you know, the reality is that’s all right. By the way, we go through this every day in the United States. You know, a state comes to us and says: If you move people here we’ll do this. It’s not—it’s not new. It’s perfectly natural human behavior to look at—you have thousands and thousands of jobs in play and say, hey, let me get my piece of that. So, hey, it is what it is.

HAASS: In the back. Yes, sir.

Q: Hi. Eric Dadiere (ph).

If you had to rank the relative importance over the next couple years of loan growth versus the yield curve and interest rates versus regulatory reform, how would you think about that? And does one multiple the others in a stronger fashion?

MOYNIHAN: Well, something you can quantify with math. So we tell the investing community every quarter what a 1 percent move in rates on a parallel basis means to our company. As of the end of the third quarter, it meant 5 billion-plus, at the end of the fourth quarter it meant 3 billion-plus. You said, what happened to 2 billion? Well, it actually now is coming through the P&L over the next year because the rate structure moved 25 basis points in the end of December, and the long bonds moved up. So it’s 600 million a quarter, we told investors, the first quarter next year, times four, there’s your 2 billion.

So, you know, I can quantify that easier and convince you that that’s sort of mathematically calculable. So they’re all important. Cost management—you know, so come back, the way we draw the company in response to growth. We got to grow no excuse, which means we have to loan deposit and fee growth. We have to do it on a customer-focused way, staying within the customer sets we deal with. We have to manage the risk well, and it has to be sustainable—investing in the future while you’re taking the expenses out and all the things we do on environment and diversity and being a great place to work. So that’s the way we think about the company.

And so in that context, all those things are important. So, but rate, I can say it’s that loan growth. You know, I can tell you what the number is, but I need an economy that actually accepts loan growth, because your biggest—i.e., that has the activity that we can get loan growth out of. And so, you know, we have basically three different things. We can control costs. We can control credit. We can’t control rates, but we’ll benefit by them if they go up. And if they go up for the right reasons, that probably means the economy is growing and that probably means loan and deposit growth, which has been pretty good, will even be better. And that makes, you know, a future for our company to start to drive the earnings up again, is pretty well-assured if those things happen. If we—you know, if something goes bump in the night and we hit a recession, it changes the calculation, except for the things we can control.

HAASS: Yes, ma’am.

Q: My name is Bhakti Mirchandani. I work at a hedge fund. Thank you for your comments.

Bank of America has grown its market share in Brazil, while some of its rivals have retrenched. What are your goals for your business there, and what would you like to see the government do to improve the economic situation?

MOYNIHAN: Well, so just a basic—outside the United States we as a company do two things: global corporate investment banking for large companies and global capital markets for large investors, because those are global businesses. And so while Brazil has gone through, you know, a tough situation, you know, the world’s come back and, you know, believes it’s on an end. The fundamental changes have gone on in terms of the political structure and legal structure and stuff are pretty amazing. The team running the country now gets great marks. Henrique Meirelles is a former business colleague of mine. And yet—you know, and it’s a big, vibrant, large country, with a lot of people, a lot of ingenuity. And, you know, been—we’ve been there since ’54, I think. So it’s not, like, new to us. And so we believe in that country and Alex Battamio, who runs Latin America for us, and the team do a great job. It’s just we’re going to ebb and flow with the activity in the market. And it’s picked back up after the obvious problems.

But you know, it’s—to me, as I think about Brazil, having gone there a number of times and listened to the people—it is important Brazil does this right, because the transition from where they were in the ’40s and before to where they are now, the ability to bring that much of the population into the middle class which, under President Lula and stuff they were able to make happen, the ability to—you know, they have certain things that no other country does, other than a few of us, which is energy, they can grow food, they have a lot of water, they have a population that already knows how to spend, honestly, and is not afraid of it. And if they fail, the message that sends to other countries trying to make that transition I think is kind of an interesting question, right, which is: This is just too hard. So they—so that socialism to social capitalism to capitalism I think is critical for Brazil to successful.

Now, it’s going to ebb and flow. And it’s been an interesting ride in the last few years. By the way, it was an interesting ride in other times. But I think the team really understands that long-term destiny of this country and is trying to shape it down that road. And so we have high hopes for it. It’s just—it’s always a little interesting.

HAASS: Yes, sir.

Q: Andrew Gundlach, First Eagle Investment Management.

When the Department of Labor fiduciary rule came out over the summer, your firm was perhaps the most immediate and toughest on its change in commission-based IRAs, things like that. Now, the whole rule is up in question. SEC might take it on. Who knows. The question for you is how do you see the rule being implemented? How does it—how do you think it’s going to change the relationship between the broker and the customer, between the home office and the satellite office, and between those who sell on your platform and want to distribute their product on their platform between—you know, that competition between product, if you will. How do you see it all playing out?

MOYNIHAN: Well, it terms of the actual rule, you know, they’ve put a delay on it, things like that. We are—we’re going the way we’re going because, I’ll come back, it’s tied into broader business change. But I think, you know, this will be the exact kind of rule that the new administration says, wait a second, in Dodd-Frank there’s a requirement the SEC promulgate a fiduciary standard. They have not yet. And then we have the Department of Labor promulgate one. And so this is going to be the exact discussion about the executive branch powers versus legislative powers, and all the debate. Quite frankly, that’ll go on. And we have to run a business and serve 2 ½ trillion of assets in that business. And by time that gets decided, you know, we’ll be off.

Come back to what’s going on in wealth management and asset management. You know, there’s a huge active to passive move. There’s a huge standardization, especially in the lower-sized asset based clients because of as the revenue comes down, you’ve got to get more standardized. And there’s nowhere that’s a bit more true than the rollover IRAs and things. So we have a 401(k) business when the company has a plan and the customer has an account in that. They roll out of that. Those accounts are always relatively small. And so the question is how bespoke you can be in that account and how many different products you can offer in it. And so we—the fiduciary rule ran into us trying to standardize the lower end of practice, and bring in, you know, what we call centralized, you know, investment advice. We don’t pick stocks. You know, we use all the products, you know, like your company, other companies. And we overlay investment advice, number one. Financial planning, investment advice, number one. And number two, asset allocation and things like that.

And so as you think about all that, that leads you to trying to drive more and more efficiency for the customer, and the financial advisor to be able to handle more and more customer relationships if they’re lower balance with less and less time spent doing one task, and much more time spending advising the client. And so that’s the transition we’re trying to make. The fiduciary rule fits within that, especially that 10 percent of our products that are in that type of thing. So we are—we’re going down this road. The question is when client balances become bigger and more revenues—you can be more bespoke. That won’t change. And so I think people—some people over-read what we were doing. But to us, the idea of saying to the customer, we’re going to not have any smaller situations, we’re not going to try to overlay this with a lot of sort of one-to-one advice.

We’re going to bring a standard. When a person has 10 million (dollars) with us, we’ll think of something—you know, we’ll do it differently, and there’ll be various in between. But it really fits into this broader platform, which is going to be across financial services, which is feed compression and then how do you get more efficient while your teammates can make more money, because nobody wants to come to work for less money next year than this year. At the same time, the customer’s got to get a better deal. At the same time, we got to standardize it so it can pass through the hundreds of millions of dollars we spend on research in a team. And that whole—and you do and your firm and other firms bring to us. That whole thing is going to change dramatically.

HAASS: Leslie, you here.

Q: Thank you. Leslie Bains.

You talked about regulatory reform and corporate tax relief, but where do you see consumer confidence at the moment? Maybe taking on more debt. And is that one of the key drivers for growth at Bank of America?

MOYNIHAN: So in the consumer business last year we made almost $8 billion after tax. So it’s the biggest business in the company, and probably always will be, as a matter of just simple math. The size of the U.S. consumer base exceeds the economies of the rest of the world on its own. So everybody talks about China’s economy. The U.S. consumer economy—two-thirds of the U.S. economy is basically—so it’s going to big business for us. So it’s critically important. And the consumer confidence jumped after the election in a way—eight points, or whatever it was—you know, which was unusual in a single month. The spending levels so far in January are 5 percent over what they were last year’s January. They were better than 5 percent in the fourth quarter. You know, so the consumer’s in good shape.

And then on the borrowing side, if you sort—the outstanding debt continues to move up incrementally. Auto loans, you know, grew fast. We don’t do student money, haven’t since 2007 so it’s not as relevant, but it grew fast, and that’s kind of around. And then on the credit card stuff, you’re seeing the balances grow slightly, but people are really transacting. So 25 percent of the balances pay off every month, with people just charging and paying it off. So that’s a lot of running to stay in place. And in home finance it’s still got room to run, in the sense that rates will move up. And people are like, oh my gosh, rates are moving up. But on a $200,000 mortgage loan, 1 percent increase in rates in $2,000 a year, divided by 12, is not a major difference. So if a person can afford a $200,000 home, and $100,000 is simply—math would be just half of that. So I think housing’s got a lot of room to run.

So I think the consumer has an ability to keep leveraging, as long as, what? Employment stays high, unemployment stays very low—which it is, historically lows, including new claims and things. And the second is wage growth. And this is one of the great debates in the economic fraternity. Has there been wage growth? And all the different fanfare. But the median wage in the United States are growing, I don’t know, 3 percent, almost to 4 percent. The average wage—because some of the population dynamics—is growing less fast, but now is 2 percent. That’s where the Fed had to move. And you hear them talk about that. But that has been going on a little more consistently than people think. So that then says, I have more money. I’m more sure of having my job. I will therefore spend more, which is the anchor behind the U.S. economy. And that’s why we think the economy continues to grow next year. If you got the policies and fiscal stimulus you might see more, but that sort of makes that 2 percent pretty well assured, unless there’s some cathartic event that comes on top.

HAASS: I’m beginning to think you’re as close to an oxymoron as I’ve ever met, a sanguine, optimistic banker. (Laughter.)

MOYNIHAN: Well, when you have a company that’s been around for 230 years—people said—you know, before the election, people kept—always asked me, you know, geez, what are you going to do about this election? And so since we’re all in New York, and all the Hamilton fans are out there, I said, well, that election in 1800 was pretty tough, and we were there then. So we got through that one. (Laughter.) So this one—and we’ll get through all of them.

HAASS: Well, on that positive note, Brian, thank you very much and great to have you. (Applause.)

(END)

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