Wednesday, June 29, 2011
By Heather Miller
The ambiguity over a slew of new banking regulations could actually be what’s hindering our economic recovery.
The ‘what you don’t know won’t hurt you’ idiom couldn’t be further from reality for banks in Acadiana as they closely monitor the status of sweeping new federal financial regulations, many of which have yet to be defined and leave banks of all sizes under a huge cloud of uncertainty. But there is growing sentiment that excessively harsh banking regulations in the new Dodd-Frank financial reform law may be hindering economic growth at a time when it’s most needed; until there is clarification, many banks are likely cutting business lending.
When Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act last year in response to the 2008 financial crisis, the new regulations were intended to level the playing field and prevent “too big to fail” banks from causing another financial downturn. But a year after the Dodd-Frank vote and weeks before the July 21 deadline for the Federal Reserve to implement the new rules, local banking execs are wondering whether the feds are just as lost as everyone else on how the new system will operate and how much it may hurt smaller banks despite its big bank intentions.
“The Dodd-Frank Act is one of a number of legislative initiatives proposed in recent months to address the ongoing global and national financial crisis,” says Duayne Richard, Whitney Bank’s Lafayette/central Louisiana region president. What banks do know is that the reform legislation will increase government regulation of the financial services industry, Richard says, but the industry as a whole is still reviewing the implications of the bill and its impact.
“Regulators are trying to re-create 80 years of legislation in one year,” says Bob Taylor, CEO of the Louisiana Bankers Association. “What we have is a big unknown as to how it’s going to work, what’s the bank going to have to do. That’s where everybody is. [Congress] kicked it to the federal regulators. They said this is what we want; you write the regulations. That’s part of the problem. Congress is giving more authority to banking agencies, and now banking agencies are writing what Congress didn’t necessarily want.”
One bone of contention among the 1,000-plus pages contained in the Dodd-Frank act is a new Federal Reserve policy still in limbo of capping the fees banks charge for each debit card transaction made, known as the Durbin amendment. Banks charge a small fee to process each debit card transaction, and the 12-cent cap proposed equals 75-80 percent less than what banks currently charge on average.
Merchants pay the swipe fees, Taylor says, which in turn means a guaranteed payment for what they’re selling and decreases the fraud risks often associated with checks. It also means a higher price on the goods for consumers, though Taylor counters that customers don’t really see the increase because it’s already built in to the cost of what they’re buying.
Federal Reserve Chairman Ben Bernanke may increase the 12-cent cap proposal when he outlines the new policies, but analysts and economic observers don’t believe the cap will be any more than what it currently costs for banks to provide the service.
Banks with less than $10 billion in assets are exempt from the debit interchange fee cap, though small banks have raised numerous concerns over whether debit card networks (i.e. Visa, Mastercard) will provide a two-tier system for capped banks and smaller banks that can continue to charge an average of 44 cents per swipe.
“What Louisiana community bankers find so objectionable, as will their customers when they realize what this will mean to them, is that Congress believes it is their job to fix the price of these transactions,” Taylor says in a Letter to the Editor submitted to media outlets across the state. “If we give this power to Washington, it will be hard to undo the damage this precedent sets. Maybe your business will be next.”
For institutions like BancorpSouth, which has $13 billion in assets and a presence in eight states, the cap could be problematic.
“In the end it’s going to come down on consumers,” says BancorpSouth Lafayette Community President Teddy Easton. “It will reduce some of the profitabilities of the bank, and it will end up being a downfall for consumers.”
With so many new policies to pick apart, Taylor says small banks are being forced to create compliance departments or hire full-time compliance officers whose sole job is to ensure banks are correctly following the new rules. According to a report from The Wall Street Journal, more than half of the 387 sets of new policies had not been outlined as of June 15.
“Their whole job is to make sure a bank is in compliance with the myriad of federal regulations out there,” Taylor continues. “Some community banks didn’t have anyone full time on this until now. They have had to beef up their staffs to make sure they comply, but what it is they have to comply with is still unknown.”
Some banks, such as Whitney, already have a compliance department in place. But even those are unsure of what they should be doing to prepare for the new rules, which are supposed to roll out July 21. The combined Whitney-Hancock bank exceeds $10 billion in assets, so it, too, will be forced to comply with the new cap on swipe fees.
“Until the full scope of the law is known, or any other legislation that might be adopted, it’s difficult to predict to what extent the legislation might affect the performance and operations of the company or its banks,” says Whitney’s Richard.