Bankers critique federal bill

Mid-Missouri bank executives believe some of the proposed federal banking regulations being debated in Congress this month could harm community banks, though a provision on deposit insurance would help.
Overall, the ongoing debate in Washington is leaving local bankers with feelings of uncertainty and unfairness.
The Restoring American Financial Stability Act of 2010 is intended to rein in risky banking practices that led to the meltdown of the US financial markets in 2008.
The legislation passed the Senate on May 20 and is being reconciled in a Congressional conference committee with similar legislation passed by the House. Although banking committee chairpersons predicted the bill would be ready for President Obama’s signature by July 4, at CBT’s press time Democrats were pushing for swifter action.
Three bankers interviewed by the CBT said they were still unsure of how the bill would impact their day-to-day operations.

“To sit here and say we know what’s going to happen and how it’s going to influence us, no clue,” said Boone County National Bank Vice President Mary Wilkerson early in the week.
Wilkerson said she had participated in a conference call with the Federal Reserve Bank of St. Louis a week prior, and the federal agency representatives were not ready to advise local banks on compliance measures.

The creation of a consumer protection regulator, with broad authority to write and enforce rules protecting borrowers, is a centerpiece of the financial legislation. Its jurisdiction would include banks, mortgage lenders and other companies whose primary business is making loans to consumers.
Wilkerson, Bank of Missouri President David Keller and Bruce Harris, president of the Missouri Independent Bankers Association and The Callaway Bank, all said some regulations are needed to protect customers.

Keller, however, described the banking bill as a “kitchen sink” approach to regulating an already bloated system.
“We’re trying to put all this regulation in place to force the element of trust in a banking system that is built on trust,” Keller said. “And it’s just adding more expense to the bank and more expense to the consumer to do business with banks.”
The executives said they wished small- and medium-sized banks had been exempt from parts of the larger legislation designed to regulate risky financial trading, a practice primarily taking place at the largest banks.
It’s “a bitter pill to swallow,” Wilkerson said of the potential regulations. Congress is punishing everyone, she added, even though community banks did not participate in risky trading schemes
The local bankers also lamented a provision expected to decrease the amount of money a bank can receive when one of its debit cards is processed by merchants.
The processing fee, called an interchange payment, would be regulated under an amendment to the bill from Sen. Richard Durbin, D-IL. Under Durbin’s amendment, the percentage at which banks could charge merchants would be decreased — a provision local bankers said would be a boon for big-box retailers such as Walmart.
Keller said that by allowing retailers instant access to money in the form of debit transactions instead of requiring them to hold out for checks to be processed, banks are providing a service to retailers as well as taking on the risk of possible overdrawn customer accounts.
“They enjoy the service, so why shouldn’t they pay?” Keller asked.
If banks are forced to lower their interchange rates, Keller said, this cost of processing the transactions and holding risk would eventually be passed along to bank customers. Some methods of transferring the cost to customers could involve the end of free checking accounts or possibly charging an annual rate to debit card users.
But Max Gleischman, a spokesman for Durbin, said the amendment would not affect the ability of community banks to set rates. The amendment, according to Gleischman, was only designed to affect banks that take in more than $10 billion in deposits — or only about 90 banks total across the nation.
Harris said that if community banks kept higher interchange rates than their larger counterparts, merchants would eventually refuse to accept community bank debit cards.
“It isn’t going to make any difference in the practical world,” Harris said. Setting higher rates “will make us noncompetitive.”
J. Craig Shearman, a spokesman for the National Retail Federation, a trade association, said Harris’ fears are unfounded. MasterCard and Visa have agreements in place with merchants, Shearman said, that do not allow merchants to pick and choose which cards they accept.
Keller, however, said he does not see a method by which card processing systems can charge different interchange rates based on the cards’ bank of issuance.
“How do you differentiate electronically in a transaction?” Keller asked.
Keller also said he fears the proposed Consumer Financial Protection Bureau will harm the ability of community banks to meet local financial needs. The new bureau will, he said, design government-sponsored financial products and force all banks to offer them.
“Regulation like this severely inhibits the ability of a local community bank to provide, to tailor its services to the needs of the community,” Keller said.
The regulatory bill before Congressional consideration, Harris said, also could contain a provision that would require all banks to pay into a fund that would provide insurance for the countries’ largest banking institutions — those often referred to as “too big to fail.”
Keller said he disagrees with the idea of providing insurance for the nation’s largest banks. He said those banks that deal in products such as derivative trading should be required to hold more assets on hand.
“If you’re going to be on the risk end of a trade, you better have the bananas to back it up,” Keller said.
A proposal to make permanent the increase in Federal Deposit Insurance that took effect on a temporary basis in late 2008, however, was met with support from the three local bankers.
Although making the raise permanent would cost banks more in insurance payments, Wilkerson said the move makes “complete logical sense.”
Harris said the move could provide a benefit for both banks and customers.
“It allows people to keep more money in community banks,” Harris said, “and gives us more money then to turn around and lend out.”