Category Archives: regulation

CFPB official visits Gothenburg, Neb., bank

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David Silberman, assistant director of research, markets and regulations at the Consumer Financial Protection Bureau, traveled from Washington, D.C., to Gothenburg, Neb., to visit yesterday with Matt Williams and his staff at the Gothenburg State Bank.

Silberman became acquainted with Williams, the chairman-elect of the American Bankers Association, last March when Silberman  addressed bankers who had come to Washington D.C. He spoke to the bankers about the CFPB’s interest in overdraft protection products, saying his agency had looked at the practices of the nation’s eight largest banks. Williams raised his hand and asked if the CFPB had looked at any smaller banks?

The next day, Silberman’s staff contacted the ABA to find out the name of the banker who asked the question. They connected and Williams invited Silberman out to his bank to see how things work at a small town bank.

Silberman is one of six associate directors at the CFPB who reports directly to the agency’s Director, Richard Cordray.

Gothenburg, a town of 3,800 people, is located on Interstate 80, three and a half hours west of Omaha. The bank has $118 million in assets, two offices and 28 employees.

Williams said Silberman arrived at 10 a.m. and stayed until 7 p.m. During his visit, Williams and his staff went over four areas: overdraft protection, new account openings, home loans and general compliance.

Williams said the visit went very well and that he has never been more proud of his staff and the community. During lunch, Williams invited seven small business customers in to explain how Gothernburg State Bank has helped them stay in business. Williams also used his time to talk up his staff, which last year collectively volunteered some 3,080 hours of service to the community.

Williams said Silberman seemed to enjoy his visit and seemed to learn a lot. Williams said Silberman told him that any new rule regarding overdraft protection cannot be written in a one-size-fits-all manner.

Here are a few photos the bank posted on its Facebook page.

 

How to customize regulation to each unique bank?

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John Ryan, who heads the Conference of State Bank Supervisors really understands the dual banking system and the role that smaller banks play in our economy. Speaking in Des Moines recently, he emphasized the importance of relationship banking, saying that larger banks simply cannot replicate the level of service that smaller banks deliver day in and day out.

Ryan said there will always be a place for community banks because small business owners demand the kind of attention that only smaller banks can deliver. He expressed concern, however, that on-going industry consolidation has been concentrated among the industry’s smaller banks. “All the net decline in the number of banks has been among banks with $100 million in assets or fewer,” he said, citing a trend going back to 1992.

Individual judgment and the ability to tailor loans to specific situations is the hallmark of smaller banks, he said, but that  mode of doing business is generally out of favor with regulators. Regulation is generally about standardization, he said, whereas smaller banks shine when delivering specialized services. “We have to figure out how to regulate to the institution, not to an arbitrary standard,” Ryan told 270 bankers participating in the annual Day with the Superintendent event on April 26.

Regulators need the flexibility to apply regulations where they are needed. It is a mistake to apply regulations equally across the board to all institutions, and he said dividing the industry into two groups — one with large banks and the other with small banks — still does not provide appropriate distinction for appropriate regulation among a myriad of institutions.

“We need to be smarter about regulation,” he concluded.

Point about health care law fits Dodd-Frank

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The Opinion page of the Wall Street Journal today points us to this essay in Friday’s Orange County Register. Columnist Mark Steyn recounts Supreme Court Justice Antonin Scalia comments last week during oral arguments over the health care law. Referencing the size of the law, Scalia says “You really want us to go through these 2,700 pages? Or do you expect us to give this function to our law clerks?”

Steyn goes on to make the point that 2,700 pages is ridiculously too long for a law to be practical. “A 2,700-page law is not a law by any civilized understanding of the term…It’s not just that the  legislators who legislate it don’t know what’s in it, nor that the citizens on the receiving end can ever hope to understand it, but that even the nation’s most eminent judges acknowledge that it is beyond individual human comprehension. A 2,700-page law is, by definition, an affront to self government.”

I am writing about this in a banking blog because isn’t 2,700 pages about the length of the Dodd-Frank Act? How many lawmakers read the entire bill before they voted on it? The same point Justice Scalia makes about the health care law could be made about Dodd-Frank. More words — more pages — don’t make a law clearer, only more complicated. We see it in health care and we certainly see in it banking.

Steyn suggests laws should be limited to 27 pages. That seems like a reasonable suggestion. Certainly, if laws are going to be useful they need to be succinct enough to understand, let alone implement.

Fed sees unique role of community banks

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With the regulatory burden on banks being higher than ever, there is a sense that the regulatory agencies are covertly working to reduce the number of banks, particularly smaller banks. The Federal Reserve says that simply is not true.

In the last couple of weeks I have been to two meetings that included representatives from the Federal Reserve and they went out of their way to put down this notion. In fact, Minneapolis Federal Reserve Bank president Narayana Kocherlakota has talked on several occasions about the unique and essential nature of smaller banks. They are the only ones really designed to lend to small businesses. “Community banks play a crucial public function, facilitating the flow of funds from savers to good projects,” he said at a meeting with bankers recently. “Community banks are viewed as an essential part of the American economy.”

At an earlier meeting, Ron Feldman, the Minneapolis Fed’s senior vice president for supervision, regulation and credit, declared: “The Fed is not interested in reducing the number of community banks. We want to see them grow.” Like Kocherlakota, Feldman emphasized the unique nature of smaller banks. “If you wand to fund small business, you need banks that gather first-hand information from those small businesses. Big banks are not equipped to do that,” he said.

The Fed, of course, implements the laws that come from congress. Regualtors have a little flexibility in terms of writing the rules and regulations, but the general tone comes from Capitol hill. Lawmakers are the ones who need to understand the unique role of community banks. Some lawmakers get it, but too many still do not.

A look at who’s on the FSOC

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President Obama has nominated S. Roy Woodall, who recently retired from the Treasury Department as a senior policy analyst, to serve on the Financial Stability Oversight Council (FSOC). Woodall is also a former insurance commissioner for Kentucky and an insurance consultant for the Congressional Research Service.

The Dodd-Frank Act established the council, which brings together top regulators to identify and respond to system risks posed by large, interconnected bank holding companies and non-bank financial companies. The FSOC has broad oversight authority to help alleviate the issue of too-big-to-fail institutions in the United States.

In addition, the FSOC has veto power over the Consumer Financial Protection Bureau. Under Dodd-Frank, a vote by two-thirds of the voting members of the FSOC can override a CFPB regulation. (Wisconsin Congressman Sean Duffy has introduced an amendment to Dodd-Frank that would require a simple majority vote, rather than two-thirds, to overturn a CFPB regulation and would require the CFPB director to abstain from voting.)

If confimed by the Senate, Woodall will serve a six-year term. The position is the only voting member on the council appointed by the President; the others seats are reserved specifically for the chief regulators at nine regulatory agencies.

According to The Hill, “lawmakers had asked the president for months to fill the seat now reserved for Woodall, as it was the only voting spot reserved for an insurance perspective.”

Treasury Secretary Tim Geithner serves as chair of the FSOC, which is comprised of 10 voting members – nine federal financial regulatory agencies and an independent member with insurance expertise – and five nonvoting members.

Voting Members
Tim Geithner, secretary of the U.S. Treasury Department
Ben Bernanke, chairman of the Federal Reserve Board of Governors
John Walsh, acting Comptroller of the Currency (Thomas Curry will be Comptroller, if approved by the Senate.)
Mary Schapiro, chairwoman of the U.S. Securities and Exchange Commission
Sheila Bair, chairwoman of the Federal Deposit Insurance Corporation (Bair’s last day as FDIC chairman is July 8; Martin Gruenberg has been nominated to replace her; Senate confirmation is pending.)
Gary Gensler, chairman of the Commodity Futures Trading Commission
Edward J. DeMarco, acting Director of the Federal Housing Finance Agency
Debbie Matz, chairwoman of the National Credit Union Administration
Director of the Consumer Financial Protection Bureau

Non-Voting Members
Director of the Office of Financial Research, who has not yet been named
Michael McRaith, director of the Federal Insurance Office
John M. Huff, director of the Missouri Department of Insurance, Financial Institutions, and Professional Registration
William S. Haraf, commissioner of the California Department of Financial Institutions
David S. Massey, deputy Securities Administrator of the North Carolina Department of the Secretary of State, Securities Division

There is talk of Geithner leave his post. According to the Wall Street Journal on July 1, Geithner has told Obama that he will consider stepping down soon after policy makers agree to raise the government’s borrowing limit, which has a deadline of Aug. 2.

If no director is appointed and confirmed for the CFPB, the Treasury secretary takes on the role of running the bureau. Read more here.

More details about the FSOC can be found in a list of frequently asked questions and minutes from past meetings are available on the Treasury web site.

Pressure mounting against Durbin amendment implementation

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Interesting news comes out of yesterday’s hearings by both the House Financial Services Committee and the Senate Banking Committee. The Senate hearing took a look at the implementation so far of the Dodd-Frank Act, whereas the House committee specifically considered the Durbin amendment — that provision in the Dodd-Frank Act that requires the Federal Reserve to cap the interchange fee on debit card transactions.

There is a growing chorus of people asking congress to delay the July 21 implementation of the Durbin amendment. It is becoming apparent that the system may force community banks out of the debit card business, which would be devistating because so often a banking relationship starts with a checking account. Click here to read the testimony at the House hearing. Specifically, here is a summary of the ABA testimony, and here is what ICBA said in submitted written testimony.

Here is information about the Senate hearing.

The American Bankeris reporting today that Fed Chairman Ben Bernanke and FDIC Chair Sheila Bair commented that they support efforts to create a two-tiered pricing system for debit interchange — something that community bank advocates have said all along won’t work. Here are the salient paragraphs from the American Banker story:

At a second hearing, across Capitol Hill, both Fed Chairman Ben Bernanke and Federal Deposit Insurance Corp. Chairman Sheila Bair suggested that lawmakers were right to be worried. Though institutions with less than $10 billion of assets are exempted from the pending central bank rule, the regulators suggested that smaller banks may still be hurt.

“It may not be the case that, in practice, they are exempt, but I don’t know for sure,” Bernanke said. “Of course, one way to address it is, if Congress wants to, would be to require the networks to differentiate.”

That suggestion was backed by Bair, who said the FDIC is planning to send a letter to the Fed urging it to adopt a two-tiered system in order to ensure community banks are truly exempt.

“We are looking at whether there is regulatory authority and enforcement capability to basically require the networks to do two-tier pricing,” Bair said in a brief interview after the Senate Banking Committee hearing. “I think that is really what the question is. If we were able to do that, I think it would be a lot better for community banks.”

Bankers say a two-tier system won’t work because merchants will simply encourage customers to use debit cards from the biggest issuers if their pricing is lower. This would force small-bank issuers of debit cards to match the big-bank price.

The Durbin amendment is attracting a lot of attention and it is possible that it may not be implemented as originally scheduled. Indeed, the ABA is lobbying hard for a moratorium of at least two years so the issue can be further studied and details better figured out. See the March 1 NorthWestern Financial Review for more. In the meantime, this is a web site with good information on this issue.

Regulator is a Scrooge about Christmas

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Here’s a story that will take the cheer out of your holiday season. A television station in Oklahoma is reporting that federal regulators are prohibiting a bank from wishing customers Merry Christmas. Click here for the details.

The Payne County Bank, in Perkins, Okla., is a strongly capitalized, $115 million institution. Apparently the Federal Reserve is saying the bank was violating Reg B by posting a Bible verse on its web site. Examiners apparently also told bank staff they couldn’t wear buttons saying “Merry Christmas, God with us.”

I think this is the most ridiculous thing I have ever heard. I have called around to a few experts to learn whether these prohibitions are a common application of Reg B. I am skeptical and suspect it is simply hyper-sensitive regulators, unfamiliar with the local community, flexing their muscle.

If you have had a similar experience, I encourage you to leave a comment with your story.

Merry Christmas!

Warren says she’ll watch non-bank lenders closely, too

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In his first public speech as acting Comptroller of the Currency, John Walsh told a luncheon crowd at the ABA convention last month that he is closely watching the start-up of the new Consumer Financial Protection Bureau. He said that he felt reassured after his initial meeting with Professor Elizabeth Warren, the special White House appointee who is heading up the agency for the time being.

Walsh said he is glad the bureau will bring previously unregulated portions of the financial services sector under its supervision.

“Under Dodd-Frank, the consumer bureau is charged with responsibility for setting rules for all lenders, not just regulated banks and thrifts, and with actively supervising the nonbank lenders that previously flew under the radar. That won’t be an easy task. Simply identifying the mortgage brokers and mortgage banking firms, not to mention payday lenders and check cashers, around the country will be a huge challenge. There is no central registry or even a requirement to register as a financial services provider,” he said.

Walsh said lawmakers and consumer groups too often focus exclusively on the highly-regulated banks and thrifts, even through problems typically arise from other sectors of the financial services industry.

“Banks and thrifts are easy to find,” he said. “Because they are chartered, we know how many there are, where they are located, and who supervises them. When there are financial problems, Congress, the media and public, ’round up the usual suspects’ and that always includes ‘banks’ and their regulators. When solutions are proposed, even if the goal is to apply them across the financial system, they are added to existing banking law and the burden across the system increases,” he said.

“It will no doubt require some vigilance to ensure that the new consumer bureau doesn’t fall into this same pattern and focus the lion’s share of its attention on the regulated bank and thrifts that are easy to find. I am reassured on this point because in our first meeting, Professor Warren made clear that the new agency will ensure that its supervision and standards are applied equally to lenders of all kinds.”