The Senate passed financial reform legislation last night by a vote of 59-39. The bill is expected to go to a conference committee headed by Rep. Barney Frank (D-Mass.) which will reconcile it with the House version of a similar bill passed in December. Congressional leaders hope to have a bill to the president for signing by Independence Day.
Some of the notable provisions in the bill that would directly affect bankers include the creation of the consumer financial protection bureau, a rule that has the Fed setting rates for interchange fees on debit cards, and a rule that prevents banks from counting trust preferred securities as Tier 1 capital.
The House bill takes a slightly different approach on many issues. For example, the House bill includes creation of a $150 billion fund that the largest banks would have to pay into. The money would be used to resolve the failure of very large financial institutions. The Senate bill originally included the creation of a $50 billion fund, but the provision was ultimately dropped.
Also, the House created an independent, stand-alone consumer financial protection agency, which is slightly different from the Senate’s idea of putting the new agency inside the Federal Reserve.
The next step for Congress is to name members of the conference committee. Amendment can be considered in conference so advocates representing various interested parties will still be working this legislation, seeking last-minute changes. Bankers would really like to see the restrictions on interchange fees dropped, as well as the proposed restrictions regarding the categorization of trust preferred securities.
The ABA has a largely negative view of the Senate legislation. Here is the statement issued by ABA’s president/CEO Ed Yingling.
The American Bankers Association has supported broad financial regulatory reform since the beginning of this debate. However, ABA and traditional bankers across the country oppose the legislation approved by the Senate because it now contains very negative provisions that will ultimately hurt American consumers, small businesses and the broader economy.
This bill contains some of the key reform principles that we support, but it also has been loaded down with provisions that will greatly undermine traditional banks’ ability to provide credit and help create jobs in their communities.
Many of these negative provisions have nothing to do with the financial crisis. Despite all the talk about this being a Wall Street bill, it, in fact, does tremendous harm to traditional banks on Main Street that had nothing to do with the crisis and that will now be less able to support the economy. This bill promised much-needed reform but has gone terribly wrong.
In testimony before Congress, in correspondence with policymakers, and in our outreach to the press, ABA has consistently expressed our support for the key principles of reform. These include creation of a systemic risk council, creation of a strong mechanism for handling the failure of large institutions, ending the concept of too-big-to-fail, closing gaps in regulation and enhancing consumer protection.
We have also continuously stressed that reform must be done right because if it is not, it will only set the stage for future bailouts, undermine thousands of traditional banks that had nothing to do with causing the financial crisis, hurt banks’ ability to lend, and drive more financial business into poorly regulated firms and overseas.
The ICBA was a little more upbeat, issuing this statement under the name of its chairman, Jim MacPhee, CEO of Kalamazoo County State Bank in Schoolcraft, Mich.:
The recent financial and economic crisis clearly demonstrates that some reform of Wall Street is needed to safeguard our financial system and the nation’s taxpayers from a future catastrophe. ICBA appreciates that this legislation includes measures that hold accountable the too-big-to-fail megafirms and nonbanks that were the root cause of this crisis—measures for which ICBA has been a leading proponent. ICBA thanks Senate Banking Committee Chairman Christopher Dodd (D-Conn.) for his leadership on this legislation and for considering the needs of our nation’s more than 8,000 Main Street community banks. ICBA appreciates the Senate’s recognition of the differences between Main Street and Wall Street by ensuring megabanks pay their fair share for the risk they pose to the FDIC’s Deposit Insurance Fund (DIF), and ultimately our entire financial system. This is a major victory for ICBA and community banks. This measure will alleviate the disproportional burden on community banks, will reduce the assessments of 98 percent of banks with less than $10 billion in assets and will keep nearly $4.5 billion in community banks and their communities over the next three years—something that is critical to aiding America’s economic recovery. ICBA thanks Sens. Jon Tester (D-Mont.) and Kay Bailey Hutchison (R-Texas) for their efforts to create much-needed parity between large and small banks.
ICBA still has grave concerns about a separate Consumer Financial Protection Bureau (CFPB). While we appreciate that community banks will have some exemptions from the proposed CFPB, the changes do not go far enough. We are disappointed that further changes were not included in the legislation. Community banks have always viewed consumer protection as a cornerstone to their business model, so it makes sense that the CFPB focus on those too-big-to-fail and shadow institutions that were at the heart of the financial crisis. ICBA will continue to work for additional revisions to the CFPB.
ICBA is pleased that the bill maintains the Federal Reserve’s examination authority over state member banks, which allows the regional Federal Reserve Banks to keep their finger on the pulse of the Main Street communities that community banks serve each and every day. These communities have diverse regional economies, and the insights provided by the current system are crucial to the ability of the Federal Reserve to exercise its monetary functions and gauge the impact of banking regulations across various institutions. ICBA thanks Sens. Kay Bailey Hutchison (R-Texas) and Amy Klobuchar (D-Minn.) for their efforts to maintain the Fed’s examination authority.
While ICBA is pleased with several measures in the Wall Street reform bill, we continue to have critical concerns with language that will inadvertently harm Main Street community banks. ICBA opposes the interchange language that will harm community banks that offer credit and debit card products to their customers. The current interchange system makes it possible for small community bank issuers to serve their customers because card networks apply the same interchange rates for small issuers that they do for large issuers. By reducing interchange fees through government regulation, consumers will face higher costs through annual fees and increasing interest rates, as well as fewer choices as community banks are forced to exit the market, thereby leaving consumers with few options and ultimately forcing them to use cards provided by the megabanks.
ICBA also has significant concerns with language that was originally intended to ensure that large banks and bank holding companies would have to meet capital standards that are as strict as those that apply to small banks and bank holding companies. However, the language is worded broadly enough so that it excludes capital instruments such as trust preferred securities from the consolidated Tier 1 capital of bank holding companies. This will cause serious harm to community bank holding companies and their underlying banks—the very institutions it originally aimed to avoid burdening. ICBA will work with the House and Senate to ensure that these onerous measures are not included in the final legislation.
This has been a long and fast-moving legislative debate, and it looks like there is light at the end of the tunnel — for better or for worse. We at NorthWestern Financial Review see the legislation bringing on unprecedented levels of regulatory burden for banks in the Upper Midwest. Greater restrictions on an industry don’t typically lead to greater innovation. That’s bad news for everyone. Plus, one of the main causes of the financial crisis completely escapes scrutiny in this legislation — Fannie Mae and Freddie Mac. Until Congress figures out what to do with these guys, financial reform really won’t mean much in terms of strengthening our overall economy.