Sunday, October 22, 2017

The Proof is in the Pudding: Affects of Dodd-Frank on Community Banks

Posted by Amit April 13, 2011 4:40pm

Photo Credit: aduhai

We all know that a glass containing some water can be described as either “half-full” or “half-empty”. Until recently, I chose to describe the Dodd-Frank bill as half empty. In fact, I was pretty vocal about the impact of regulatory burden on community banks.   It wasn’t until last Wednesday afternoon when I converted.

 Last week, I was in Washington D.C. attending a legislative conference for a trade association. I, among other members, had a 20 minute session with Barney Frank.  He was as adorable in that meeting as Barney the purple dinosaur.  He was pretty dismissive about even the notion that somehow this bill would have a negative impact on small community banks. He rattled off all of the good things that the bill would benefit small banks and the fact that anything restrictive in the bill was clearly identified as intended for the larger institutions.  All that was missing were some cheerleaders with their pom-poms chanting, “Dodd- Frank, Dodd-Frank!” He couldn’t understand why community banks would be so concerned.  He pointed out the decrease in the assessment base for deposit insurance, the permanent increase in deposit insurance limits, the requirement to regulate non banking entities providing similar products and services, the $10 billion in asset size exemption for the Consumer Financial Protection Bureau among others. He ended the session by saying that if there is any confusion about the intent of the bill or if the regulatory agencies don’t enforce it as the legislatures had intended, to contact his assistant.

 His assistant in fact stuck around after he left to convince us that all we had to do was contact her, so that they could ensure that the bill is being enforced in the vein that it was intended.  What vein, you ask? From what I gathered, it was to help reign in the “bad guys” and not the small community banks. The message to me was quite clear: as astute a politician as he is, Barney Frank does understand community banking.  But is he their champion who will continue to fight on their behalf? I suppose time will tell. I came out of the meeting a bit perplexed and found myself questioning my stance on the bill.  Is it possible that my initial assessment is more influenced by what I hear from the noise around me rather than my own assessment?  Or maybe this bill isn’t so bad after all? 

 

A week later, I can’t help but be a bit hesitant in embracing this bill as effectively and passionately as Barney Frank. Then again, I am certainly not as smart as him and his staff.  So I figured I’d take a stab at listing many of the key provisions of the bill and see how each one of them would impact small community banks. Below is a brief summary and my assessment of the intended impact:

 

Legislation

Affects Community Banks

If Yes, Good or Bad or Don’t know

 

Yes

No

 

The Consumer Financial Protection Bureau  (“CFPB”) – ability to examine and enforce regulations for all mortgage related businesses and banks and credit unions with assets over $10 billion.

X

X

Technically, the CFPB will not have examination powers on small banks but the regulations that come out of it will have to be followed by them, so it’s both a Yes and a No. Banks below $10 billion will be examined for compliance by their regulator. Removes unfair advantage for non-banking companies who will now be regulated.

CFPB – sets new rules for consumer protection governing all financial institutions – banks and non-banks.

X

 

Deemed bad. If your community bank that offers a significant amount of consumer products then this is very bad. You’ll be subjected to more regulations.

Establishes the Financial Stability Oversight Council (“FSOC”) – makes recommendations to the Federal Reserve for increasing rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity.

 

X

 

FSOC - Ability to regulate non-bank financial companies.

 

X

 

FSOC – Able to Federal Reserves decision to require a large complex company to divest holdings.

 

X

 

Establishes the Office of Financial

Research within the Treasury.

 

X

 

Establishes a floor for capital that cannot be lower than the standards in effect today.

 

X

 

Collins Amendment – Trust Preferred Securities are to be excluded from a bank holding company’s regulatory capital – to be phased in at different times depending on size and type of institution.

 

X

TPS issued before May 19, 2010 by most community banks is exempt.

Requires large, complex financial companies to periodically submit plans for their rapid and orderly shutdown should the company go under.

 

X

 

Establishes an orderly liquidation mechanism for FDIC to unwind failing systemically significant financial companies

 

X

 

Significantly alters the Federal Reserve’s 13(3) emergency lending authority to prohibit bailing out an individual company

 

X

 

Reforms the Federal Reserve – new rules on emergency lending and others

 

X

 

Establishes transparency and accountability for derivatives

 

X

 

Raises standards and regulations for Hedge Funds

 

X

 

Establishes an Office of Minority and Women Inclusion

 

X

 

Establishes new Mortgage Reforms

X

 

New disclosure (TILA and RESPA) requirements and prohibits certain products. It was needed in the industry but will proportionally have a greater cost burden on smaller banks.

Establishes new requirements and oversight of Credit Rating Agencies

 

X

 

New rules for managing executive compensation and corporate governance

X

 

Most small community banks won’t really be affected by this.

Eliminates the OTS

X

 

Probably bad, the OCC is quite different than the OTS. For many it will be a culture shock.  But then this may lessen differences between banks and thrifts.

Strengthens supervision of holding company subsidiaries

 

X

I don’t know of that many community banks that would be impacted.

Interest on business checking

X

 

Good change, maybe.  Will probably raise the cost of funding and increase competition for such accounts.

SEC Reform

 

X

 

Establishes the Federal Insurance Office

 

X

 

Interchange Fees – requires that fees charged to merchants by credit/debit card companies are reasonable and proportional to the cost of processing those transactions

 

X

Although many community banks will be exempt (assets less than $10b), market pressure from large banks will force community banks to price at the lower level. Very vague language which was intended according to Barney Frank in the right vein but being contested by the large banks since smaller banks are exempted. The exemption is not very practical as such variance in fees would only serve to drive the customer away.  Proponents point out that large banks would have to counter by raising other fees to customers to make up for the shortfall and hence creating opportunity for community banks.

Securitization required for companies that sell products like mortgage-backed securities

 

X

 

Improves oversight of Municipal Securities Industry

 

X

 

Neighborhood Stabilization Program

 

X

Might actually help the community banks

Emergency Mortgage Relief

 

X

 

Foreclosure legal assistance

 

X

 

Provides greater transparency for the Extraction Industry (oil, natural gas or minerals)

 

X

No clue as to what this is doing in here

Permanent increase in deposit insurance to $250,000

X

 

Good change

Change in Deposit Assessment Base – now based on assets less tier 1 capital rather than domestic deposits.

X

 

Good change.  Barney Frank was quick to point out that this will help reduce cost for deposit insurance for many healthy community banks.

Interstate Branching

X

 

Good change in my opinion. But New York and NJ haven’t signed on as of yet.

 

Of course this not a complete list of all of the regulations covered under Dodd-Frank bill: it is 2,600 pages.  It stipulates 250 new rules and 65 studies which can lead to further regulations. The administration’s budget allocates approximately $6.5 billion in anticipated regulatory spending for eight Federal agencies to hire approximately 5,000 new employees.  But a quick review of the table above by a small community bank would indeed give it some comfort that most of the regulations probably won’t affect it in a significant way.  So why worry?  Barney knows what he is doing and does it well.  He was born in Bayonne, NJ and is a Harvard graduate.  How could this combination ever be wrong?

 But then I got to thinking. While the intentions of everyone in Capital Hill are probably right, what if the guys in charge of enforcing the rules see it differently? So I suppose the real issue is not necessarily the intent of the bill but its unintended consequences. I can recall when the BSA/AML requirements were first introduced, we were informed the intent was to regulate the big banks that had been careless in their money laundering monitoring efforts.  The trickle down effect of such regulations is that small community banks today must also implement an automated rule based system and have a BSA/AML Officer playing detective and monitoring activities of all of their customers.

 When one looks at the continually increasing list of small banks being shut down by the FDIC and the impact of such closures on the taxpayers, would it be so far out to assume that the regulators may apply the same paint brush to all banks, irrespective of the cost implications?  This uncertainty is a cause for concern.  In my line of work, I interact with different regulatory agencies based on the different charters of our clients.  (Lucky me!).  Based on such interaction, I know that there are differences in the way each enforces the same regulation.   The OTS and the OCC have had in my opinion the most disparity in the past.  Their consolidation into the OCC will undoubtedly have a significant affect on the savings banks.  While this change in emphasis may be enacted slowly (I hope), nevertheless there will be a significant change. This is probably an example of the unintended consequence of a change. So the question is how many other unintended consequences of this 2,600 page bill will the small community banks have to absorb?

 When speaking with Barney Frank’s assistant, she assured us that they are ready to fight the unintended consequences of the bill if the enforcement is not in line with the bill’s intent.  In fact, she added that some of the studies that the bill calls for are designed to measure the impact before enactment of more regulations.  All we have to do is e-mail her our concerns. They need the feedback to ensure that the enforcing agencies understand all aspects before enacting rules that would be cumbersome for small community banks. That was certainly very nice of her to say that Barney will be the champion on behalf of the small community banks. No offense to them, but as they say - proof is in the pudding. So far all I see is JELL-O. I’ll stay skeptical for a bit longer, how about you?

 

 

Comments

Amit Govil
Re: Interest on business checking Reply #2 on : Thu April 28, 2011, 15:59:30
I don't necessarily disagree with you. I think DF will definately have an impact on the banking landscape. I believe that Congress, including Barney Frank, did try to reduce the impact on community banks. However I am not sure that anyone really took the time to understand the true impact of the provisions of the bill while intended for "megabanks," would have on the community banks. That's what I refer to as the unintended consequences.
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Visitor
Interest on business checking Reply #1 on : Mon April 25, 2011, 10:43:07
In what world is this good, maybe for community banks?

This is good for megabanks to put pressure on community banks.
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