Banks brace for financial reform regs

Local bank officials are concerned about myriad new regulations on financial institutions by the Dodd-Frank Wall Street Reform and Consumer Protection Act signed July 21 by President Obama.

While proponents say the act polices the industry, some in the field see unneeded rules for an industry that’s already highly regulated.

Initially written to protect consumers from situations similar to the Wall Street meltdown two years ago, the law has regional and community banks fearing its impact.

“We always worry when the pendulum swings and government attempts to help usually overcompensate,” said Bill Ratliff, executive vice president of government relations for the Missouri
Bankers Association, which represents 2,000 banking locations and 30,000 employees in the state.

“Trying to punish Wall Street, I think they may have hurt Main Street,” he said.

Key points in the 2,300-page law establish the Financial Stability Oversight Council, empower the Federal Deposit Insurance Corp. to liquidate failing banks and give the Government Accounting Office authority to audit the Federal Reserve System.

“The new law negatively impacts an already weakened industry by limiting diversified income streams such as overdraft fees and bank-card fees,” Commerce Bank’s Springfield Region President Bob Hammerschmidt said via e-mail. “Competition has always kept fees in check.”

While the number of regulations the law will create remains unknown, a report by global law firm Nixon Peabody LLP estimates the number at 500. The American Bankers Association predicts 5,000 pages of new regulations.

“I’m speechless,” said Frank Hilton, president of Citizens National Bank, which was operating under a cease and desist order before agreeing to merge last month with Empire Bank. “We’re regulated to death already and now 5,000 more pages get added.”

Other key points include:
• An original $50 billion bank-paid fund was abandoned following opposition from Senate Republicans in place of allowing the FDIC to liquidate failing banks;
• Prohibiting banks from proprietary trading and investing in private equity firms or hedge funds;
• Forcing banks to spin off some derivative trades to a subsidiary so that they are not in the same group as federally insured deposits;
• Calling for a two-year study of the credit rating agencies system, with the Securities Exchange Commission creating a board to assign credit ratings agencies to issuers of asset-backed securities; and
• Increasing the amount banks pay to the FDIC to 1.35 percent from 1.15 percent of total assets, and ending future payments from the Troubled Asset Relief Program.

Hammerschmidt said compliance costs, which are yet to be determined, will be passed to consumers.

The bright side, to Hammerschmidt, is that the bill will apply FDIC charges to total assets instead of total deposits. “This is a good thing because some banks were growing by funding their balance sheets with other liabilities, such as (Federal Home Loan Bank) certificates, thus putting risky loans on their books without paying FDIC premiums,” he said.

A key unknown, Ratliff said, is determining who will lead the Financial Stability Oversight Council.

“We’re concerned because they can affect all the banks; even though they don’t have direct impact on the banks, they do on the regulators,” Ratliff said.

Hammerschmidt calls the council a “wild card.”

“It will be within the Federal Reserve System but not accountable to the (Federal Reserve Board),” Hammerschmidt said. “I am concerned about the details of this agency and the potential to mandate or control bank products offered.”

The American Bankers Association has issued a statement opposing the law.

“While its core provisions provide needed reform, it is overloaded with new rules and restrictions on traditional banks that did not cause the financial crisis,” ABA President and CEO Edward L. Yingling said in the statement.

In Missouri, Democratic Sen. Claire McCaskill voted for the law, and Republican Sen. Kit Bond voted against it.

“It has been almost two years since some of Wall Street’s biggest banks nearly destroyed our economy,” McCaskill said in a news release. “This bill will hold these large investment banks responsible, and keep us from repeating history.”

The MBA will track the changes the law brings, but Ratliff said its final impact would be long in coming. “We’re concerned and will be watching this, but it’s going to take probably two to three years before the full impact hits us and our customers,” Ratliff said.[[In-content Ad]]