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Senate Banking Committee release is misleading


A release issued on March 29 by the Senate Committee on Banking, Housing, and Urban Affairs states that community banks will “win” if the legislation recently adopted by the Committee becomes law. In reality, the release is little more than an attempt to pit larger industry players against smaller ones in a clear “divide and conquer” strategy.
Let's look at what this release says, followed by our comments: 
Giant Wall Street banks are spending millions of dollars to lobby against financial reform.  These giant firms face one problem, (sic) money can't buy you love.  So, to try and sway public opinion, they are trying to take advantage of the well deserved reputation of their responsible smaller colleagues, community banks.
It's not just “giant Wall Street Banks” that oppose this plan. It includes banks of all sizes, from every region of the country. To suggest otherwise is simply false. 
Some giant Wall Street firms abused their customers and took enormous risks that nearly brought down our economy
Now the tone shifts to Wall Street FIRMS, MEANING A large number of “investment banks,” rather than traditional banks, that focused on the wrong issue. These entities, including mortgage brokers and mortgage bankers, focused on getting deals done rather than getting GOOD deals done. They did so because that's how they were paid. Whether the underlying mortgage loans were good ones was somebody else's problem, not theirs.
while our nation's nearly 8,000 community banks have been responsible actors who have paid dearly for big banks' mistakes. The financial reform bill reflects those differences, imposing greater costs and restrictions on the superbanks (sic), reining in the abuses that caused the crisis, but allowing community banks to continue serving their communities.
But it will not end the most important problem – “too-big-to-fail” as a matter of national policy – and, in fact, it WILL IMPOSE additional costs and regulatory burdens on community banks and their customers in the process. 
Here's a quote from the ICBA Chairman before the bill was advanced:
Community Banks are Big Winners in Financial Reform
“This financial and economic crisis has clearly demonstrated the need for meaningful financial regulatory reform that protects America's taxpayers and the integrity of our financial system. 
(This is true)
The best way to accomplish this is by ending too-big-to-fail . . .
 Amen. We couldn't agree more. Unfortunately, this bill doesn't do that.
and regulating and enforcing rules on the unregulated financial players. 
Yet the Senate bill exempts many of the same firms that brought us to the edge of the abyss, i.e., those regulated by the SEC and the Commodity Futures Trading Commission, from the reaches of the CFPB.
ICBA welcomes the draft legislation released today by Chairman Dodd because it moves financial regulatory reform forward and aims to safeguard future generations by reining in the systemically dangerous institutions that were at the heart of this economic catastrophe.”
R. Michael Menzies, Chairman of the Independent Community Bankers of America (ICBA), March 15, 2010
Remember, this quote is taken from the ICBA website before the bill was advanced from Committee, after it had been "amended" by Senator Dodd, on a partisan vote.  It may not accurately reflect the ICBA's current position on the specific language that is pending in the Senate. The only reason it's quoted here is because it's quoted in the Committee release
In any event, no one can read this statement as complete and unfettered support for the bill, as is intended. And certainly the ICBA does not support creation of the proposed Consumer Financial Protection Bureau that is envisioned by this bill. 
While it may move the discussion forward and “aims” to rein things in, Bankers need to make certain in their own mind that it does that. Many observers – including Kansas City Federal Reserve Bank President Tom Hoenig and Ranking Member Senator Richard Shelby (R-AL), agree with us that it does not end “too-big-to-fail” as a matter of national policy.  
Here's the balance of the memo: 
Levels Playing Field: For the first time, community banks will no longer have to compete with unregulated non-banks. The Consumer Financial Protection Bureau (CFPB) will have the ability to adopt rules that prohibit unfair or deceptive practices, and the Bureau will have the power to enforce these rules on large banks, mortgage companies, and major players in the shadow banking industry.
The approach to consumer protection will still create conflicts between safety and soundness and consumer regulation, with banks caught in the middle. The consumer function should be part of a prudential regulator and not merely have the same address.
Furthermore, the bill does not effectively regulate non-banks, which is said to be one of the major purposes of the idea of creating this monumental new bureaucracy. For example, a community bank that did nothing to cause the financial crisis will be subject to heavy new and conflicting regulatory burdens, while non-bank competitors may have little or no new enforcement or reporting requirements.
Now, how can that be? Simple: the new consumer rules won't apply to an entity that's regulated by the Securities and Exchange Commission or the Commodity Futures Trading Commission. How will that exemption “prohibit unfair or deceptive practices” by those that may have practiced them but who work for SEC-regulated firms? The short answer is, it won't. 
In addition, the proposed new bureau has exceptionally broad authority, and can add any prohibition it deems appropriate using the new and untested term “abusive.” What in the world does that mean? Do you know in advance what is and what isn't
Moreover, it imposes two costly new reporting requirements on deposits and small business lending. The latter requirements have nothing whatsoever to do with preventing a financial crisis which is, after all, the reason behind the bill in the first place.
Finally, community banks have been subjected to strong consumer oversight and regulation for more than 30 years. They didn't cause the current mess, but those banks and their customers will pay a very steep price for this “new world” of consumer protection while many of those firms who brought us to this dance will skate untouched by the hand of consumer reform regulation.

One Exam & Enforcement Regulator:  Rules written by the new CFPB will be enforced by the same regulator (OCC or FDIC) that enforces safety and soundness rules for banks with assets below $10 billion. Small community banks will continue to follow the same rules they follow today – like the Truth in Lending and Truth in Savings Acts. The CFPB will not be able to tell banks what products to offer or to cap interest rates.
That's a nice idea - exempting community banks from the CFPB, and something we favor - but,unfortunately, it's not true.  Community banks will be subject to all of the rules and regulations proposed and written by the CFPB, without any input from prudential regulators in that process. 
If you have doubts about the intent of this effort, see House Financial Services Committee Chairman Barney Frank's statement that the CFPA [House version of financial reform] will apply its rules to all community banks. They are not exempt. Here's what he said:
 “Some inaccuracies have appeared in the press about institutions exempted from the reach of the Consumer Financial Protection Agency in the House-passed financial reform bill.  For instance, yesterday's New York Times reported that it “exempted smaller community banks, credit unions, retail merchants. . . .”  Not true.  All of those institutions will be subject to all rules issued by the agency with respect to the extension of credit.  They also will be subject to agency enforcement.  The exemption for smaller financial institutions is only with respect to examination which will continue to be the responsibility of the institutions' prudential regulators. . .”
Go to:http://www.house.gov/apps/list/press/financialsvcs_dem/presscfpa_012110.shtml) to read Mr. Frank's entire statement.
Preserves Dual Banking System:  This system allows for critical checks and balances and diversity of financial institutions, promotes consumer choice and is sensitive to financial institutions of various complexity and size.
Yet it takes the Federal Reserve out of the business of regulating state member banks and, thus, takes the “canary out of the coal mine” when it comes to understanding what's going on in the real world outside of Washington and New York, and makes community bank activities irrelevant in formulating monetary policy decisions.
What's the justification for eliminating the Federal Reserve's authority to regulate state member banks?   There is none. 
Moreover, the result will be a Federal Reserve that is limited in its view and input to the largest financial firms, undermining its ability to fully understand small and mid-size institutions and the communities they serve across the country. It would be a terrible mistake to so limit the Federal Reserve's ability to view the whole economy and thereby create an inherent bias toward financial centers.   And it would further establish the “too-big-to-fail” doctrine as a matter of national policy.
Consumer Protections Consistent with Safety and Soundness: Rules written by this agency must take into account the costs and benefits to consumers and businesses.  
Yes, but there's no provision or procedure giving prudential regulators the ability to comment on or provide their insight into how proposed rules will impact safety and soundness concerns.   While it's true that consumer protection and safety and soundness must be considered together, safety and soundness concerns should “trump” consumer protection issues.
No New Fees or Assessments, Fairer Assessments: The CFPB will not charge small banks fees or assessments and the FDIC will change the way it charges banks assessments to reflect the size of companies' liabilities, easing the burden on community banks.  
Advance Warning System: Creates a systemic-risk regime that would rein in the size and scope of too-big-to-fail institutions so they never again have the ability to nearly topple our economic system.  
We understand that's the intent, but does it do this as a matter of fact? Or is it just lip service? “Big” is a relative term, and just because something is “big” doesn't necessarily mean it's “bad”. What's important is who's minding the store and examining/regulating the activities? What's the authority to unwind them? At what point
Ending Too Big to Fail Bailouts:  The FDIC will have full resolution authority for the orderly unwinding of systemically dangerous institutions that fail.  
That's clearly everyone's intent (ending “too-big-to-fail” as a matter of national policy), but is that really what will happen? If so, where does the money come from? Who bears the ultimate loss?
The $50 Billion fund that's suggested won't even come close to solving the problem of a mega-bank failure, so what happens then? There's nothing in this bill that clarifies this concern
The resolution mechanism, while much improved from earlier versions, still does not fully address “too-big-to-fail”. Creation of a before-the-fact resolution fund will be perceived by the market as the creation of a de facto too-big-to-fail insurance fund, thus implicitly supporting “too-big-to-fail”.
Easier Mortgage Disclosure: The Consumer Financial Protection Bureau will create one form that combines the two federal mortgage disclosures currently required, eliminating this burden to small community banks.
Thank goodness – someone finally figured out that all of those “consumer” disclosures didn't make things better; rather, they made real estate closings incomprehensible for most people.
And then there's the problem of preemption and eliminating the accounting language in the House bill. The provisions on preemption are complex and unclear. They will lead to years of litigation before federally-chartered institutions will know what the rules are, and that will impact us at the state level, big-time.
Instead, federal preemption should be maintained.  We have a nationwide financial system and a mobile population.  Requiring federally chartered institutions to understand and comply with potentially hundreds of different state and local laws will raise costs to bank customers, confuse consumers, and inhibit the creation of new products because of potential legal costs.
Finally, the failure to address accounting policy is a critical omission. The fact is, pro-cyclical accounting policies exacerbated the financial crisis.   FASB, itself, basically agreed that its policies were misguided and changed them. It is no coincidence that the dramatic turnaround in the stock market began the very day FASB announced it was changing its policies.
The last two G-20 reports, supported by the United States, strongly recommended that financial regulators need input into accounting policy, especially in the context of avoiding systemic risks. Yet the bill does nothing to implement the G-20 recommendations. This serious omission can be addressed by specifically empowering the systemic risk council to review accounting policies, while at the same time protecting the independence of the accounting policy process through FASB.

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