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Financial reform: It's about traditional banks -- the good guys

Impact of the Pending Financial Regulatory Reform Bill

This bill isn't about “Wall Street vs. Consumers” as the Administration wants you to believe. It will impose new and costly obligations on community banks – the ones that were NOT responsible for the financial meltdown – and result in higher consumer costs.  
 
In the U.S. Senate, the pending financial reform bill being pushed hard by President Obama is a great starting point, but it simply cannot be the end of the discussion. For one thing, it purports to end the “too-big-to-fail” doctrine which penalizes smaller, community banks – the ones that dominate the Oklahoma landscape – but in reality this bill institutionalizes the doctrine.  
 
Importantly – and something that consumers need to understand clearly - this bill will impose significant new obligations and costs on smaller community banks that will ultimately be passed on to consumers. 
 
A.    Here's today's reality: Currently community banks must comply with more than 1,700 pages of consumer regulations and guidelines -- over 50 pages for each of the 34 people employed by the median-sized community bank.  (Note to the Administration:  These are not giant Wall Street firms.)  Community banks, already struggling with the weak economy and much closer examiner oversight, will find it much harder to do what is so badly needed to get their local economies on the right track:  lend money at a reasonable rate.
 
1.   Broad New Consumer Rules. All banks will be subject to the new consumer rules. Big, small, in-between – everybody
 
a.    These rules will apply broad new and untested standards to retail bank products.  What standards, you ask?  “Abusive” or “unreasonable” – standards that can only be implemented and determined after the fact
b.    The standards will give the new consumer bureau wide latitude to influence what products are offered, on what terms, and under what circumstances.
c.    It's true that the new bureau would not have explicit authority to mandate offering “plain vanilla” products. But the way the real world works is that regulators can make alternatives to the bureau's ideas so painful that community banks are likely to conclude that the new consumer bureau's favored versions of checking accounts, savings programs, home equity loans, and everything else are the only versions of the products that are safe from regulatory criticism.
2.   Small Business Loan Reporting. All banks would have to set up an expensive mechanism to gather extensive additional data on all small business loan applicants, including whether the applicant is a woman- or a minority-owned business.  Who do you think is going to pay for that new system
3.   Deposit Reporting Requirements. All banks will have to set up an expensive mechanism to gather and report data on the total number and dollar amounts of deposits at all branches, ATMs, and other deposit-taking facilities.  Then they have to geo-code the data, and segregate it based on whether the depositor is a residential or commercial customer.  Again, who do you think is going to pay for these new systems?
4.   Added Consumer Account Information. All banks would be required to provide consumers with expanded access to account, transaction, fee, and other information.  This new access won't happen automatically.   Who do you think is going to cover the cost
5.   Reports on Other Subjects. The new consumer bureau has the authority to require reports or information from any bank or banks at any time in any detail on any subject related to consumer products and services, and it has significant latitude to disclose the information as it deems to be in the “public interest.”   What the @$#@ does that mean? Who decides? 
6.   We are not your problem!  Traditional community banks have been subjected to tough consumer rules for more than 30 years. These banks – the ones that support our local communities and our schools, are not your problem, Mr. President. This can't be hard to understand. 
7.   New consumer rules won't be sufficient to affect non-bank financial firms. Banks already have in place long-established mechanisms for examination and enforcement that do not apply to non-bank competitors.  These were the ones that escaped notice and enforcement during the build-up to the crisis. These non-banks don't have an enforcement mechanism in place now, and some competitors, such as the Farm Credit System or any firm regulated by the SEC or the CFTC, are explicitly exempt from this bill. That's nuts.
8.   Examination and Enforcement by CFPB. The new consumer bureau has the authority to send its examiners into any community bank at its discretion to “sample” the situation. There are no limits placed on this discretion, no definition of “sampling,” and no criteria to be met for the new bureau to exercise this discretion. The new bureau may also take enforcement actions against any bank, regardless of size, to obtain whatever information it deems relevant.  These will be costly. Again, who do you think is going to pay for it?
9.   State Attorney General Actions. State attorneys general will have the authority to bring civil actions in state or federal court for any violation of the bill or its regulations against any bank.  Again, more cost, more “playing defense” at the expense of the consumer. 
10.                Traditional Community Banks are not the problem. Oklahoma's community banks did not cause the financial meltdown, and these new requirements – which will add to bank customer costs – cannot be justified as a response to the financial crisis. Why? Because they had nothing to do with it! 
11.                  Bottom Line:  the typical Oklahoma bank will see increased costs relating to additional regulations that have nothing to do with the financial crisis. The costs they will incur will be paid for by Oklahoma consumers and put Oklahoma banks at an even further disadvantage to non-banks.
 
B.   Then there are the proposed Rules on SecuritizationWhat will that do?  Choke off residential real estate lending by traditional community banks and further restrict credit availability.  
1.   Provisions in the bill designed to address problems in the securitization process are way too broad. The idea may make sense at first blush, but in the real world it will require banks to raise capital in an impossible market and significantly undermine the ability of community banks to move loans off their books to participations or securitizations.
2.   Again, there is no record of there being a problem in this area with community banks. The problems in residential real estate markets that are being hammered were caused by mortgage brokers – the guys that were incentivized to put deals together and get people into houses without asking the basic “Banking 101” questions, like “will you pay back this loan?” 
3.   The result will be less profitable and, in fact, more risky community banks; more importantly, less credit will be available.
 
C.     Removing examination authority from the Regional Federal Reserve Banks is nuts.   If you run a coal mine why would you take the canary out of it? Don't you want to know if there are breathing problems in the mine before it explodes or one of the miners suffocates?  
 
1.   That's what we're talking about. This proposal would force the Federal Reserve Bank of Kansas City (and all of its sister banks) to give up oversight of the very institutions that give it the necessary information to help the Fed set realistic monetary policy goals.
2.   Not everything happens on the east coast or in California. Some things actually go on here in the Heartland that make a difference.
3.   Narrowing the Fed's mission to the nation's largest financial institutions is more evidence that “too-big-to-fail” would be the federal government's mantra, and taxpayers would be the ones to suffer.  
 
a.    This proposal gives the Fed responsibility for bank holding companies with total assets exceeding $50 billion. That will skew the Fed's insights into the banking industry and focus the Fed on the largest firms.
b.    For both monetary policy and economic regulation purposes, the Fed will develop a skewed vision of the economy, focused on the largest institutions and money centers to the detriment of community banks and the communities they serve. That will hurt consumers who happen to live somewhere other than in the financial center of the universe.
 
We could go on, but I think the point is made: Traditional community banks are not the enemy. They are willing to help the administration resolve the issues and problems that brought about the near-collapse of the financial system and the nation's economy. But these banks should not be the main target of this revision, and lumped in with “Wall Street” firms when people in Washington talk about “banks”. That's nuts.

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