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Regulatory Reformers Meet July 4 Deadline

July 6 - The outlines of regulatory overhaul finally took shape during the wee hours of June 25, as Senate and House conferees barely met their self-imposed deadline to have finished legislation on President Barack Obama’s desk by July 4. However, although the House passed the bill on June 30 with a vote of 237-192, the Senate, interrupted by the death of Sen. Robert Byrd, D-W. Va., on June 28, failed to vote on the Dodd-Frank Act before leaving on its week-long July Fourth recess.

Several modifications and additions during the days leading up to June 25 and since will have a profound effect on community banks, for better or worse. The following summary was compiled from press reports and trade association bulletins.

Interchange fees. The amendment capping interchange fees proposed by Sen. Richard Durbin, D-Ill., was modified late in the process to provide that the Fed can regulate interchange fees but not Visa and MasterCard network fees “except to ensure that the fees are not used to circumvent interchange fee regulation.” Generally exempted are government-administered cards and reloadable prepaid debit cards. Lenders with assets of less than $10 billion are exempted, but trade groups for community banks expect the measure to make their cards more expensive than those of larger banks.

Consumer Finance Protection Bureau. The CFPB will be housed within the Fed but independent from it and will be blessed with appropriations of at least $200 million through 2014. It will exempt banks with less than $10 billion in assets; provide limited exemptions for auto dealers and attorneys; regulate remittances and reverse mortgages; and apply to payday lenders, check cashers and private student loan providers.

Capital Rules. As originally proposed by Sen. Susan Collins, R-Maine, an amendment would have excluded trust preferred securities and other financial instruments from holding companies’ Tier 1 capital. Modifications approved by the conference committee provide that trust preferred securities held by banks with assets of less than $15 billion are grandfathered. Banks above $15 billion will have five years to replace trust preferred securities with common stock or other securities.

Volcker Rule. Named for former Federal Reserve Chairman Paul Volcker, now an adviser to President Obama, this will limit banks’ investments in hedge funds or private equity funds to no more than 3 percent of a fund’s capital and no more than 3 percent of a bank’s tangible equity. The ban on certain types of proprietary trading affects the ability of banks with federally insured deposits from trading for their own benefit.

Derivatives. Community banks will be shielded from the amendment offered by Sen. Blanche Lincoln, D-Ark., which originally would have forced them to cease derivatives trading along with their giant brethren. The largest banks were cut some slack as well, being allowed to deal and trade derivatives through separately chartered affiliates and having two years to comply with the new rules.

Federal Reserve. Some of the more onerous curbs on the Fed’s independence fell away. Gone is the provision that the president of the United States would appoint the president of the New York Fed. District presidents will continue to be appointed by their respective boards, but banker members of those boards won’t have a vote. The central bank’s interest rate decisions will not be subject to audit by the Government Accounting Office, but the crisis decisions of 2008 will be open to inspection and after a two-year lag details of loans through the discount window will be revealed. 

FDIC. A significant new provision was added in conference committee that makes permanent the $250,000 FDIC deposit insurance limit, which was set to expire in 2013. The higher limit would also be made retroactive to 2008, which would cover depositors in banks that failed before the limit was raised from $100,000 in October 2008. The proposal would also make permanent the Transaction Account Guarantee Program, which was set to expire this year-end.

Mark-to-Market Accounting. An American Bankers Association-backed amendment makes accounting oversight a function of the Systemic Oversight Council. The council would monitor domestic and international regulatory proposals and developments, including insurance and accounting issues. Also included is an ABA-backed amendment requiring the council to review and comment on existing and proposed accounting standards.

Too Big to Fail. The FDIC is authorized to liquidate failing financial firms that pose systemic risk to the economy. The House bill would have covered costs with a $150 billion fund supported by the largest financial companies, but the Senate version, which would collect from the same companies after the fact, will be the operative one. In either case taxpayers are not supposed to have to pay the bill.

Paying the Bill. The estimated $19 billion cost of the Dodd Frank Act over 10 years would be paid with a hike in FDIC premiums for banks over $10 billion and unused funds from the Troubled Asset Relief program. Proposed as an alternative to the “bank tax,” a special assessment on the largest financial institutions, the measure would raise the FDIC’s required ratio of reserves to deposits from the current 1.15 percent to 1.35 percent with an increase in insurance premiums for banks over $10 billion. In addition, the TARP would be shut down, using leftover funds to help defray the cost of the bill with an estimated savings of about $11 billion.

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