The Basel III Fallacy

July 25th, 2012

I never subscribed to pessimistic theories that bank regulators were out to rid this world of community banks.  After all, if there were no community banks, there would be no need for regulators since it appears that no one has bothered to regulate or close too-big-to-fail banks.  But, I must admit, as I walked out of the Dallas FDIC regional offices last Friday, having just attended a two hour briefing on the new proposed rules on Basel III and the new standard for risk weighting bank assets, the thought crossed my mind: “maybe someone does have their sights set on the demise of community banks.”

At this point, Basel III is just a set of proposals, a notice of proposed rulemaking (NPR) issued for all of the world to shoot at.  Regardless, it’s hard for me to fathom how, once again, community banks have found themselves in the crossfire of proposed new international capital adequacy standards that were, for all intents and purposes, intended for the giant “worldly” banks.  It makes me wonder what exactly might be in the water in Basel, Switzerland.

Texas community bankers are baffled and, frankly, pissed off.  What was to be a 30-minute question and answer period at the conclusion of the FDIC briefing turned into a 30-minute gripe session.  “Do you have any clue whatsoever what this proposal, if not modified, would mean for our ability to provide mortgage and small business loans to our customers?” one participant asked.

Another observed, “This essentially ends any possibility of attracting new investors to community banks.  These new capital levels, coupled with the risk weighting of community bank bread-and-butter loan assets and increased regulatory burden, makes the community bank business model unattractive for current or would-be investors.”

Several members of the House Financial Services Committee have weighed in, too.  In a letter dated July 17, 2012, to Fed Chairman Bernanke, FDIC Chairman Gruenberg and Comptroller Curry, nine members wrote:

“we believe these new standards could significantly curb the ability (of community banks) to lend and provide liquidity in their local markets.

“As community based organizations with only local or state level reach, holding them to the same standards as international systemically significant institutions could place them at a competitive disadvantage, in part due to limited investor demand for small capital offerings and nominal access to capital markets beyond their regions.”

The letter went on to challenge the regulators to provide answers as to why community banks should be subjected to the same capital standards based on their size and complexity leading to a “one-size-fits-all” standard.

Make no mistake, these two NPRs threaten the future viability of community banks.  This is no time to lay back and watch your franchise be further eroded or doomed to extinction because some over-educated, under-experienced bureaucrat from some other country decided this was a good idea.  IBAT will come out blazing in our comment letter to the agencies and you should too.  Comment letters are due before the close of business on September 7, 2012.  We should all ask for no less than an exemption from the proposals for all community banks regardless of size, based solely on risk profile, and return to the Basel I standards that have served the industry well.

There seems to be a universal opinion that “community banks didn’t create this mess,” and are “the good guys” in the financial services world.  There also is recognition that the ever-increasing regulatory burden is strangling smaller banks.  It is baffling that, in this environment, we would see a proposal with so much burden and so little benefit to community banks and the customers they serve.  This is a good idea?  Really?

I commend the FDIC for having this meeting and exposing these proposals for what they are…bad ideas that will do nothing but create further uncertainty and frustration leading to mass consolidation of community banks.  Funny, but I almost believe that is exactly why the FDIC sponsored the meeting.

After all, they need community banks to regulate too.

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Posted in Basel III, community banks, FDIC, Independent Bankers Association of Texas | 2 Comments »

It Looks Like TAG Is a Win-Win

June 28th, 2012

If unlimited FDIC protection for non-interest-bearing accounts is so good for the biggest American banks, then why is the American Bankers Association silent on the need for the program to be extended?

This is the question that came to my mind time and time again as I read “More Evidence TAG Helps Only the Big Banks” in American Banker last week. The piece, written by Christopher Whalen, senior managing director of Tangent Capital Partners, certainly made some interesting points. Mr. Whalen supports his claim with the following arguments:

1. The TAG program attracted deposits from institutional money market accounts to the biggest banks, driving down the cost of funds and allowing the mega-banks to out-price community banks on loans; and

2. Excess TAG deposits have given banks like JP Morgan/Chase more money to play with, and particularly, to speculate on credit derivatives. Further, the excess deposits have helped Wells Fargo expand its market share of home mortgages by allowing them to underprice community banks.

Mr. Whalen’s points are, at face value, supportive of the claim that TAG has been helpful to the big banks. However, I question whether the gains realized by the largest banks are coming at the expense of community banks.

I’ll start by addressing Mr. Whalen’s points directly:

1. When was the last time that loan pricing wasn’t tilted against community banks? The strength of the community banking business model has never been predicated on rock-bottom pricing. How could it be when our primary competitors are tax-exempt credit unions and too-big-to-fail banks that undercut pricing regardless of the risks associated with the credit?

Community banking is not now, nor was it ever intended to be, a discount shopping experience. The strength of community banks is in providing exceptional customer service, as well as a commitment to the community. Most customers are happy to pay a little extra for exceptional service, just as they do when purchasing quality retail goods.

2. Mr. Whalen, do you know a lot of community bankers who are clamoring for mortgage market share? There is no part of me that rejoices in the expansion of Wells Fargo’s market share of mortgages. However, the expanded mortgage compliance burdens of Dodd-Frank and uncertainty of new rules being contemplated by the Consumer Financial Protection Bureau have many community banks exiting the mortgage market. That is a real tragedy, particularly in rural areas where community banks are the only source of farm and ranch and homestead loans.

The message I’ve heard from community bankers is simple—the unlimited FDIC protection of non-interest-bearing deposits has given customers peace of mind to keep money on deposit in community banks. More than $1.3 trillion in deposits can be linked to the TAG program since its inception. It serves as a counterbalance to the de facto government guarantee enjoyed by the too-big-to-fail behemoths.

So, maybe TAG does provide some benefits for big banks, along with many benefits for community banks. In the post Dodd-Frank world, it’s not often that any public policy is so win-win. If that’s the case, I look forward to reading that the American Bankers Association has joined the ICBA, its 34 state affiliates, and dozens of small business and consumer groups in supporting the extension of the program. But, I am not holding my breath and you shouldn’t either.

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Posted in community banks, Lending, Main Street, too big to fail | 3 Comments »

Lies, Damned Lies, and Statistics

May 7th, 2012

by Shannon Phillips, Deputy General Counsel, Independent Bankers Association of Texas

There are three kinds of lies: lies, damned lies, and statistics.  The origin of this phrase is questionable, but two things are not:

1) Mark Twain popularized it; and

2) It is as true today as it was in Mark Twain’s days.

Also true is the fact that community banks are continually dogged by incomplete, inaccurate or misleading statistics.  Community bankers are all too familiar with the statistical analyses federal regulators use in fair lending examinations.  Less obvious is the role that statistics play in the recent attacks by federal regulators on overdraft protection programs.

In 2006, the FDIC initiated a study of overdraft programs at FDIC-supervised banks that resulted in the November 2008 publication of a report entitled FDIC Study of Overdraft Programs (Study).[i] While I believe the Study is instructive and useful, I am troubled by the use of a certain statistic from the Study by the Consumer Financial Protection Bureau (CFPB) that, when taken by itself, doesn’t tell the whole story.

The statistic was used by CFPB Director Richard Cordray in his prepared remarks[ii] at the February 22, 2012, CFPB Roundtable on Overdraft Practices in New York City (Overdraft Roundtable) and then again in the Background section of the CFBP’s February 28, 2012, Notice in the Federal Register (77 Fed Reg 12031) (Notice) seeking information regarding the impact of overdraft programs on consumers.  More specifically, at the Overdraft Roundtable, Director Cordray said:

Evidence indicates that a small number of checking account customers – just under 10 percent – bear a whopping 84 percent of all overdraft fees.

The Background section of the Notice provided:

While not based on a representative sample of banks, the FDIC’s analysis of account-level data found that the approximately 9% of accountholders who incurred 10 or more overdrafts annually bore approximately 84% of overdraft-related fees.

My hyperbolic opening aside, I don’t think that the CFPB was lying when it used this statistic. However, I suspect the CFPB may be using the statistic to support a preconceived notion about overdraft protection.  And when viewed in a vacuum, this statistic does appear to describe overdraft protection programs that are broken.  However, when you view the statistics as a whole, they actually paint a picture of overdraft programs that are working for over 90% of deposit customer accounts. Let’s take a closer look.

Again, the CFPB states that nine percent of checking account customers pay a “whopping” (speaking of hyperbolic) 84% of overdraft related fees.  While that statistic is true, that means that conversely approximately 91% of accountholders bore only approximately 16% of overdraft-related fees.

In our comment letter[iii] responding to the CFPB’s Notice, we explain in more detail how the FDIC’s statistics actually support our supposition that overdraft protection is not fundamentally broken and is working for the vast majority of deposit account customers:

The Study also revealed that during the 12-month period examined “almost 75% of customer accounts had no NSF transactions … almost 12 percent of consumer accounts had 1 to 4 NSF transactions, 5.0 percent had 5 to 9 NSF transactions, 4.0 percent had 10 to 19 NSF transactions, and 4.9 percent had 20 or more NSF transactions.”[iv]

During the 12-month period the FDIC studied, 75% of customer accounts paid no overdraft related fees because they had no overdrafts, and 14% of customer accounts had 1 – 4 overdrafts. Therefore, eighty-seven percent of customer accounts had 4 or fewer NSF transactions. That means the average NSF fees paid in a year by 87% of customer accounts was $8.96.  That is success, not failure, especially considering that a large majority of these accounts incurred no monthly fees.

These statistics reveal that the vast majority of bank customers are not writing checks without funds in their account, are balancing their checkbooks, are using ACH and online billpay appropriately, and are using their debit cards responsibly.  It is that success alone that skews the percentage of NSF fees paid by the nine percent of customer accounts that incur ten or more overdrafts in a year.  The more success banks have in increasing the number of customer accounts with few or no overdrafts, the higher the percentage of fees those with more overdrafts will pay.  Currently, nine percent of customer accounts pay 84% of all overdraft fees, and with customer education and improved disclosures, the percentage of customer accounts with 0 – 4 overdrafts per year will increase as the percentage of customer accounts with 5 or more overdrafts per year decreases.  And, as percentage of customer accounts with 0 – 4 overdrafts per year increases and the percentage of customer accounts with 5 or more overdrafts per year decreases, the percentage of total overdraft fees that are paid by customer accounts with 5 or more overdrafts per year actually will increase, rather than decrease.

According to the FDIC’s own statistics, we have an overdraft protection system in the United States that is working for nearly 90% of customer accounts.  Instead of dismantling, overhauling or punishing banks for having a huge majority of customers with fewer than four overdrafts per year, the answer lies in the educating and providing clear disclosures to consumers – especially the 13.9% of customer accounts who overdraft their accounts five or more times per year.  Once the dual goals of education and disclosure are accomplished, neither the CFPB nor the banks should meddle paternalistically in the lives of bank customers.

(For a good discussion explaining and supporting overdraft protection programs, please read the remainder of our comment letter, beginning on page 2 with the section entitled Background of overdraft payments.)

While I don’t deny that improvements can be made in the area of overdraft disclosures and that innovative solutions are needed for those customers who don’t bring their overdrafted accounts current[v], I think the nine percent paying 87% statistic caught the eye of the CFPB and caused them to leap to an unsupported conclusion without considering the entirety of the overdraft usage statistics presented in the Study.

Additionally and importantly, the CFPB’s Notice asked 12 questions about overdraft protection programs that only banks with overdraft protection programs will know the answers to.  If you have an overdraft protection program, we urge you to answer these questions on or before the end of the comment period, which was recently extended[vi] to June 29, 2012.


[v] We address disclosures, bringing overdrafted accounts current, and other issues/solutions in our comment letter.

 

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Posted in CFPB, Consumer Financial Protection Bureau, FDIC, Independent Bankers Association of Texas | No Comments »

Heed the Warning of the Dallas Federal Reserve

April 9th, 2012

Too-Big-To-Fail Banks are a Clear and Present Danger to the US Economy

The annual report recently issued by the Federal Reserve Bank of Dallas was different than the usual, matter-of-fact reports we are accustomed to seeing—and it was a welcome perspective to many of us in the banking industry who have long held the beliefs shared in this report.

The report, “Choosing the Road to Prosperity: Why We Must End Too Big to Fail—Now,” was a surprisingly easy 34-page read. Harvey Rosenblum, 40-year veteran of the Federal Reserve and former president of the National Association for Business Economics, authored the essay with an introductory letter by Dallas Fed President Richard Fisher.

In his introduction, Fisher makes the following poignant assertion: “The too-big-to-fail (TBTF) institutions that amplified and prolonged the recent financial crisis remain a hindrance to full economic recovery and to the very ideal of American capitalism. It is imperative that we end TBTF. In my view, downsizing the behemoths over time into institutions that can be prudently managed and regulated across borders is the appropriate policy response.”

This statement might not have the same impact if said by the Occupy movement but when the top officials at the Federal Reserve—the institution that bears responsibility for our banking system—put it in an annual report, it hits home. And why? Because it is true.

One of the most startling revelations shared in the report is that more than half of banking assets are on the books of just five institutions. I would bet most people can easily list the banks in question. The report asserts that “a financial system composed of more banks—numerous enough to ensure competition but none of them big enough to put the overall economy in jeopardy” is where we need to be.

The report goes on to state, “If allowed to remain unchecked, these entities [TBTF] will continue posing a clear and present danger to the U.S. economy. As a nation, we face a distinct choice. We can perpetuate TBTF, with its inequities and dangers, or we can end it.”

This brings two questions to mind—what has been done to date to address the danger presented by the TBTF system, and what can we as consumers do to stop this system and ensure another financial crisis doesn’t occur in the future?

In 2008, the U.S. Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, known simply as Dodd-Frank, to promote financial stability and ultimately, to end TBTF. However, Fisher writes that “Dodd-Frank does not eradicate TBTF…it may actually perpetuate an already dangerous trend of increasing banking industry concentration.”

William Isaac, former chairman of the Federal Deposit Insurance Corporation, agrees. “I think that Dodd-Frank is a terrible piece of financial legislation,” he said. “It didn’t address any of the causes of the crisis that we just went through. It won’t prevent the next crisis. It’s heaped volumes and volumes of regulations.”

More importantly, a number of provisions in Dodd-Frank should be amended—quickly—to mitigate the impending avalanche of new, and in many cases unintended, regulatory burden on community banks. Perversely, this legislation has the potential to actually increase the threat of TBTF as hundreds of community bank charters are eliminated due to increased compliance costs.

Isaac agrees. “The bigger banks can absorb it, the smaller banks can’t. I would not be surprised to see half of the community banks in this country go out of business if we don’t give some relief for them.”

As an advocate of independent, locally owned community banks across the state, I encourage you to “Go local” and visit your nearest community bank to discuss how it can meet your unique banking needs. You might even be surprised at the wide array of personalized services that community banks offer individuals, families and small businesses. Supporting your community’s locally owned financial institutions will ensure that you are part of the solution to end TBTF while stimulating local investment right where you live and work.

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Posted in federal reserve, IBAT, ICBA, Independent Bankers Association of Texas, systemically important, too big to fail | 1 Comment »

A Warning to Small Credit Unions

February 21st, 2012

One has to admire the tenacity of the credit union lobby. Once again, a handful of very large credit unions are wearing out Congressional officials to pass legislation that will increase their business lending authority from 12.5% of their total assets to 27.5%. The commercial banking industry has fought off similar attempts for such expansion in previous Congressional sessions and we are working hard to do so once again. On the surface you might think that this longstanding intramural fight is much to do about nothing—that is, until you truly understand the ironies of these mega bank-like credit union arguments, and how small credit unions are being sucked into these peril-laden efforts.

First, the credit union lobby argues that banks are not lending to small businesses. They also say that gaining Congressional authority to permit them to deploy more capital to this sector of our economy will aid in the U.S. economic recovery. While it is true that community and regional banks have decreased lending to this sector in recent months, banks universally report significant decreases in demand for such loans; small business borrowers have little appetite to expand human resources, inventory and plant in such uncertain times. I have yet to find a community banker who wouldn’t love to add more quality business loans to their asset mix. Banks must deploy their capital and deposits to make money, and have and will continue to lend to credit-worthy borrowers, even in this soft economy. With more than 7,000 banks in the country, one would seriously question how a small business loan would be turned down by multiple banks, yet somehow be a “bankable” asset at a credit union.

Second, they argue that banks fear competition. Community and regional banks have competed aggressively and fairly for decades. Our free enterprise system is grounded in the practice that business entities should compete fairly and equitably. But somehow, credit unions have translated free enterprise to mean that their enterprise should be free; free from federal and state taxes and oppressive regulations that stymie their competitors and increase the cost of doing business. Stated differently, how would any business like competing with another business essentially providing the same goods and services that was able to discount those products and services because they were not subjected to the same rules of engagement? The banking industry would welcome any credit union wishing to make more commercial loans to convert, and they can even choose a mutual charter. Such conversion would entail enhanced regulation and the responsibility to pay their fair share of taxes – something that appears anathema to these large institutions.

Our Congressional leaders should once again reject credit unions’ phony pleas. And small, singularly focused “common bond” credit unions that have been dragged into this fight to support this movement, despite their intent to stay true to their mission of serving the under-served, might soon come to understand the perils of speaking with one industry “voice.” Small community banks are paying a high price for the sins and greed of their big bank competitors.

Be careful when you join forces with counterparts that seek an agenda different from your own, or prepare to suffer the consequences. You might soon be saddled with paying taxes and coming to grips with new regulations like the rest of us.

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Posted in Credit Unions, Lending, Small Business Lending | No Comments »

The Good and Bad of a Fully Functional CFPB

January 17th, 2012

Over the past two weeks, copious amounts of ink have been spilled about President Obama’s “recess” appointment of Richard Cordray, the Director of the Consumer Financial Protection Bureau (CFPB).  Although the Justice Department has issued a statement alleging the constitutionality of the appointment, it is inevitable that legal challenges will soon be filed and drag on for the foreseeable future. 

Since the Dodd-Frank financial reform law was passed more than a year and a half ago, I’ve heard from a number of community bankers who identify the creation of the CFPB as their single greatest concern arising from the law.  To be sure, their concerns have merit.  The CFPB’s power will not be limited to the biggest financial institutions. The rules they write have the potential to stifle product innovation and increase regulatory costs on community banks.  All of this without any oversight from Congress.

But, as in almost every story, there is some potential for good.  The naming of a Director for the CFPB means that the most abusive and unregulated entities providing financial services to consumers are now subject to the bureau’s rulemaking authority.  Payday lenders, private student lenders and other financial intermediaries who have been preying on the poor, unadvised and unsuspecting of our society will soon be reined in by the CFPB’s authority. 

The unscrupulous behavior of these entities has done more harm than good in the name of providing “service” to consumers.  If the CFPB can provide any assistance in ending or limiting the abuses they perpetuate then I believe we all have reason to celebrate.

As this takes shape community banks have an opportunity to distinguish themselves.   We know what it means to serve customers, understanding their financial needs and seeking solutions to help them meet their goals.  Community banks are built on the bedrock of long-term relationships, not short –terms profits.   

Only time will tell what the future holds for the CFPB and how the agency intends to implement “tiered regulation” and resist  the temptation to promulgate rules to fit all institutions as Director Cordray has promised. But as the banking industry looks to the uncertain future, we have the power to influence our lawmakers and the CFPB itself to enhance the bureau’s potential to do good. 

The recent appointment of Robert Cordray is the subject of a recent Op Ed IBAT is currently distributing to publications around the state.

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Posted in bank regulators, Barney Frank, CFPB, community banks, Consumer Financial Protection Bureau, Dodd bill, financial regulatory reform, IBAT, Independent Bankers Association of Texas | No Comments »

Getting the ‘Right People on the Bus’ Means Throwing Big Banks Off

January 3rd, 2012

In his December 20, 2011, American Banker editorial, “Community Banks Should Ask for a Divorce,” Robert H. Smith summarizes the growing frustrations of community bankers today in this way:

Unfortunately the community banks of this country are thrown under the bus by just being a bank.  They have been unable to disassociate themselves from extra costs and lost credibility resulting from the scarred reputation of the bigger banks. Today the community banks are subject to the same increased regulatory burden, increasing capital and general public disdain as the larger bank. It’s time for community banks to disassociate themselves from the big banks in the eyes of the public, the legislatures and the regulatory community. They must seek regulation under a different set of expectations, consistent with their size, capabilities and ability to compete consistent with community opportunities.

Smith, a former Chairman and CEO of Security Pacific Corp., now founder and director of a community bank in Newport Beach, California, “gets it.” Having made a living in a “too big to fail” bank and now having to survive and compete with Security Pacific’s acquiring institution, Bank of America, Smith conveys the mounting uncertainty of the future of community banks in a post Dodd-Frank era.

What’s perplexing to me is the inability of so many of Smith’s community banker comrades to recognize the reality of the financial service marketplace today. For more than 100 years, community banks and big banks have coexisted serving different market segments with virtually the same product mix.  Community banks relied on the larger banks for traditional correspondent relationships seeking help with loan participations and clearing needs. And while some of these relationships still exist today, most have gone by the wayside with the emergence of community “bankers banks” and other larger community bank correspondent relationships. Today, the systemically important to big to fail institutions have come to rely on community banks for one thing and one thing only…their credibility and grassroots relationships with lawmakers.

Make no mistake; the big banks are taking a ride on the community bank advocacy bus in Washington and throughout state legislatures all across the country. They hide like thieves in the night behind the goodwill and unified message of the community banks proclaiming “one industry voice” as the only means to a successful legislative and regulatory end. And look where that has gotten us…a “one size fits all,” over-regulated world and a growing public perception that a bank is a bank, all of us out for personal enrichment and public deception.

In his bestselling book, “Good to Great,” Jim Collins says this about the philosophy of great companies:

They start by getting the right people on the bus, the wrong people off the bus, and the right people in the right seats. And they stick with that discipline—first the people, then the direction—no matter how dire the circumstances.

The same rings true for industry success. It is time community bankers to throw the “too big to fail” off our bus. Community bankers should finally unite as one and support only those organizations whose philosophies and advocacy match precisely their needs and is not conflicted by having to serve two masters. Or as Smith concludes:

The community banks should work to convey a message that they should and must stand alone if they are to remain. They must be divorced from the larger banks both in reputation and regulation if not name.

It only took Kim Kardashian 72 days to realize that her union with Kris Humphries was not a marriage made in heaven. As we begin this New Year, let’s resolve that we have tied the knot with the too big to fail for far too long and vow instead to pull our own wagon by bifurcating and advancing our own legislative and regulatory agenda and pursuing and preserving our own good name.

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Posted in bank regulators, community banks, Compliance, financial regulatory reform, Independent Bankers Association of Texas, Texas Community Banking, too big to fail, wall street | 3 Comments »

Bank of America’s $5.00 Durbin Fee

October 7th, 2011

“You don’t have some inherent right just to, you know, get a certain amount of profit, if your customers are being mistreated,” he said.  Later, he added, “this is exactly the sort of stuff that folks are frustrated by.”

Those words, spoken in response to a question posed by an ABC news correspondent about Bank of America’s decision to begin charging a $5.00 monthly debit card fee by our 44th President, sent shock waves throughout the banking community this week.  And, well, it should have.

He went on to say, “This is exactly why we need this Consumer Finance Protection Bureau that we set up that is ready to go,” Obama said.  “This is exactly why we need somebody whose sole job it is to prevent this kind of stuff from happening.  You can stop it because if you say to the banks, ‘You don’t have some inherent right just to – you know get a certain amount of profit.  If your customers are being mistreated, that you have to treat them fairly and transparently.”

Now let me say at the outset that I don’t have any warm fuzzy feelings about too big to fail Bank of America.  Every time they are held out for their lame-brained treatment of the consuming public (remember this summer’s robo-signing incident?) it hurts all banks, including community banks.  But, if you believe in our free enterprise system, then you must admit that B of A has the right to model and price their product offerings any way they want.

Senior Democratic Senator Dick Durbin from the land of Lincoln, whose infamous interchange amendment prompted the fee to begin with, couldn’t wait to pile on.  He used the announcement to offer this suggestion to B of A customers in a personal privilege speech to his colleagues on the Senate floor.  “Vote with your feet.  Get the heck out of that bank.” Is this the brave new world of civility and discourse we live in?  Did a United States Senator call, from the floor of the Senate, no less, for a run on an American financial institution?

President Obama showed a modicum of political savvy as he later followed his advisors and backed away from his earlier comments.  When asked in a subsequent news conference whether government has the right to dictate how much profit American companies make he responded, “I absolutely do not think that.  Now (B of A) has the right, but it’s not good practice.  It’s not necessarily fair to consumers.”

A couple of observations.  First, Obama has shown his true colors and zest for creating the Consumer Financial Protection Bureau (CFPB) in the first place.  Short of this country having a nationalized banking system, he wants bank product and price regulated, and he is willing to use the bully pulpit to suggest so.  That is precisely what the industry feared when the new agency was constructed in Dodd-Frank.  Only after speaking to Secretary Geithner and Acting CFPB Director Raj Date was our President reminded that the CFPB’s mission is in fact, not to regulate product and price, but to ensure financial products and fees are clearly disclosed to consumers in plain English.

Second, just what did our fearless leader and trial lawyer Senator expect would happen when they craftily inserted debit fee interchange price controls in Dodd-Frank?  The banking industry warned that such limitation would dramatically affect debit card usage and likely result in higher fees for consumers.

I certainly do not suggest that all banks will follow Bank of America’s lead and impose a monthly fee on their debit customers.  I only opine that there is inherent danger when government gets in the way of free enterprise and attempts to create winners and losers.

Our leaders should spend less time trying to interject public policy into free markets and concentrate instead on truly enabling financial institutions to fail, regardless of size, something they attempted to do in the financial reform legislation.

Bank of America doesn’t need their help in driving consumers to other financial institutions.  They seem to be doing a pretty good job of doing that all by themselves.

Posted in CFPB, community banks, Consumer Financial Protection Bureau, debit card, Dodd bill, Durbin amendment, Independent Bankers Association of Texas, Interchange, Texas Community Banking, too big to fail, wall street | 2 Comments »

Consumers…The Real Victims of Consumer Protection

August 22nd, 2011

Guest blogger Shannon Phillips, IBAT Deputy General Counsel, provides his observations in this Missing Linc post.

The American University radio station, WAMU 88.5 FM, reports on its Web site that Greg Fairchild, Director of the University of Virginia’s Tayloe Murphy Center, has studied what happens to poor communities when bank branches close.  (UVA Researcher Looks at Banks’ Effects on Neighborhoods)  His research found that bank branches were likely to decline in areas outside the areas of general affluence leaving a vacuum for other lenders.

And when the banks left, he says, predators stepped in.

“These would be check cashers, payday lenders, automobile loan companies, title loan companies,” he says.

They often charged very high rates, up to 300 percent on loans, and predatory lenders were not the only ones who took advantage of bank less consumers.

Mr. Fairchild also found that banks made areas more prosperous and that crime went up when banks left.

“Often times you’d find criminals who would bust into an apartment, find the gentlemen that were there with cash in hand, and take that cash with little worry of the police either patrolling at the moment and/or any of those individuals calling the police afterwards.”

If Congress and the federal regulators continue to push onerous regulations down to our community banks, his observations will spread beyond the poor suburbs of Virginia to the small towns of Middle America.  As the federal government sits back and counts the dwindling number of community banks without lifting a finger to stop the carnage, your neighbors are the ultimate victims.  Unfortunately, the government has positioned itself so that the banks will be blamed for this carnage while the federal government will claim that this happened despite their best efforts.

As an aside, at least as reported in this article, Mr. Fairchild falls into the familiar trap of misunderstanding the differences between banks and credit unions and the unfair competitive advantage afforded credit unions by federal tax laws.

But when communities had banks, crime rates dropped, and that helped push property values up. Fairchild also found it was possible for credit unions to prosper in poor neighborhoods without ripping people off.

“These are non-profit entities,” he says. “There are not shareholders. They’re owned by the community, and so often they’re able to offer a lower cost services, and they’re often able to offer better rates.”

If credit unions are able to offer lower cost services and better rates, it isn’t because they are non-profit, owned by the community, and lacking shareholders.  It is because they are allowed to grow without limits, do not pay federal income taxes, and face far less regulatory scrutiny.  Lest I go Rambo on Mr. Fairchild while chasing this red herring, I will merely assume that, because he spoke highly of community banks, when he juxtaposes credit unions against “banks,” he is talking about the Too-Big-to-Fail monoliths.

Notwithstanding his prejudice or misunderstanding of credit unions, Mr. Fairchild’s primary point that when banks consolidate it hurts consumers, particularly the poorest among us, is deadly accurate.

Posted in default category | No Comments »

Time To Stop Over Regulating the Innocent

August 15th, 2011

Well, I have had just about enough of “the banks aren’t lending money” crap.  Everywhere I turn I read about the so-called credit crunch and small business just can’t get the resources it needs for expansion.

Let me see if I can help out the media with this “problem.”  First, if you have a true creditworthy borrower who is seeking funds to expand their established, cash flowing profitable business, call me.  I can put him or her in touch with about 6000 independent community banks that would love to have a good earning asset on their books.

Second, call Christopher “I am now a lobbyist for the motion picture industry” Dodd and Barney Frank.  They, by virtue of their so called Financial Reform legislation, have created such trepidation and doubt and red tape that many community banks are hesitant to lend to marginal customers.  Their Dodd-Frank legislation has so empowered the federal regulatory agencies (including new ones) to conduct “witch hunts” on the industry.  In this economic environment, Congress has blamed the regulators for the financial crisis for not being “tough” enough.  The regulators in turn have unleashed their wrath on the industry with a “we’re going to getcha” mentality.  Community bankers are scared to death to lend.  You would be too if you had already been judged guilty until you could prove yourself innocent.

Hell, even the Department of Justice has gotten into the game.  Examiners looking at hundreds of loans on the books might discover a fair lending discrepancy in a rate charged one borrower vs. another for almost identical loans.  Forget about the fact that one of the borrowers might have a lower FICO score than the other…Justice Department referral.

Want to solve the so-called credit crunch and get this country moving again?  Find a few members of Congress with the backbone to reverse the horrible trend of over regulating the innocent and set their sights on the big bank abusers.  It is ludicrous to think that the same regulatory rules should apply to a 100 mm community bank and a 100 billion mega bank. 

If something is not done soon to reverse this horrible regulatory overkill trend, I’ll show you a real credit crunch when all the independent community banks throw in the towel and sell, leaving all the small business and consumer credit decisions to the big banks.

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Posted in community banks, Dodd bill, financial regulatory reform, IBAT, Independent Bankers Association of Texas, Lending, Loans, Small Business Lending, Texas Community Banking | 3 Comments »

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