Community banks fear Dodd-Frank regulatory changes
Published: August 26, 2010
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The new law reshaping regulation of the U.S. financial industry is earning poor reviews from community bankers in northeastern Pennsylvania even as many of the details remain to be worked out.
Bankers say the law will end up saddling their companies with more work and higher costs even though they had little to do with the nearly two-year-old financial crisis that drove the push for change.
“I think you can take it to the bank, no pun intended, that there’s going to be added expense to community banks, and it wasn’t needed,” said Bob Snyder, president and chief executive officer of Luzerne Bank, which has seven branches and assets of $270 million. “This wasn’t about community banks. The whole meltdown was not about community banks.”
Indeed, the push for new rules began in 2008 after the collapse of large financial companies such as the investment bank Lehman Brothers and mortgage giant Washington Mutual. Congress responded with legislative proposals in 2009 and, after months of debate and partisan wrangling, President Obama signed the final bill in July.
The law has been hailed by some observers as the biggest change since the Great Depression to federal rules governing finance. The bill tightens the regulation of mortgage lending, strengthens federal oversight of derivatives, imposes new rules on hedge funds and gives shareholders a louder voice on executive pay at publicly held companies.
The law also permanently raises the limit on federal deposit insurance to $250,000 per account and lifts the ban on paying interest for business checking.
In addition, the law sets up a new group—the Financial Stability Oversight Council—designed to identify and deal with financial companies or practices that pose a threat to the broader economy. The goal is to eliminate the need for bailouts of big companies.
Now, bankers are waiting for regulators to develop rules based on the law, which also creates a new agency to protect onsumers in financial transactions, the Bureau of Consumer Financial Protection. Bankers are concerned that the bureau, even though it won’t directly regulate smaller banks, may be overly punitive.
“There’s a fear out there among all the smaller banks about these regulatory changes and the impact they’re going to have on us,” said Snyder, who is considering adding another staff member at Luzerne Bank to deal with regulatory compliance.
One of the potential effects for community banks is a loss of revenue from interchange fees, the charges assessed whenever someone swipes a debit or credit card to pay for something. The new law asks regulators to set a cap on those fees, something retailers have sought for years. Merchants claim interchange fees drive up the costs of goods.
The limit, which has yet to be determined, won’t apply to banks and credit unions with less than $10 billion in assets. However, executives at smaller institutions said they may have to drop their prices to stay competitive.
“The small (card) issuers should be OK in theory,” said Mike Wishnow, senior vice president of the Harrisburg-based Pennsylvania Credit Union Association. “But there will be downward pressure.Although the new law is designed to protect financial consumers, it could end up pinching them financially as banks figure out ways to recoup their own higher costs. Free checking and free debit cards may both become things of the past, observers said.
Customers who keep low balances but have a high number of transactions may find they have to pay fees or that they won’t earn any interest, said Alan Dakey, president and chief executive officer of Peoples National Bank in Hallstead, which has $560 million in assets and 11 branches in Pennsylvania and New York.
“I don’t think the banks are going to be anxious to be overly aggressive on paying interest on smaller-balance accounts,” Dakey said.
Given the heavier burdens, some banks may start hanging out a “for sale” sign, Dakey and other bankers said.
“At some point you get to where your cost structure for compliance is too high, and it may cause banks to think about merging,” said Lewis J. Critelli, president and chief executive officer of Wayne Bank. Based in Honesdale, the bank has $546 million in assets and 11 branches in Wayne, Monroe and Pike counties.
On top of the financial burden imposed by new regulations, Critelli added, is the way they come between community bankers and their customers.
“Most of the small banks in northeastern Pennsylvania have been around for 100-plus years,” Critelli said. “Obviously, we have such a vested interest in the community and our customers that adding any other layers on us is just a cost, and I don’t think it adds any benefit.”
