In the battle over the potential negative effects for community banks from the Dodd-Frank Act, it all comes down to the Durbin amendment.
The provision to limit debit interchange fees has become the go-to example of how the regulatory reform law will hurt smaller institutions and is one of the only measures most major players agree on — with the notable exception of Sen. Richard Durbin, D-Ill., the amendment's author. At a Senate Banking Committee hearing Wednesday on the state of community banking, the provision once again took center stage.
Officials from the Federal Reserve Board, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency acknowledged the provision may damage small banks, while bankers repeatedly urged Congress to step in to help them.
Despite a statutory exemption from the limit for banks with assets of less than $10 billion, regulators said institutions are right to be worried.
"We are extremely concerned that, under proposed regulations, community banks may not actually receive the benefit of the interchange fee limit exemption explicitly provided for in the law," said Sandra Thompson, director of risk management supervision of the FDIC.
Other regulators emphasized it was one of bankers' biggest problems with the Dodd-Frank law.
"Bankers have brought several provisions of the Dodd-Frank Act to our attention as particular areas of concern for community banks," said Maryann Hunter, deputy director of division of banking supervision and regulation for the Fed. "One such provision is the requirement that the Federal Reserve issue a rule to limit debit card interchange fees and to prohibit network exclusivity arrangements and merchant routing restrictions."
Under Dodd-Frank, the Fed is required to ensure debit interchange fees are "reasonable and proportional." The Fed issued a proposal in December to limit such fees to 12 cents, arguing that would cover all of an institution's costs for setting up and using a debit system.
The rule has caused community bankers, credit unions, lawmakers and regulators to complain that the Fed has gone too far in its plan.
Even FDIC Chairman Sheila Bair, who has steadfastly defended Dodd-Frank, has acknowledged the Durbin amendment could have a negative impact, and sent a letter to the Fed raising several concerns with its proposal. Acting Comptroller of the Currency John Walsh has also weighed in, arguing the central bank's plan is too narrowly focused and excludes legitimate bank costs in setting up a debit system.
Lawmakers at the hearing noted the unusual accord between regulators and the industry. "Typically, we here try to rail against regulatory overreach," said Sen. Bob Corker, R-Tenn. "In this case, the regulators are even concerned about what they have been tasked to do. Certainly, the Fed has been expressed concerns about the criteria. The FDIC and the OCC have strong concerns what it's going to do to community banks."
In late March, Fed Chairman Ben Bernanke sent a letter to both leaders of the Senate and House banking committees saying the central bank would miss its April 21 deadline to finalize the rule given the volume of comment letters received on the issue. He said the Fed would still ensure a final rule is in place before the regulation goes into effect July 21.
Lawmakers have offered two measures to delay the rule. Sen. Jon Tester, D-Mont., a member of the Banking Committee, has proposed a bill that would delay the Durbin amendment for two years and require a study of the costs of creating a debit system. Speaking to reporters after the hearing, Tester said he had the 60 votes necessary to prevail.
"Now that was last week. Hopefully we still have them this week," said Tester, according to Dow Jones Newswires.
Rep. Shelley Moore Capito, R-W.Va., has introduced a bill that would delay the interchange rules for a year and force the Fed to make changes if two of the four financial institution regulators — the Fed, the FDIC, the OCC and the National Credit Union Administration — argue the central bank needs to include other costs in the proposal.
To be sure, interchange was not the only area of concern regulators acknowledged.
Community banks, they said, are worried about the ultimate cost of the newly created Consumer Financial Protection Bureau or a requirement by federal agencies to modify their regulations to remove references to credit ratings.
But the regulators said it was too early to say how those parts of the law would play out.
"The immediate effects will be different for different banks, depending on their current mix of activities, so it is not possible to quantify those impacts with accuracy," Jennifer Kelly, senior deputy comptroller for midsize and community bank supervision for the OCC, said in prepared testimony.
She was seconded by John Ducrest, commissioner of the Louisiana Office of Financial Institutions, on behalf of the Conference of State Bank Supervisors.
"We are still unaware of the full scope of the impact of Dodd-Frank will have upon the industry as a whole, and community banks specifically," Ducrest said.
Still, Thompson said that with the exception of the Durbin amendment, community banks would not be harmed and received some benefits, including a change to deposit insurance assessments that lowered many small banks' premiums and a permanent increase in the coverage limit to $250,000.
"Much of the Dodd-Frank Act should have no direct impact on community banks, while certain changes in the Act provide real benefits," said Thompson.
Thompson also suggested that regulations to address "too big to fail" would help to return competitive balance by imposing additional capital standards and enhanced prudential regulation on the largest banks.
"Much of the regulatory cost of the Dodd-Frank Act will fall, as it should, directly on the large institutions that create systemic risk," Thompson said. "The leveling of the competitive playing field will help preserve the essential diversity of our financial system, and prevent any institution from taking undue risks at the expense of the public."
Not all regulators agreed that "too big to fail" had been fixed, however, and the OCC's Kelly suggested community banks may be burdened by all the new regulations that result from the reform law. For example, she said, costs related to small-business lending will increase when new HMDA-style reporting requirements take effect.
"Regardless of how well community banks adapt to Dodd-Frank Act reforms in the long term, in the near-to-medium term these new requirements will raise costs and possibly reduce revenue for community institutions," Kelly said.
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