Remarks
by
Stephen P. Wilson
Immediate Past Chairman, the American Bankers Association
and
Chairman and CEO, LCNB National Bank
Lebanon, Ohio
The Challenges to the U.S. Banking Industry
Under the Dodd-Frank Act
22nd Special Seminar on International Finance
Tokyo, Japan
Nov. 17, 2011
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Thank you. It’s a pleasure to be here and to participate in this 22nd Seminar. It is
an honor to appear on this program with so many distinguished speakers. I
particularly want to acknowledge John Walsh, acting comptroller of the currency,
and Cam Fine, president and CEO of the ICBA.
I also want to thank my hosts for their hospitality.
It is an honor to be here today with you.
For several years now, the American Bankers Association has been proud to
participate in this annual event. I’m proud to continue that tradition in my role as
the immediate past chairman of ABA. The American Bankers Association
represents banks – federally insured depository institutions – of all sizes and
charters and is the voice for the nation’s $13 trillion banking industry and its two
million employees.
PAUSE
My topic today is “The Challenges to the U.S. Banking Industry Under the DoddFrank Act.” The Dodd-Frank is officially called the Dodd–Frank Wall Street
Reform and Consumer Protection Act. It was named for the two committee
chairman who shaped it – Sen. Chris Dodd, who, at the time, represented the state
of Connecticut and was chairman of the Senate Banking Committee, and Rep.
Barney Frank of Massachusetts, who was then chairman of the House Financial
Services Committee.
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The impact of the Dodd-Frank Act has been, and will continue to be, profound. We
could spend days discussing this, but I’m going to give you the highlights from a
community banker’s viewpoint.
Let me begin by giving you some perspective. I want to tell you about my bank. As
you can see from Slide 2, LCNB was founded some 20 years after the end of the
American Civil War. We’re in Lebanon, Ohio, about mid-way between Cincinnati
and our capital city of Columbus.
I am a community banker because I want to be close to my community – to help
my customers make their dreams come true, and help my community grow and
prosper. And that’s why I am so troubled by the challenges the Dodd-Frank Act
will impose on my bank – and thousands of banks like mine.
PAUSE
How did we get to the point that our Congress would write the Dodd-Frank Act?
To understand, we need to go back to 2008, and the aftermath of the financial
crisis. By the fall of that year, it was very clear that our industry – the highly
regulated traditional banking sector – was going to face a massive piece of
legislation under the most difficult political circumstances. Four forces came
together at one time that led to this:
-- First, we had just experienced the deepest recession since the Great Depression,
and one that grew worse because of problems in the financial system;
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-- Second, the Troubled Asset Relief Program, or TARP, led to charges, generally
misreported in the media, of a “bailout,” to which the public reacted very
negatively;
-- Third, a new, highly partisan Congress was elected;
-- And fourth, a new president was elected who had the support of, and remained
close to, consumer and community groups.
In the many months of congressional debate and work on the Dodd-Frank financial
regulatory reform legislation, our industry – the traditional banks – strongly urged
that Congress close the regulatory gaps that exist outside the banking industry
through better supervision and regulation of the nonbank sector.
Community banks like mine bear a hefty and expensive regulatory burden. As the
implementation of the Dodd-Frank Act moves forward, our regulatory burden is
growing exponentially.
The Dodd-Frank Act has resulted in over 5,233 pages of proposed and final rules,
which laid end-to-end would be nearly five times the height of New York’s
Empire State Building (Slide 3).
Managing this burden is a significant challenge for a bank of any size, but for the
median-sized American bank, with only 37 employees, it is overwhelming.
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The weight of these new rules creates pressure to hire additional compliance staff
instead of customer-facing staff. It means more money spent on outside lawyers,
reducing resources that could be directly applied to serving a bank’s customers and
community.
In the end, it means fewer loans get made, slower job growth, and a weaker
economy.
Some provisions in the Dodd-Frank Act are particularly troubling for community
banks. I’ll outline them.
1. Risk Retention. The Dodd-Frank Act requires banks to retain a portion of the
risk of loans that they originate and later sell to other parties. Banks then must hold
capital against that retention, at a time when additional capital is particularly hard
to come by. Banks will be forced to originate fewer mortgage loans, as their
capacity to make and retain loans will steadily get used up.
2. Higher Capital Requirements and Narrower Qualifications for Capital. The
capital regime supported by the Dodd-Frank Act requires banks to hold more
capital, and it restricts what qualifies as capital to little other than shareholder
interest and retained earnings. New shareholder investors are hard to find,
especially for community banks. Regulatory pressure on bank earnings – for
example, through the Federal Reserve’s policy holding down interest rates,
controls on debit card interchange revenues, restrictions on overdraft programs,
and higher compliance costs – leaves little revenue to pay investors or to retain to
boost capital.
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3. The Securities and Exchange Commission’s Municipal Advisors Rule.
Banks that provide municipalities with traditional banking services, which are
already subject to oversight by primary regulators, will be subject to additional
registration and oversight burden by the SEC. The compliance costs of duplicative
regulation may make serving local municipalities unattractive for community
banks.
4. Derivatives Rules. New derivatives rules will make it much more expensive for
banks to offset their loan exposures to customers, industries, lines of business,
interest rates, credit default, and other risks through the use of derivatives.
5. Doubling Size of the Deposit Insurance Fund (DIF). Under Dodd-Frank, the
FDIC has announced plans to double the size of the DIF, taking as much as $50
billion out of the earnings and capital of the industry.
There’s also the sheer volume of new regulations and new reporting burdens, many
of which will flow from the new rules set by the new Consumer Financial
Protection Bureau. These will have a direct negative impact.
All banks – large and small – are required to comply with rules and regulations set
by the CFPB. ABA recently testified on this before the U.S. Congress, noting:
“The Bureau ... can join the prudential regulator by doubling up during any smallbank exam at the Bureau’s sole discretion. It is also true that bank regulators will
examine smaller banks for compliance at least as aggressively as the Bureau would
do independently. In fact, the FDIC has created a whole new division to implement
the rules promulgated by the new Bureau, as well as its own prescriptive
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supervisory expectations for laws beyond FDIC’s rule-making powers. Thus, the
new legislation will result in new compliance burdens for community banks and a
new regulator looking over our shoulders.”
The Dodd-Frank Act also requires 20 new Home Mortgage Disclosure Act
reporting obligations.
These and other reporting requirements will add considerable compliance costs to
every bank’s bottom line.
I’m painting a rather grim picture. And it gets worse when we talk about the DoddFrank Act’s Durbin Amendment, which mandated that the government set price
controls for debit card interchange fees. You’ve probably read some recent articles
about the impact of this amendment, which is named after Sen. Dick Durbin of
Illinois.
The price controls instituted under the Durbin Amendment will result in a 45
percent loss in debit card interchange revenue for banks. These revenues are used
to provide low-cost accounts, fight fraud and maintain a safe and efficient U.S.
payments system.
This unprecedented transfer in costs from retailers to consumers –
the result of government price-fixing – threatens consumers with higher fees for
basic bank services. In the face of protests, some fees have been withdrawn. But
the loss of income remains a problem for many banks.
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Rep. Jason Chaffetz (R-Utah) and Rep. Bill Owens (D-N.Y.) have introduced
legislation, supported by ABA, that would repeal the Durbin Amendment.
Congressman Chaffetz describes the Durbin Amendment as “a perfect example of
the dangers of price controls and the inefficiency of government intervention in the
free market.”
“The Durbin amendment is an affront to consumers and the banking industry,” he
said.
In a newspaper op-ed article, a Texas banker said this regarding the consequences
of the Durbin Amendment: “It’s easy to blame the banks, but by capping the fees
merchants pay for the value and efficiencies of using a debit card, government
intervention has fundamentally altered the economics of offering debit cards to
consumers.”
PAUSE
As I said earlier, the picture of the impact, or the aftermath, of the Dodd-Frank Act
is grim. We hope to fix some of these things. We hope to lessen the impact of
others.
There are provisions in Dodd-Frank that our industry supported, including several
industry-advocated provisions aimed at preventing a repeat of the crisis that nearly
brought our economy to its knees in 2008. They are noted in Slide 4.
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There is a new process for winding down failing, systemically important
institutions. It is now as close to a controlled bankruptcy as possible. This change,
aimed at ending the assumption that some institutions are too big for the
government to allow to fail, should result in more disciplined behavior by
institutions, creditors and depositors alike.
The legislation also charges a regulatory body with the specific responsibility of
monitoring not just the institutions that comprise our financial system, but the
system itself. By rounding out our supervisory system to encompass both the forest
and the trees, the bill, we hope, will spot and stop a potential contagion before it
spreads.
Let’s turn to these new systemic risk management provisions.
The Dodd-Frank Act puts in place several new entities – Slide 5 – and a statutory
liquidation process to deal with systemically risky institutions:
-- The new Financial Stability Oversight Council charged with monitoring
systemic financial risks. The Council will have significant authority to identify
potential systemic threats and to direct the regulatory agencies to take action to
address those risks.
-- The Federal Reserve – Slide 6 – has new authority to impose additional
prudential requirements on large bank holding companies and significant
nonbanks, including heightened capital and liquidity and other requirements, such
as a self-designed resolution plan.
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-- And a new process is established for Federal authorities to place failing bank
holding companies and significant nonbanks into an FDIC-operated receivership
structure. This is similar to the one in place for banks under the Federal Deposit
Insurance Act. This process is intended to give federal authorities the power to act
quickly to respond to potential liquidity or other crises of confidence involving
non-depository institutions.
As Slide 7 shows, the Federal bank regulatory agencies, and in particular, the
Board of Governors of the Federal Reserve, are given extensive new authorities to:
-- One, monitor the systemic safety of the financial system and to take proactive
steps to reduce or eliminate threats to it.
-- Two, impose strict controls on large bank holding companies with total
consolidated assets equal to or in excess of $50 billion and systemically significant
nonbank financial companies supervised by the Fed to limit the risk they might
pose for the economy and to other large interconnected companies.
-- And, three, take direct control of troubled financial companies that are
considered systemically significant.
It’s important to note that the biggest failures of the regulatory system in the wake
of the financial crisis, including consumer protection failures, have not been in the
regulated banking system, but in the unregulated or weakly regulated sectors.
Nonetheless, the legislative remedy – the Dodd-Frank Act – whose rhetoric was
largely aimed at Wall Street, focused unfairly on traditional banks.
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PAUSE
It’s also important to note that portions of the Dodd-Frank Act must still be
supplemented with an overhaul of America’s housing finance system.
Determining the future of the housing government-sponsored enterprises – or
GSEs – is going to be a key legislative issue.
The Obama administration has said that reform of Fannie Mae and Freddie Mac
must address four key issues: the method and extent to which the government
should provide stability to the housing finance system; the government’s role in
supporting affordable housing; regulation of the securitization market; and a
strategy for transitioning markets away from government programs while
maintaining consumer access to affordable credit.
In the words of U.S. Treasury Secretary Timothy Geithner: “We need to begin the
process of weaning the markets away from government programs and make room
for the private sector to get back into the business of providing mortgages.”
ABA has provided Congress and the Obama Administration with the banking
industry’s perspective on what needs to be done to establish a sustainable, limited
government-supported mission that would promote housing-market stability and
liquidity. Our recommendations include:
– Ensuring that the primary goal of any GSE in mortgage finance should be to
provide stability and liquidity, to facilitate the ability of the primary mortgage
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market to provide credit for borrowers who have the credit and skill sets required
to maintain homeownership.
–Requiring that, in return for the GSE status and any benefits conveyed by that
status, these entities must agree to maintain their mission in all economic
environments.
– Ensuring that strong regulation, examination and authority for prompt corrective
action of any future GSE is a key element of reform. Regulation also must include
review and control for systemic risk.
– And strictly confining any GSE involved in the mortgage markets to a welldefined and regulated secondary market role. The GSEs should not be allowed to
compete with the private, primary market.
This is going to be a major debate that will set the course for American housing
policy.
PAUSE
Let me step back from all of these issues and look at Dodd-Frank by the numbers.
Although traditional banks had little to do with the financial crisis of 2008, they are
being made to pay the price through expensive new government regulation.
The Dodd-Frank Act at its one-year anniversary had already imposed more than
19.6 million paperwork burden hours on U.S. businesses, according to one analysis
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that used official estimates from The Federal Register. (Source: American Action
Forum.)
This excessive regulation comes at a cost to banks, our commercial and consumer
customers, and our communities. It is a very real impediment to U.S. economic
growth. (Slide 8.)
The Institute of International Finance estimates that because of new banking
regulations, the level of real GDP could be 2.7 percent less by the year 2015 than
would otherwise be the case for the United States. This could result in 2.7 million
fewer jobs being created.
According to a recent General Accountability Office (GAO) report, the agencies
primarily responsible for implementing Dodd-Frank will require 2,849 additional
federal employees through 2012, at a cost to taxpayers of more than $1.2 billion.
(Source: American Action Forum.)
Seventy-four percent of American voters believe that businesses and consumers
are over-regulated, and 59 percent believe consumers end up paying the costs of
federal regulations, according to a recent survey. (Source: The Tarrance Group.)
This survey also found that 69 percent of voters believe the agencies that enforce
regulations fail to consider how their decisions lead to increased prices and job
losses.
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According to a Gallup survey, small-business owners in the United States are most
likely to say complying with government regulations is the most important
problem facing them today.
PAUSE
Let’s consider some examples of how the Dodd-Frank Act will increase bank costs
or reduce bank services. They include:
-- Changes to the deposit insurance system will take as much as $50 billion out of
banks’ earnings and capital.
-- A change in the way the Labor Department defines “fiduciary” could increase
the costs of brokerage IRA accounts by 75-195 percent.
-- One proposed new rule (Slide 9) defines a “qualified” residential mortgage as
one that includes a minimum 20 percent down payment. It would take the average
American family 16 years to save a 20 percent down payment -- assuming that the
family directs every penny of savings toward the down payment. Because banks
will not want to make any mortgages that don’t meet the regulators’ definition of a
“qualified residential mortgage,” the rule as proposed is likely to spark a severe
retraction in housing credit and a worsening of housing market conditions.
We are working with a broad-based coalition of organizations – together we’re
called the Coalition for Sensible Housing Policy – to advocate for significant
revisions in the proposed qualified residential mortgage rule. Without these
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changes, millions of creditworthy Americans will likely be denied credit or forced
to pay substantially more to buy a home.
PAUSE
While not directly connected to the Dodd-Frank Act, we are also continuing to
hear reports from bankers about the impact of overzealous examiners, which has a
chilling effect on bank lending and economic growth.
One problem occurs when examiners force a bank to classify loans that are
performing.
A second problem occurs when regulators press banks to increase capital-to-assets
ratios by as much as 50 to 75 percent above minimum standards. For many banks,
it seems like whatever level of capital they have, it is not enough to satisfy the
regulators. This is excess capital not able to be redeployed into the market for
economic growth. To increase capital levels, banks must limit or reduce lending.
There can be no question about the profound impact of the Dodd-Frank Act. It has
made it more difficult for us to lend and to help grow our communities and the
nation’s economy. It has also affected our debit card revenues, which makes it
increasingly difficult for us to offer no- or low-rate accounts and services for
consumers.
So, where do we go from here? We move forward.
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Our job as an industry, unified and united under the American Bankers
Association, is to help policymakers – lawmakers and regulators alike – understand
the real-world implications of the Dodd-Frank Act’s many provisions.
We want to identify problems, suggest solutions and do what we do best: Taking in
deposits and making loans that build businesses and help our economy grow.
And we want to work with the federal regulators who have yet to write 77 percent
of the regulations that the Dodd-Frank Act requires.
PAUSE
I hope I have conveyed to you the great concern I have about the challenges that
the U.S. banking industry faces under the Dodd-Frank Act.
Let me also point out that while we do have significant challenges, the U.S.
financial system – with its incredible diversity in bank organization, size and
business models – will make every effort to meet those challenges where we must,
and minimize them where we can.
The key is for regulators, lawmakers and bankers to work together in identifying
the negative consequences – intended and unintended – of the Dodd-Frank Act and
fixing them. From our perspective, we, as bankers, need to provide effective realworld examples of what is, and what is not, working.
It is in everyone’s interest – regulators, lawmakers, bankers, and our customers
alike – to promote a thriving banking industry that drives economic growth.
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Thank you.
I’m more than happy to take your questions.
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