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The more I think about the Financial Stability Oversight Council, the more nervous I get. This is the council created by the Dodd-Frank Act that will be responsible for figuring out what to do with the largest financial firms when they get in trouble. Any bank holding company with more than $50 billion in assets falls under its jurisdiction. Currently, there are 26 such companies.

But the council is further authorized to supervise any number of firms that it deems capable of affecting the country’s financial stability. Technically, the Federal Reserve (which is part of the council) will supervise these other companies, which could be insurance firms, investment companies, hedge funds or other kinds of companies. The language guiding the council on the selection of such companies is so vague that, in effect, it has complete discretion to choose whatever companies it likes (or doesn’t like).

On the face of it, it just doesn’t seem like a good idea to let a regulatory body determine which companies it supervises. Congress really needs to determine which companies a specific agency or council is responsible for. It seems like a mistake to let the agency or council self-select. What kind of incentives might there be for the council or agency to select one company for supervision, but ignore another. Talk about a political football.

Congress is going to have to add some kind of clarifying language here. Companies need to know which regulators to worry about. Clear language in the law needs to specify which companies fall under the purview of the new oversight council.

U.S. Rep. Erik Paulsen (R-Minn), who sits on the House Banking Committee, addressed bankers gathered for the ICBM convention on August 7. His short video message addressed the Dodd-Frank Act. He said:

While most of us can agree that some amount of reform was definitely needed, I don’t think anyone in this room was comforted by the bill’s final passage or by the fact that the legislation’s primary author wasn’t even sure that his bill will be able to prevent another economic crisis. Instead, as pointed out in a sobering opinion piece in the June 29 Wall Street Journal, the Dodd-Frank Bill, with its tangle of new regulations and as-yet unwritten financial rules, seriously threaten community banking by punishing the people and institutions like you who played no role in the crisis.

What is also important about this missed opportunity is that the financial reform bill fails to address many of the issues that caused the crisis in the first place. Instead, it paints everyone with a broad brush and gives more power to the regulators who missed the early warning signs and failed to do their jobs.

It also completely ignores reforming and restructuring government sponsored enterprises Fannie Mae and Freddie Mac, which taxpayers have already spent more than $100 billion bailing out and are on the hook for billions more.

What may be most troubling for many of you is that most of you will now be affected in some way in how you run your business … small community banks are being made subject to rules set by a new credit czar and the newly created Consumer Financial Protection Bureau which will have broad authority to set sales practices, limit credit products, and mandate compensation growth. This credit czar has been given broad authority to determine whether a consumer financial product is unfair, and as the legislation is written, will have nearly complete authority to review consumer products and ration credit. In the end this will raise the cost of credit to consumers and small businesses while also imposing a hefty regulatory burden on your banks.

You know for every page of this 2,300-page bill, you will see about 10 pages of new rules and regulations. This enormous new compliance burden will expose small community banks to lengthy mandates and more burdensome regulations. In my opinion, instead of creating new bureaucracies and limiting consumer choice strangling small banks and small business with red tape, we should be focusing on safety and soundness and real solutions that will get the economy going, getting the credit markets lending again and also creating jobs.

U.S. Sen. Amy Klobuchar (D-Minn.) was in Brainerd to address the convention of the Independent Community Bankers of Minnesota on Saturday. The Senator, who has taken a keen interest in community banking in the last couple of years, talked about working with Sen. Kay Bailey Hutchison (R-Texas) to get an amendment added to the Dodd-Frank Reform Act that preserved the Federal Reserve’s roll in community bank supervision.

“We had a big fight with the leadership over this,” she explained. “The view we in the Midwest have of community banks is different than the view they have on the East Coast.”

She cited a letter she received from Noah Wilcox of Grand Rapids State Bank, Grand Rapids, Minn., in influencing the outcome of the debate.

“When Congress established the Federal Reserve in 1913, it purposefully created a system of regional banks overseen by a board in Washington who made sure the power of the institutions would not be concentrated far from these banks and the communities they serve,” she said. “And that is why that letter Noah wrote was so powerful for me; he wasn’t just advocating for his bank in Minnesota, but for this concept that has long been the foundation for how the Federal Reserve works.”

The Klobuchar-Hutchison amendment was passed 90-10.

Klobuchar said read Noah’s letter into the Congressional record, and later framed a copy to give to him. “I didn’t know this, but he told me that on the back it said, ‘if you need help hanging this, please call the federal government.’ Fortunately he was judicious in the use of our federal resources and didn’t call,” she told a room full of more than 100 amused bankers.

U.S. Sen. Al Franken (D-Minn.) spoke to bankers at the annual convention of the Independent Community Bankers of Minnesota this morning through a taped message. Here is what he said:

I know people all across Minnesota are facing hard times right now due to the unregulated greed on Wall Street that led to the biggest financial collapse in a generation. The big banks and investment firms and insurance companies put profit ahead of everything else and in the end it cost the American people billions of dollars in lost retirement savings, it caused national unemployment to skyrocket to 10 percent, and forced many small businesses to close their doors.

Thankfully there are folks like you - people all over the state who run small community banks — to help ease these burdens. I know you’ve made efforts to work with your customers, often your neighbors, to strike a compromise on their mortgage payments until they can find a new job, or you’ve extend credit to a local small business that was turned down by all the big guys.

Because there are over 400 community banks in Minnesota, that means more Minnesotans have a local bank in their town, even those in rural areas.

I met with many of you in April to hear your concerns about the Wall Street reform bill. You told me about the impact of new regulations on small banks. I think the new bill passed strikes a reasonable compromise. New rules will hold the big banks accountable while minimizing the impact on small community banks which didn’t cause the financial crisis in the first place. The bill takes significant strides toward ending too big to fail. However, as the bill is implemented I want to make sure you can continue to do the work you do so well in your communities.

I hope you enjoy the rest of your conference. I look forward to working with each of you and find new ways to partner, grow our local communities and strengthen our national economy.

After this message, bankers greeted former Minnesota Governor Arnie Carlson, who talked about the need for elected officials to get beyond partisanship in order to solve real problems.

ICBA President/CEO Cam Fine took exception to something Iowa Bankers Association Chairman Roger Claypool wrote in his column that appeared in the July 16 edition of the IBA Exchange (it appeared earlier on line). The column was mostly a reprint of this ABA memo to community bankers. Fine was “irked” by point No. 11, in which it says that raising the Deposit Insurance Fund minimum ratio to 1.35 from 1.15 sets a “precedent to use premiums as a revenue raiser to support other government spending programs.”

Fine, who spoke to members of the Community Bankers of Iowa via speaker phone on July 15, said: “That’s a lie. I don’t know if they don’t know their history or if they were intentionally trying to mislead you. But the FDIC premiums have been on the unified federal budget since 1967… In 1967, President Lyndon Johnson placed the FDIC on the unified federal budget to reduce the deficit so he could hide the cost of the Vietnam War. That’s a true story, that’s fact. Look it up.”

Fine further went on to explain that Congress puts things on budget or holds them off budget all the time to achieve their desired political purposes. Putting the FDIC on the unified federal budget makes the deficit look smaller, and keeping Fannie and Freddie off the budget, he noted for further example, keeps the deficit looking smaller. “It’s all politics, folks,” he summarized.

Fine, of course, is right, but ABA also has a point. The precident is not that the DIF balance will count toward the budget, but that its statutory minimum is being increased by Congress for purposes other than protecting bank deposits.

The integrity of the Deposit Insurance Fund is something to be concerned about. Although the FDIC always has existed in a political environment, deposit insurance has enjoyed overwhelming public support; the public views the FDIC as a credible, reliable agency. The more politicians play with the fund, the greater risk they run that the public will wonder about the integrity of the fund.

Moving the minimum ratio up is actually one of two moves in the Dodd-Frank Act which further politicize the DIF. The other is the move toward the asset-based formula on premiums. Proponents of the switch often say “deposits don’t fail, assets do.” But the fund doesn’t protect assets. It would be more pure to keep the formula centered on deposits. Nonetheless, I understand the reasons for going to an asset-based formula and I think an asset-based formula can be credible also, but it definitely is more political.

I am sure the public trusts the government on these two counts and will continue to respect deposit insurance for what it is, but how far can you push the public? I think that is a question worth contemplating. Further politicization of the deposit insurance system may erode the credibility behind the system, and that would be bad for everyone.

The Dodd-Frank bill will be signed into law and there is an interesting debate about whether that is a good thing or a bad thing for the industry. The point of view I pick up from people affiliated with the ABA is that it is a bad thing. The feeling is we could have done better. Sure, there was going to be legislation, that was certain. But the legislation could have been a lot better for banks.

The point of view I pick up from people affiliated with the ICBA is that it is a good thing. The feeling is this bill is as good as we could have done. There are a lot of carve-outs and exceptions for smaller banks which make the legislation palatable.

Cam Fine, ICBA President/CEO, spoke by telephone to bankers in Iowa on Thursday. He told them that if Congress failed to pass a bill this time around and had to take up financial reform legislation in the future, he highly doubts it would be willing to grant many of the things that make the current bill tolerable — things like the continued supervisory role of the Federal Reserve, the continued ability to count trust preferred securities as Tier 1 capital, the carve-out on CFPA exams for banks with less than $10 billion in assets, and the new asset-based formula on FDIC premiums.

As the Senate was taking its vote on Thursday morning, the ABA opposed the bill and ICBA was neutral. Jim MacPhee, ICBA chairman, explained that his organization could not support the bill because of its negative provisions, particularly its impact on interchange fees. However, the ICBA did not want to oppose the bill because it didn’t want to disregard the help it got from other interested parties that helped it achieve many of the positive provisions in the bill. “If you oppose it, you throw everyone under the bus,” MacPhee, a Michigan banker, told about 125 bankers in Okoboji.

If you read the statements both groups published on Thursday afternoon, you see they both expect a lot of work in the coming months and years in the rule-making process where much of the about-to-be-signed bill will be articulated.

The Dodd-Frank Wall Street Reform bill awaits the president’s signature now that the Senate has passed the historic legislation. Here is some of the reaction:

From ABA’s Ed Yingling:

“The American Bankers Association is very disappointed with the regulatory reform bill that is now headed for enactment.  While its core provisions provide needed reform, it is overloaded with new rules and restrictions on traditional banks that did not cause the financial crisis.  The result will be over 5,000 pages of new regulations on traditional banks and years of uncertainty as to what the massive new rules will mean.

“Its impact will be felt not only by the banking industry itself, but by the millions of consumers and businesses that rely on financial services every day to meet their saving, borrowing and financing needs.  It will also, by extension, have a considerable impact on the broader economy and the capability of traditional banks to provide the credit needed to create jobs and drive economic growth.

“The Dodd-Frank Wall Street Reform and Consumer Protection Act does contain some key reform provisions that bankers have long supported, including creation of a new systemic regulatory body, a new process for ending the concept of too-big-to-fail, better consumer protections, and provisions designed to rein in the shadow banking system. 

“Implementation of this legislation will be challenging for regulators, and we stand ready to work with them to ensure that they have the information they need to make certain that the regulatory process is carried out as effectively and efficiently as possible.”

From the ICBA:

Independent Community Bankers of America (ICBA) Chairman Jim MacPhee, CEO of Kalamazoo County State Bank in Schoolcraft, Mich., and Camden R. Fine, ICBA president and CEO, issued this statement today following Senate passage of the financial reform bill.

“This financial and economic crisis clearly demonstrates that reform of Wall Street is needed to prevent this kind of catastrophe from ever again harming our nation’s taxpayers and our communities. While ICBA still vigorously disagrees with some sections of the final bill, the Dodd/Frank Act does create an important precedent that recognizes two distinct sectors within the financial services spectrum-Main Street community banks and Wall Street megabanks. 

“Important ICBA-advocated wins in the bill such as changes in the FDIC assessment base, stricter oversight of too-big-to-fail institutions, and the inclusion of non-bank financial firms under consumer compliance regulations will save community banks money and allow them to better compete, serve their communities and promote economic growth in their markets. Also, the bill contains important concessions for community banks, including protection for trust preferred securities and an exemption from paying higher FDIC premiums to increase the minimum size of the deposit insurance fund.  These and several other concessions establish the congressional policy for tiered regulation that recognize Main Street community banks as having a different banking model from large and internationally active institutions.    

“After the President signs this bill into law, ICBA will work to fix problem provisions in the legislation and minimize any additional burdens on community banks as regulations are written and implemented so community banks can continue to serve the needs of their local customers and do not continue to pay the price for an economic debacle they did not cause.” 

From Neil Milner of the the Conference of State Bank Supervisors:

The passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act reaffirms the importance of the dual-banking system-a system that has existed for nearly 150 years.  Just as in previous reform efforts, the dual-banking system has emerged from the debate wholly intact, refuting the claim that the structure of our financial regulatory system somehow came about by accident.  Congress once again made the deliberate decision to reject proposals that threatened to do away with the dual-banking system by creating a single federal regulator.  The consensus remains: the state supervisory structure is vital to our country’s financial system, and it is here to stay.

Congress today passed a bill that preserves the dual-banking system and all that it entails:  a system of checks and balances between state and federal regulators that prevents consolidation of regulatory authority in Washington, D.C. and influence into a handful of money-center banks; a diverse and competitive industry marked by charter choice and innovation; and access to credit for individuals and businesses in every corner of the country.  By acknowledging the essential role of state regulators and state-chartered banks in our financial system, this historic bill recalibrates the balance of power between state and federal regulators and ushers in a new era of collaboration and cooperation between the two entities-in safety and soundness as well as consumer protection regulation.

As regulators and policymakers move to implementing the Dodd-Frank law, state and federal regulators all have an obligation to set aside institutional preferences and biases and to commit to a regulatory approach that strengthens our financial institutions while ensuring that the flow of credit is not halted.  Credit must continue to flow or the bill will not have achieved one of its most important goals:  facilitating economic recovery.

An important part of accomplishing this goal is ensuring that no lender has an institutionalized competitive advantage over another.  This disparate treatment among institutions can be seen in the funding advantage systemic banks enjoy over other institutions.  Until this differential between institutions is eliminated, then the implications of having “too big to fail” banks will be a financial system driven not by market forces, but by the unequal application of an implied government guarantee of a handful of banks.

CSBS appreciates Congress’s acknowledgement of the integral role of the dual-banking system and we look forward to working with our federal counterparts to implement these monumental reforms.

From former Comptroller of the Currency Eugene Ludwig:

“With today’s Senate vote, a sweeping and well intentioned financial reform bill is on the verge of becoming the law of the land. Although the impact on banks will undoubtedly be profound, we won’t know how profound for some time. We can now see the contours of the ‘new normal’-a tougher, more prescriptive regulatory environment for all. However, it is up to financial regulators to fill in the details. They have a massive task ahead of them, as they set about crafting and implementing literally hundreds of new regulations. This process will take at least a year, and it will certainly be painful at times.”

From Don Childears, president of the Colorado Bankers Association:

“The Colorado Bankers Association is deeply disappointed that Congress filled this bill with unnecessary and harmful provisions instead of focusing on the reform our country needed. The unfortunate reality is that this bill will raise the costs of credit and stifle credit availability - two things that don’t help us recover from this recession - while placing new burdens on our local regulated banks - burdens from which Wall Street is enforceability exempt.”  

“Colorado bankers have advocated for smart, needed financial reform that would help protect our communities, our mortgage markets and our businesses from the threats of another financial meltdown. CBA has advocated that Congress take action to implement a systemic oversight council, responsibly improve consumer protections, create a system that allows appropriate bodies to step in and stop companies that are too big to fail, and create a system of regulation that places nonbank financial institutions on a similar level of regulation as our country’s regulated banking industry.”

“The Dodd-Frank bill does contain some needed reforms, however, Congress’ enormous 2,300 page bill contains so many additional unrelated proposals that we believe there is no way to implement this bill without having an overall negative impact on credit availability and financial services our Colorado banks supply to consumers, communities and businesses.”  

“The reality is that the Congress’ bill will require regulators to write 500+ new rules, 5,000+ new pages of regulations, create a massive new government bureau to oversee consumer protection, keep the unregulated nonbanks out of the reach of enforcement of these rules, and implement special interest price fixing for big retailers, like Wal-Mart, that bank customers will have to swallow. ”

One of the biggest problems with the financial reform bill, now officially called the “Wall Street Reform and Consumer Protection Act of 2010,” is section 611, which would prevent state regulators from setting lending limits for the banks they supervise. It would require all banks, regardless of charter, to abide by the lending limit established by the OCC.

This would be a huge blow to the dual banking system. Twenty states currently have lending limits higher than the OCC limit.

Lending limits, of course, are much more important for smaller banks than they are for larger banks. Forcing all banks to abide by the OCC limit shifts tremendous competitive advantage to larger banks. Currently, smaller, state chartered banks can accommodate more local customers with a loan limit that reflects local conditions. A national loan limit — equally applied to all banks regardless of location — would mean only big banks could make larger loans. A national limit would significantly reduce the loan market for a lot of state chartered banks. And it means many borrowers would have fewer options. They would be forced to go to larger banks, where the service would most likely be less individualized.

Tim Karsky, the Commissioner for the North Dakota Department of Financial Institutions, put together an interesting list of the state’s 77 state chartered banks. (There are 92 banks total in N.D.) North Dakota currently has a lending limit for its state chartered banks that is more generous than OCC limits. The list shows each state bank’s current lending limit and the limit that would be in place if OCC rules applied to them. The average reduction in lending limit (expressed in terms of actually dollars that could be lent) at each of the individual banks is about 35 percent. At eight banks, the reduction in lending limit exceeds 40 percent, including one bank, where it exceeds 50 percent.

Some might argue that higher loan limits mean riskier banking, but that is completely false. In North Dakota, there have been no bank failures during the financial crisis of the last few years.

OCC lending limits are always going to be lower than state limits. If you have to come up with a one-size-fits all rule, as the OCC has to do, then you are going to be conservative to manage the riskiest parts of the country. This is wise, but it is bad for people who live in states where the economy is strong. A national rule forces everyone to live as if conditions are equally difficult in all parts of the country. That is ridiculous. Why punish states that diversified their economy, managed their public budgets well, and created the right environment for local businesses to flourish? Also, state regulators can respond to changing local conditions much quicker than a regulator who has to implement a national rule.

Applying one national lending limit to all banks is an incredibly bad idea. I hope the conference committee figures this out and corrects the legislation before it gets to the president’s desk.

We sent this post from Bank Lawyer’s Blog around yesterday with our weekly email. At every opportunity, we who care about the banking industry should ask the regulators, “What is your goal?”

I think it is amazing that in all the debate that went on in Congress about financial reform we never got a clear answer about what the goal of regulation should be. Maybe the goal by some people in power is a smaller industry. If so, why? We need to have this discussion, and it needs to happen in an open forum.

I think most regulators would tell you they want a safe and sound industry. But what does that mean? Does that mean no bank failures? I would argue that it does not mean that. No failures could mean the industry is not innovative enough. Remember, the most effective way to never fail is to never try. A certain amount of failure is symptomatic of a healthy industry.

It is easy to understand where some might assume the regulators want a smaller industry. Raising capital requirements is a way to weed out weaker institutions that are unable to raise new capital. But why would we want a smaller industry? From a macro level, we want a diverse system for credit allocation. We do not want a highly concentrated system, as exists in Europe and Canada. The more decentralized the system, the more opportunity there is for start-ups, entrepreneurs and non-traditional borrowers. More centralization just means less opportunity. Sure, it might be easier to supervise an industry with only 6,000 players, but it might not be better for people who need to borrow money.

I hope this is the kind of discussion that is going on at the highest levels of government. What kind of credit allocation system is best for the country? How can government, through Congress and the regulatory structure, encourage that kind of system? Is “number of institutions” an effective way to measure the industry’s size? What about non-regulated companies that allocate credit? How do they figure into the issue?

We need to define our goal. If we are not clear on our goal, then it really doesn’t matter what’s in the financial reform legislation, because if you don’t know where you are going, any road will take you there.

The Senate passed financial reform legislation last night by a vote of 59-39. The bill is expected to go to a conference committee headed by Rep. Barney Frank (D-Mass.) which will reconcile it with the House version of a similar bill passed in December. Congressional leaders hope to have a bill to the president for signing by Independence Day.

Some of the notable provisions in the bill that would directly affect bankers include the creation of the consumer financial protection bureau, a rule that has the Fed setting rates for interchange fees on debit cards, and a rule that prevents banks from counting trust preferred securities as Tier 1 capital.

The House bill takes a slightly different approach on many issues. For example, the House bill includes creation of a $150 billion fund that the largest banks would have to pay into. The money would be used to resolve the failure of very large financial institutions. The Senate bill originally included the creation of a $50 billion fund, but the provision was ultimately dropped.

Also, the House created an independent, stand-alone consumer financial protection agency, which is slightly different from the Senate’s idea of putting the new agency inside the Federal Reserve.

The next step for Congress is to name members of the conference committee. Amendment can be considered in conference so advocates representing various interested parties will still be working this legislation, seeking last-minute changes. Bankers would really like to see the restrictions on interchange fees dropped, as well as the proposed restrictions regarding the categorization of trust preferred securities.

The ABA has a largely negative view of the Senate legislation. Here is the statement issued by ABA’s president/CEO Ed Yingling.

The American Bankers Association has supported broad financial regulatory reform since the beginning of this debate.  However, ABA and traditional bankers across the country oppose the legislation approved by the Senate because it now contains very negative provisions that will ultimately hurt American consumers, small businesses and the broader economy.

This bill contains some of the key reform principles that we support, but it also has been loaded down with provisions that will greatly undermine traditional banks’ ability to provide credit and help create jobs in their communities.

Many of these negative provisions have nothing to do with the financial crisis.  Despite all the talk about this being a Wall Street bill, it, in fact, does tremendous harm to traditional banks on Main Street that had nothing to do with the crisis and that will now be less able to support the economy.  This bill promised much-needed reform but has gone terribly wrong.

In testimony before Congress, in correspondence with policymakers, and in our outreach to the press, ABA has consistently expressed our support for the key principles of reform.  These include creation of a systemic risk council, creation of a strong mechanism for handling the failure of large institutions, ending the concept of too-big-to-fail, closing gaps in regulation and enhancing consumer protection.

We have also continuously stressed that reform must be done right because if it is not, it will only set the stage for future bailouts, undermine thousands of traditional banks that had nothing to do with causing the financial crisis, hurt banks’ ability to lend, and drive more financial business into poorly regulated firms and overseas.

The ICBA was a little more upbeat, issuing this statement under the name of its chairman, Jim MacPhee, CEO of Kalamazoo County State Bank in Schoolcraft, Mich.:

The recent financial and economic crisis clearly demonstrates that some reform of Wall Street is needed to safeguard our financial system and the nation’s taxpayers from a future catastrophe. ICBA appreciates that this legislation includes measures that hold accountable the too-big-to-fail megafirms and nonbanks that were the root cause of this crisis—measures for which ICBA has been a leading proponent.  ICBA thanks Senate Banking Committee Chairman Christopher Dodd (D-Conn.) for his leadership on this legislation and for considering the needs of our nation’s more than 8,000 Main Street community banks. ICBA appreciates the Senate’s recognition of the differences between Main Street and Wall Street by ensuring megabanks pay their fair share for the risk they pose to the FDIC’s Deposit Insurance Fund (DIF), and ultimately our entire financial system.  This is a major victory for ICBA and community banks.  This measure will alleviate the disproportional burden on community banks, will reduce the assessments of 98 percent of banks with less than $10 billion in assets and will keep nearly $4.5 billion in community banks and their communities over the next three years—something that is critical to aiding America’s economic recovery. ICBA thanks Sens. Jon Tester (D-Mont.) and Kay Bailey Hutchison (R-Texas) for their efforts to create much-needed parity between large and small banks.

ICBA still has grave concerns about a separate Consumer Financial Protection Bureau (CFPB).  While we appreciate that community banks will have some exemptions from the proposed CFPB, the changes do not go far enough.  We are disappointed that further changes were not included in the legislation.  Community banks have always viewed consumer protection as a cornerstone to their business model, so it makes sense that the CFPB focus on those too-big-to-fail and shadow institutions that were at the heart of the financial crisis.  ICBA will continue to work for additional revisions to the CFPB.

ICBA is pleased that the bill maintains the Federal Reserve’s examination authority over state member banks, which allows the regional Federal Reserve Banks to keep their finger on the pulse of the Main Street communities that community banks serve each and every day.  These communities have diverse regional economies, and the insights provided by the current system are crucial to the ability of the Federal Reserve to exercise its monetary functions and gauge the impact of banking regulations across various institutions.  ICBA thanks Sens. Kay Bailey Hutchison (R-Texas) and Amy Klobuchar (D-Minn.) for their efforts to maintain the Fed’s examination authority.

While ICBA is pleased with several measures in the Wall Street reform bill, we continue to have critical concerns with language that will inadvertently harm Main Street community banks.   ICBA opposes the interchange language that will harm community banks that offer credit and debit card products to their customers. The current interchange system makes it possible for small community bank issuers to serve their customers because card networks apply the same interchange rates for small issuers that they do for large issuers.  By reducing interchange fees through government regulation, consumers will face higher costs through annual fees and increasing interest rates, as well as fewer choices as community banks are forced to exit the market, thereby leaving consumers with few options and ultimately forcing them to use cards provided by the megabanks.

ICBA also has significant concerns with language that was originally intended to ensure that large banks and bank holding companies would have to meet capital standards that are as strict as those that apply to small banks and bank holding companies.  However, the language is worded broadly enough so that it excludes capital instruments such as trust preferred securities from the consolidated Tier 1 capital of bank holding companies.  This will cause serious harm to community bank holding companies and their underlying banks—the very institutions it originally aimed to avoid burdening.  ICBA will work with the House and Senate to ensure that these onerous measures are not included in the final legislation.