Last Thursday and Friday, I was in Charlotte for the UNC School of Law Banking Institute. The conference is very deserving of its great reputation (albeit after almost 6 hours of Dodd-Frank analysis on Thursday, I was just glad to be able to stand). The panels and speakers consisted of attorneys, representatives from the Federal Reserve, FDIC and OCC, and bankers, including BB&T President and CEO Kelly King and Fifth-Third Bank Executive Vice President and Chief Administrative Officer Paul L. Reynolds. Considering the wealth of insight and information shared, I thought I would pass along some of my community banking takeaways.
1) Be Aware of the Consumer Financial Protection Bureau (CFPB). – Not only will the CFPB have supervisory authority of depository institutions and affiliates with assets over $10 billion, but it also has complete rule making authority for all the consumer protection statutes listed in Dodd-Frank – and that is a long list, including the FDCA, TILA and the SAFE Act. The CFPB can prescribe rules and regulations as may be necessary or appropriate to carry out its purpose. The effect of this being that if the CFPB were to rewrite a rule affecting a consumer protection statute, then all banks REGARDLESS OF THEIR SIZE would have to comply.
2) The Interchange Rules are Trouble. – Albeit smaller banks are exempted from the cap, small banks will still be hit hard by the rules. There will likely be discrimination by retailers against smaller banks’ debit cards and due to increased bank fees on the consumers by the larger banks (since right now the .12 cap does not even cover the costs of a customer using his or her debit card), debit cards may become a practice of the past.
3) Increasing Legal Costs. – Dodd Frank requires the CFPB to study the use of arbitration clauses in numerous consumer contracts and authorizes it to restrict or preclude their use. If this is done, then any dispute would be litigated in the court system, which could substantially increase the bank’s costs and fees. Thereby, it could make such consumer contracts prohibitively expensive for the smaller banks.
4) Community Bank Business Model – There was substantial discussion regarding whether the present community bank business model was no longer workable. Many believe that there is a need for more consolidation in the industry, formation of associations among community banks to share “back office” costs, and reorientation of their services to small businesses. (I would very much enjoy hearing your thoughts on this if you would like to email me.)
5) Consolidation Will Not Be Easy. – The regulators are not going to easily approve mergers of banks or their holding companies, especially if the combined entity will have poor capitalization. They do not want the new bank to merely be forestalling the inevitable collapse but want it to be a good, strong bank. As part of that, they want to see good business plans, good management, good capital and that the two entities will complement each other.
6) Southeast is Next. – The Southeast is to be the next hotbed for the FDIC.
7) Write downs. – There are many community banks in the market that have not written down loans as they should. This affects them negatively both with regulators and potential capital investors.
8) Buckle up. – The ride is going to stay bumpy.