Talking About a `Regulation Tsunami'; FDIC Plans Tougher Merger Scrutiny; Bankers Hit D.C.
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There was a lot of action on the financial regulatory front in Congress this week, as lawmakers rushed to get out of town. The SEC’s “overreach” got an airing in a House Financial Services subcommittee, while the full panel went deep on global governance groups’ influence on U.S. rules. Though some of the hearing focused on the Basel III capital hike, there was a lot of talk about China — and Russian banks. Meanwhile, the FDIC proposed much stricter guidelines for reviewing bank mergers. It was a win for the head of the CFPB and his progressive allies. We also dropped in on the ABA’s Washington conference, where we found a lot of besieged executives who are no longer fearful about suing their federal overseers. We spoke to one of them for our Friday interview, a community bank president from Massachusetts.
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Friday Q and A: Some 1,200 executives came to town this week for the American Bankers Association’s annual Washington Summit – and it’s clear that the industry is pretty beleaguered. Though the attendees spent time up on Capitol Hill lobbying lawmakers, much of their attention was trained on the federal agencies that have been pushing out new rules at a rapid clip. Whether it's the Fed’s Basel III capital plan, the CFPB’s small business lending data requirements or the Biden administration’s war on “junk fees” there’s been a lot to complain about. And sue over.
Looking to get some perspective on the onslaught – and to find out what it looks like to an actual banker – we sat down this week with Julieann Thurlow. She is the president and CEO of Reading Cooperative Bank, a $900 million community lender in Massachusetts. Along with her real-world experience, Thurlow is also the chair of the ABA’s board where she’s been very active in the group’s policy battles.
Read on to learn Thurlow’s thoughts about the Biden administration agency heads, the collective impact of so many new rules on the industry and how the Community Reinvestment Act overhaul may actually make it harder for her bank to continue helping a struggling city. What follows is our (lightly edited and condensed) discussion.
Capitol Account: How’s it going in your term as chair of the ABA?
Julieann Thurlow: It was a little bit busy the first year, a little more busy the second year, and now I'm headlong into it.
CA: How much of that is due to all the new rules aimed at the banking industry? At your conference, ABA President Rob Nichols referred to it as a `tsunami’ of regulation.
JT: I actually wanted to change it to the Hunger Games. We're here in the Capitol and us bankers are the district. We're in the games, and every game is a regulation. Then 1071 [the CFPB small business lending data rule] comes – and some of us won’t survive that. Just kidding.
CA: That seems to be one of the regulations that banks are most unhappy about. Why?
JT: It is the one that has been out there the longest – it actually was a requirement of the Dodd-Frank Act…But when the CFPB finally published the rule, it was much bigger than it was ever intended to be.
CA: It seeks information about lending to women-owned and minority-owned small businesses. Banks argue that the bureau went overboard in the amount of data it wants – and now it will be extremely expensive to comply. Many in the industry think the CFPB didn’t listen to warnings about how this would work in practice.
JT: There was a lot of feedback. ABA came forward, a lot of banks came forward, with a lot of information. It's just not reflected in the final rule…I participated in hearings with the CFPB, [reading] their 100-page PowerPoint beforehand, reviewing all of the questions for two days of testimony and then writing long letters identifying how much it was going to cost our bank. But it really didn't matter because the rule ended up coming out the same…I can't imagine what banker would give up five days of their life to participate in one of these events when it is just a farce.
CA: Last year ABA joined a lawsuit to overturn the rule.
JT: It was a last resort. I don't think that point has been shared that much.
CA: The ABA is also suing over the Community Reinvestment Act revamp. Was it a tough call as a bank president to challenge a regulation that seeks to prevent discrimination in lending?
JT: I’ve talked about how intentional we've been around meeting the needs of low [and] moderate income individuals, particularly in large minority communities. We've invested a lot of money. CRA is all about community reinvestment – and we truly believe in it.
CA: So what is the problem?
JT: You commit to a strategy and you spend a lot of money on it, and then all of a sudden the rule changes.
CA: Don’t the banking regulators have a point when they say the requirements need to be revised to take into account developments like mobile banking?
JT: We strongly believe that CRA needs to be updated. We're all walking around with our cell phones, and we don't walk into the branch the same way. But branching is the connection. In fact, you see JPMorgan Chase is actually opening 500 branches this year. That's because they recognize there is a connection between a facility and technology.
CA: There’s been a lot of talk about the cumulative impact of so many different regulations coming at once. How does that play out for you, as the head of a small bank?
JT: Think about all the operational challenges that come with introducing these new regulations – pivoting, changing your business model…Then add no overdraft fees, no late charges, reducing the amount of revenue that we can make on our swipe accounts. All of a sudden, there's not a business line that's not been attacked – and is not less profitable as a byproduct of all these rules.
CA: So the Washington policy world needs a better understanding of how your business really works?
JT: I don't think it actually connects very well with what's happening in the real world. There are a lot of agendas.
CA: Is that especially true with the current crop of regulators?
JT: Historically, I haven't seen so much change from administration to administration – as far as swings in philosophy at the head of the agencies…There's become almost more of an adversarial relationship between the regulator and the regulated.
CA: Do banks have an image problem in Washington?
JT: Is it the weakness?...SVB was the weakness, and everybody seems to be [having] a reaction to that. Whatever their pet project is, [regulators] seem to be honing in. I really despise the word junk fees.
CA: Let’s talk about that, because we often hear that same complaint from bank executives.
JT: First of all, these are lawful fees that are actually written into regulation – as far as their limits and their scope and what they can be used for. And we get audited every time the examination happens – to make sure that we're applying the rules.
CA: Why isn’t capping late fees a good idea?
JT: When you think about it from a consumer perspective, if it is not punitive, then you won't pay attention to it. There's nothing worse – I saw this during the foreclosure crisis – when a consumer gets 90 days past due on their mortgage, and their mortgage is $2,000 a month, they are behind $6,000. Sometimes there's a certain point where there's no return from that, because it's gotten out of control. There's a reason for establishing a punitive point so that consumers do everything that they can that is in their power to keep on top of their bills.
CA: Is there a broader message that the industry has about the junk fee campaign?
JT: We are still a capitalistic society. Banking is still a private business. We should be able to set our fees the way we choose to set our fees, and let the consumer decide where they want to bank…(Friday)
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Stricter Scrutiny: The FDIC vote setting out tougher guidelines for approving mergers is (finally) a win for progressives, who have long complained that lax scrutiny harms consumers – and fuels the rise of more too-big-to-fail behemoths. Not surprisingly, the revamp bears the heavy imprint of CFPB Director Rohit Chopra, an outspoken critic of bank deals who sits on the FDIC board.
The proposal, which the board backed by 3-2 vote, would give the regulator far more running room to block combinations. The guidance puts more onus on banks to show that a merger benefits the public, and it also requires regulators to consider whether it could pose risks to financial stability. More broadly, the policy makes clear that lenders with more than $100 billion in assets will get more scrutiny.
“I'm just really glad that we are moving away from a pro-merger policy posture,” Chopra said at the FDIC meeting. He stressed that the agency has “had a long iterative process that seemed almost interminable” and favored “getting to yes, rather than calling balls and strikes.”
The FDIC’s two Republicans dissented. The new effort “really reflects and implements a bias against mergers that is, at the end of the day, bad policy and also contrary to law,” Jonathan McKernan said. Vice Chairman Travis Hill maintained that the guidance “moves in the wrong direction, potentially making the process longer, more difficult, and less predictable.”
The banking industry, already upset about the anti-merger stance of the Biden administration, blasted the plan.
“The FDIC is inventing new obstacles to mergers that have no basis in statute,” Gregg Rozansky, a senior vice president at the Bank Policy Institute, said in a statement. “Because these novel standards are almost wholly subjective, they inject a level of uncertainty that most firms – acquirer or target – will generally find unacceptable.”
Bigger picture: The impact of the new guidance, which will need another FDIC vote to become final, may be limited because the regulator doesn’t oversee that many very large banks. The policy also differs from a merger review plan issued earlier this year by Acting Comptroller Michael Hsu. Nevertheless, as an FDIC board member he signed off on the changes. Liberals hope that will prod him to make the OCC’s guidelines stronger…(Thursday)
‘Regulatory Tsunami’: It’s been a year since the American Bankers Association last held its Washington Summit. And the times have changed dramatically. The regional bank crisis, which dominated the previous event and threatened to swallow up the group’s legislative agenda, is now in the rear-view mirror – much to the relief of the 1,200 executives from across the country who gathered at the Marriott Marquis. Even so, the mood wasn’t exactly giddy. That’s because, as ABA President Rob Nichols took pains to point out, there is still plenty to worry about.
“The focus of the attention has shifted to the regulatory agencies,” he noted. “Folks, the banking agencies have been busy – some might say too busy.” Nichols even coined a new phrase to describe the situation: “I refer to this as the regulatory tsunami, this tidal wave of regulation that has crashed down on the banking industry in recent months.”
Indeed, it is a long list. Of particular interest to the crowd: the Basel capital rule, the Fed’s plan to lower the debit interchange cap, the Biden administration’s war on “junk fees,” the banking agencies’ Community Reinvestment Act revamp and the CFPB’s small business lending data rule.
With all the action, the ABA’s advocacy has “evolved” to a more confrontational posture, Nichols acknowledged. “We’ve had to turn to the courts.”
The group has already filed several suits against the CFPB; it is also seeking to overturn the new CRA rule put out by the Fed, OCC and FDIC. And while Nichols stressed that the association made the moves reluctantly, he also offered a pretty strong admonition to the regulators (which garnered sustained applause):
“We have an obligation to make sure the agencies overseeing the banking system are carrying out their duties within the law, and consistent with the authority granted to them by Congress. When they don’t, they can count on seeing us in court. If we have to follow the rules, so do they.”
What follows are some of the highlights of the other speeches and discussions at the conference.
Speaking of court challenges: Until recently, banks have been extremely reluctant to sue their prudential overseers. But ex-Fed Vice Chair for Supervision Randal Quarles emphasized that going to court isn’t really a big deal. “Suing the regulators is not a declaration of war,” he said. “In my view, it's consulting the dictionary on a disputed Scrabble play.” As the room erupted in laughter, Nichols interjected, “Well, we apparently are doing that four times.” Quarles then explained: “It’s a useful discipline.” He said the strategy kept his sister “constrained” when they played the word game.
More Quarles: The former Fed governor, who was on a panel with two other Trump-era financial overseers, threw a decent amount of red meat to the assembled bankers on other issues as well…(Tuesday)
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