Making it hard on the little guys

by Ted Carter

Published: August 8,2010

Tags: analysis, banking, Ted Carter

Remember when your big brothers acted up in the backseat on a long car trip and your aggravated dad reached back and gave innocent you the back of his hand?

That’s the kind of pointless persecution a lot of U.S. bankers are feeling at the moment, says Peter E. Garuccio, a lawyer and vice president of public relations for the American Bankers Association.

You may recall, says Garuccio, Congress set out to calm the massive anxieties that accompanied the near collapse of some of the nation’s largest banks and financial services institutions. Somehow the stage instead got set for the break up of small banks in Mississippi and across the country, Garuccio says. 

“That’s one of the ironies of this bill. They were going to end ‘Too Big-to-Fail.’ But now they have created a scenario that all we will have left is big banks. Through this they are going to make it harder for the little guys to stay in business.”

Look for more mergers and acquisitions and fewer choices for banking, he says. And look for some banks to go away entirely, he adds. “Some of our members have told us they are considering exiting the business altogether.”

What’s got them scared, Garuccio says, is an expected huge drop in revenue from interchange fees, which is money banks get each time a retail customer swipes his card at the checkout counter. The banking reform mandates that the Federal Reserve set the interchange fees charged by banks with assets of over $10 billion. Banks with assets below $10 billion must swallow the lower fees as well or face having merchants refuse to accept their debit cards.

Estimates are that banks could see a 75 percent decline in their take from the fees, according to Garuccio, who says the revenue loss is likely to leave small banks with no way to cover the costs of free checking, online banking and other amenities. “We’ve heard an end to free checking is a possibility. Some banks have already started doing this.”

Wells Fargo/Wachovia last month began charging some new depositors fees for checking. And other big national banks are expected to follow.

Garuccio says he is not surprised, considering that testimony given to Congress on behalf of the American Bankers Association put the cost of setting up a new checking account at $150 to $200 and maintaining it at $300 annually.

Congress wants the Fed to limit interchange fees to those that are reasonable and proportional to the “incremental” cost related to each transaction. But no one actually knows what “incremental” means in this law, said Robert Oeler, president and CEO of Dollar Bank, a $5.7-billion Federal Savings Bank that serves Western Pennsylvania and Northeastern Ohio, in testimony July 29 to a subcommittee of the U.S. House of Representatives’ Committee on Small Business.  

Oeler expects that merchants will argue that the “incremental cost” should not include the large costs of the entire debit card system, including the overhead, maintenance and investments in new software. 

Meanwhile, banks will have to adjust in other ways, including cutting expenses and jobs, Oeler predicted. Also, banks will have fewer retained earnings to build capital, he said. “This is a problem for any bank, but it is a severe problem for banks like mine that are mutually chartered” and must rely on earnings for capitalization. 

“It could mean a reduction of up to $14 million per year or 200 small business loans per year. For the industry as a whole, a 50 percent loss of interchange income would mean that lending could fall by as much as $74 billion.”

Steve Verdier would like to talk the ABA’s Garuccio in off the ledge. “I really kind of disagree with the doom and gloom scenarios,” says Verdier, executive vice president and director of congressional affairs for the Independent Community Bankers of America. 

“I think the elements of the bill recognize the differences between community banks and big banks.”

He concedes community banks will have to either scale back services or “explicitly price” those services.

But community banks have the advantage of being “very adaptive,” Verdier notes. “That isn’t going to change.”

Some of the things mandated in the reform legislation community banks “can do more efficiently than the big banks.

“If we can get this economy going the community banks will do quite well,” Verdier says. “One reason is that technology has allowed them to offer the same services as the big banks.”

Going forward, the nation’s 5,000 community banks will pay substantially less in deposit insurance premiums to the Federal Deposit Insurance Corporation than will big banks. Their savings could be as high as $1.5 billion a year, according to the ICBA.

The higher premiums paid by banks with more than $10 billion in assets will go toward reaching a 1.35 percent Deposit Insurance Fund minimum reserve ratio by 2020. The current reserve ratio is 1.15 percent. With this increase, “the FDIC is going to have more cash to deal with the next recession,” Verdier says.

At least now, they will have the means to “take an institution down” before it falls down on its own, he adds.

Another positive, says Verdier, is that even though Congress didn’t kill Too-Big-to-Fail, it took steps to prevent non-bank financial service giants like IGA from falling through the cracks.  Regulators “are going to have the power to say, ‘You guys are done because your institution is failing.’”

The landmark legislation left banks of all sizes with lots of challenges. But Congress met the key goal it set for itself, Verdier says. “We wanted more regulation of the big guys. They are going to have this.”

Garuccio only wishes the fatherly backhand of Congress didn’t reach so far into the backseat.

 

Ted Carter is a Savannah, Ga.-based freelance journalist and occasional writer for the Mississippi Business Journal.

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