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Conference decisions to decide reform outcome

As this issue of the Oklahoma Banker goes to press, there's still a great deal of uncertainty about what the “financial reform” bill will ultimately look like as Senators and House Members try to work out the differences between the House version of reform and the one passed by the Senate.

“What tends to frighten me even more is that once the final version is signed into law in whatever manner an agreement can be reached, the real nasty fight is still ahead of us over how the legislation is to be implemented,” said OBA President Roger Beverage. “The battle ahead is not for the faint of heart, I'm afraid.”
Beverage noted that now the focus is on resolving the key differences between the two versions of reform.

“The most important issue, at least in my view, deals with ending 'too-big-to-fail' (TBTF) as a matter of national policy,” Beverage said. “And there's a difference of opinion about whether either bill really ends this discriminatory policy.”

The House version creates a pre-paid $150 billion “TBTF resolution fund” to be financed by imposing an assessment on larger institutions. The Senate bill started out with a pre-funded TBTF fund of $50 billion, but that provision was ultimately stricken. It results in a major difference in the approach to this important issue that must be resolved.

There's also the question of process: the House bill makes banking regulators the arbiters of bank solvency and continuity. The Senate bill forces failing financial companies through a bankruptcy-like process.

“But regardless of the process that ultimately prevails, there's plenty of room for the Federal Reserve and the FDIC to take steps to maintain the corpse on life support long after the plug should have been pulled, if it's deemed necessary to do so,” Beverage said. “The FDIC still has the power to pick and choose among creditors and bondholders. The Federal Reserve still has the ability to step in and provide funding on a temporary basis to large firms, if necessary.

“Does that end the policy (of too-big-to-fail), or merely reinforce it? You tell me.”

The Collins amendment added in the Senate eliminates the use of trust-preferred securities as elements of Tier-1 capital.

“The amendment is being pushed by FDIC Chairman Sheila Bair and would cause tremendous problems for at least 644 banks across the country,” he said. “At the end of the day it would probably end up being a lot more than that. Such a provision is not contained in the House version of reform, and it's being opposed by bankers, the Fed and the Treasury Department.”

Then there's the question of “interchange.” An amendment proposed by Senator Dick Durbin was approved on a vote of 63-33. The potential impact of this specific amendment is in the billions of dollars range, and will disproportionately hit traditional community banks harder than Wall Street firms. Again, a similar provision was not included in the House version of the bill. We think it will be very difficult to completely remove the provision, but we're going to give it a shot.

The question about “preemption” also involves different language in each of the respective bills. The House version is much more problematic for banks that operate across state lines, and the differences may end up being significant.

“We use this argument every legislative session to beat back bad ideas aimed at out-of-state banks that would have no impact on the targets, but that would hurt Oklahoma banks,” Beverage said. “I can't tell you the number of times we've successfully used this ploy to kill bad legislation down the street.”

How about derivatives? Both versions demand more transparency but the Senate bill goes much further than the House version by limiting and restricting certain activities that increase a bank's exposure to risk. It also requires banks to place their derivatives desks in a separately capitalized affiliate and places more restrictions on “proprietary trading,” a term that most observers find difficult to define.

“As a practical matter the Senate language would bring the practice of making a market with a bank's own money to a halt,” Beverage noted. “Will it survive a conference? Who knows? I know there is a lot of opposition to the Senate language, and its inclusion is at least in part tied to the Arkansas Senate primary run-off election this month.”

Federal Home Loan Bank concentration limits present another problem for traditional community bankers. The Senate language imposes a 25 percent limitation; the House bill does not.

“We're told that this issue will be fixed in conference, but for some reason that 'assurance' doesn't leave me feeling all warm and fuzzy,” Beverage said.

Risk-retention requirements on home mortgage loans present a problem for traditional community banks and may also be a problem for conferees. The Senate version creates a “safe harbor” for traditional banks, but it's not clear whether that language will be included in the final draft. Unless this “fix” is retained, it will dramatically impact the ability of community banks to originate home mortgage loans of any type.

In addition, the Senate bill prohibits the use of yield-spread premiums and applies national bank lending limits to state-chartered banks. The Senate bill also removes Oklahoma's limitations to interstate branching.

“And then there's the consumer 'agency'or 'bureau,' a subject that at one time was the top priority of most bankers, from large banks and not-so-large banks,” Beverage said. “The House version creates a separate, stand-alone agency funded by the Fed, assessments on large banks and through the Congressional appropriations process for some $200 million of its budget.

“The Senate version, on the other hand, puts the entity inside the Federal Reserve, to be funded by the Fed at 10 percent of the Fed's operating costs (roughly $500 million to begin) and increasing to 12 percent in 2013. The advantage to the Senate's method of funding the new entity is that it eliminates the need to go through the 'appropriations' process, which probably means that it's the better option for conferees.”

Beverage pointed out that both versions have exceptionally broad powers to create new rules and regulations governing all aspects of your bank's relationship with its customers. In both instances smaller banks (those under $10 billion in total assets) will be examined by their prudential regulator for CFPA compliance, with the new agency/bureau having back-up authority. All banks large and small will be subject to the Agency/Bureau's rules and regulations. Importantly, there's no safety and soundness oversight in either case.

Beverage also pointed out that the House version of “reform” includes a provision that would allow audits of the Federal Reserve, including emergency lending and some monetary policy decisions. The Senate bill, on the other hand, allows the General Accountability Office to “study” the emergency lending that took place in the throes of the near-collapse of the financial industry and the nation's economy, but nothing more.

“These are just a few of the issues to be resolved in conference as the bill is finalized and sent to the president,” he said. “I'm told the plan is to have it finished by the fourth of July and on the president's desk. There's a lot of work to be done between now and then, and after it's signed into law – in whatever form it ultimately takes – the real work at shaping the landscape begins.”