Click here to access a PDF of IBAT's Winter 2013 Federal Legislative Issues.

Community banks play a key role in the economic health and vitality of communities across Texas and the nation. We as an industry continue to fund a disproportionately large percentage of agriculture and small business loans, and provide a meaningful alternative to consumers who opt not to bank with a large or not-for-profit institution. In the midst of a serious recession, the important contributions community banking makes to the overall health and well-being of our economy on both a micro and macro basis are becoming clearer as are the vast differences between our business model and that of the largest banks. Our member banks did not participate in, nor profit from, the excesses that contributed to the meltdown in the financial services industry. Yet sadly, we are paying dearly for the inappropriate behavior of others in the form of depressed real estate markets, increasing competition from government subsidized and too-big-to-fail competitors, additional regulatory burden, nervous customers and anxious regulators. The present economic conditions and regulatory environment only exacerbate an already difficult competitive environment. Key issues for our industry in the 113th Congress are expected to include:

• Regulatory Burden;
• Credit Union Competition;
• Basel III Capital Proposal;
• Overdraft Protection; and
  
• Subchapter S.

Regulatory Burden

One-size-fits-all approach to regulating Wall Street and Main Street banks is killing community banking.

The passage of landmark banking legislation in the 111th Congress, along with legislative and regulatory responses to address the financial crisis, have had and will continue to have a significant effect on the community bank business model. Perhaps the most significant positive to come out of the debate on Dodd-Frank was the virtually universal acknowledgement that community banks are different, are important, and need to be treated as such. We are hopeful that this recognition will translate into procommunity
bank action going forward.

In attempts to correct the bad behavior of other sectors of the financial services industry, community banking has frequently been “caught in the backwash.” Many of our banks are struggling mightily to keep up with the constant onslaught of new regulatory requirements and, in some cases, a much harsher examination protocol. The absorption of added compliance expense, not to mention the difficulty in attracting and compensating the necessary staff, is much more problematic for a smaller institution.

Ultimately, many of these institutions will simply opt to sell or merge with a larger entity as the cost of compliance continues to increase past the point of economic sustainability.

There is tremendous concern regarding the future, especially as the Consumer Financial Protection Bureau (CFPB) begins to exercise its very broad Congressional mandate. We urge both the CFPB and the prudential regulators to carefully consider the impact of any new regulations, guidelines or directives (as well as the cumulative effect of many seemingly innocuous requirements) on the community banking sector prior to issuance. Any new regulatory initiatives should be measured and should not inadvertently increase regulatory burden and costs, disrupt the marketplace nor create disincentives for legitimate borrowers and lenders.

IBAT will continue working with the Independent Community Bankers of America (ICBA) and other interested parties to generatesupport for “The Communities First Act” (H.R. 1697 and S. 1600 in the 112th Congress). This important legislation provides for meaningful and necessary regulatory and tax relief for the community banking sector. Further, we have long advocated a “bifurcated” industry, and are developing a proposal to create a truly separate regulatory scheme, with unique designation for non-complex, “stick to the basics” community banks. We are absolutely committed to ensuring a viable future for the community banking industry, and look forward to working with those who share in this passion.

Credit Union Competition

Nontraditional credit unions acting like banks, but not paying income taxes, disadvantages community banks.

The unbridled expansion of community and multiple common bond credit unions is of tremendous concern to IBAT. These taxexempt de facto banks are competing head-on with community banks, but with neither commensurate regulatory oversight nor the tax burden shouldered by our members. We find their legislative initiatives (H.R. 1418 and S. 509 in the 112th Congress), which grant these tax-free institutions additional commercial lending authority, to be wholly unacceptable.

Additionally, any efforts to place additional hurdles for credit unions to convert to another charter type are strongly opposed. We believe that all financial services entities should have the right to choose among charters based upon their business plans and the interests of their various stakeholders. The existing restrictions placed upon those credit unions attempting to convert to a different charter are inappropriate and unacceptable.

We urge Congress to thoughtfully consider the far-reaching public policy implications of fueling the credit union sector to be a tax-free banking industry. We also strongly encourage Congress to either tax and regulate the "nontraditional" credit unions which are operating in a manner indistinguishable from commercial banks or provide for a similar structure for community banks, with commensurate tax treatment.

Basel III Capital Proposal

The inclusion of community banks in this complex new capital proposal is indicative of the disconnect between certain federal regulators and the real world.

Basel III should not be a “one size fits all” proposal. The Basel III proposals were tailored for large, sophisticated financial institutions competing with others of a similar scale internationally. With no frame of reference for, nor apparent understanding of, the unique characteristics of a community banking sector, it is no surprise that the architects of this proposal chose to follow this path. We are troubled that our own U.S. regulatory authorities would include community banking in this complex new capital scheme, and can only assume that this is a result of a major “disconnect” between academic theory and practical reality.

While community banks have historically been required to maintain significantly higher capital levels than their large bank competitors, and we are advocates for more equitable capital levels among the various players in the banking industry, this proposal is not the solution.

The Basel capital rules, if enacted, will significantly impact community banks and the customers they serve. Complex calculations and new requirements in determining capital adequacy will increase costs, and epitomize the continuation of unnecessary regulatory burden on community banks. The inclusion of unrealized gains and losses in the securities portfolio (known as
Accumulated Other Comprehensive Income, or “AOCI”) as a component of Tier 1 common equity has created significant anxiety among our membership. This will introduce significant volatility into capital calculations, introduce regulatory sanctions based purely upon market rate movements and require additional capital that could otherwise be deployed for growth and lending opportunities. The new risk-weightings for real estate loans create a disincentive at a time when public policy should be encouraging investment in these sectors. Congress spoke clearly in the Dodd-Frank Act regarding treatment of “Trust Preferred Securities” (TruPS) as Tier 1 capital for entities under $15 Billion in assets (the “Collins Amendment”). A significant number of community banking companies across the country utilized this regulator approved hybrid capital vehicle. This proposal not only phases out that treatment, but appears to directly contradict the will of Congress.

While we are obviously concerned about the damaging effects of this proposal on an already overwhelmed community banking industry, the ultimate losers in this draconian change are consumers, small businesses and local government entities who will face higher borrowing costs and diminished  availability of both credit and bank services. There is never a “good time” for public policy to result in such outcomes, but given the tenuous state of the national economy at this juncture, such seems especially counterintuitive.

Overdraft Protection

Legislation or regulations limiting this popular consumer-driven product could result in higher costs to consumers.

The majority of community banks offer some type of overdraft protection to their customers and are once again paying the price for the abuses of a few, primarily large banks. We support clear and concise disclosure and an opportunity to opt out of any program. However, we strongly oppose any legislation or regulatory fiat mandating price controls, prohibition or limitation of fees for a service rendered, or arbitrary limitations on any transactions between a customer and their financial institution of choice.

Legislation or regulatory mandates limiting numbers of checks or other debits eligible for such programs could result in higher costs to consumers as they deal with returned check fees, negative credit score implications and possible criminal prosecution. Consumers should be permitted to make an informed choice and not be constrained by a regulator’s notion of what is appropriate.

Subchapter S

Allowing Sub S preferred stock to enhance capital positions contributes to safety and soundness and credit availability.

Community banks have had the ability to operate as Subchapter S entities since 1996. Nearly one-third of all banks are Subchapter S corporations. This has proven to be a significant tool to allow such banks to compete and continue to serve their respective communities. We will be working on legislation to allow these entities to issue preferred stock to enhance their capital position, contributing not only to safety and soundness but also to their ability to grow and extend additional credit to their communities. Additionally, when policymakers advance higher income tax rates, it is important to realize these rates would directly impact all Subchapter S banks and small businesses that pay the individual income tax.

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Comments & Questions

If you would like to comment on legislative topics or if you have
questions about this information please call our public affairs expert,
Mae Beth Palone at (800) 749-4228 or e-mail mbpalone@ibat.org.