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Dodd-Frank expected to set off new competition for customer deposits
As published in the Mississippi Business Journal.
Bankers should be prepared to raise more capital reserve money without looking for it in the places they are used to finding it.
And in a first for the U.S. banking sector, bankers should prepare to pay interest on the "demand deposit" accounts held by businesses.
Those are among the challenges the Dodd-Frank Wall Street Reform and Consumer Protection Act has handed bankers in Mississippi and elsewhere in the nation. The ambitious reform born as an effort to kill - or at least diminish - the doctrine of "Too Big to Fail" morphed into legislation that that left regional and community banks with new compliance burdens and new limits on meeting the compliance.
Big banks are assuredly sharing the strong medicine, though no one is saying the era of Too Big to Fail is over. Dodd-Frank does, however, give regulators new authority to take over and liquidate troubled giant financial institutions and firms if their failure would pose a significant risk to the financial stability of the United States. The reform also for the first time makes it a regulatory objective to lessen systemic risk and maintain system-wide financial stability.
For Mississippi's regional and community banks, Dodd-Frank will forbid banks with over $500 million in assets from using trust preferred securities to raise Tier 1 capital. Use of trust preferred securities as part of Tier 1 capital will be phased out over a three-year period starting in 2013.
This eliminates a popular source of capital, says the American Bankers Association, though banking sector professionals say acquiring capital through selling of trust preferred securities has become a hard sell throughout the Southeast since the banking crisis set in.
"It's been extremely difficult in terms of trying to raise it," said Sonny MacArthur, an audit partner with Atlanta banking services firm Porter Keadle Moore.
MacArthur said bankers may bemoan the loss of the option to raise capital through issuance of trust preferred securities, but noted the securities never represented "true equity" because they "had the characteristics of debt."
Basel 3's new capital mandates
Rusty Butcher, chief of banking practices for HORNE LLP, noted increased capitalization requirements that will accompany Basel 3, an international standard for capitalization of banks, are going to add pressure on U.S. banks to raise new capital from new sources. "Basel 3 is really what's going to change the composition of capital," he said.
"All of the rules on that are not in, and the timing is still not decided." Some bankers expect initial phases of the new rules could be in place by mid-2012.
Designed to help avert the type of financial collapse that occurred in 2008 and to ensure that banks can maintain adequate capital levels throughout an economic downturn, Basel 3 mandates two new capital buffers - a conservation buffer and a countercyclical buffer. The conservation buffer is set at 2.5 percent above the 8 percent required total capital and must consist solely of common equity, advises International Law Office, a global corporate law exchange. "In effect, common equity capital must be equal to 7 percent of risk-weighted assets, other than in times of stress, when the buffer can be drawn down," International Law Office says.
Banks that do not meet this buffer will be restricted from paying dividends, buying back shares and paying discretionary employee bonuses, International Law Office notes.
The countercyclical buffer measure gives banking regulators authority to order increases in the conservation capital buffer whenever they fear excessive credit growth is posing worldwide risks.
"Jurisdictions are likely to only need to deploy the buffer on an infrequent basis, perhaps as infrequently as once every 10 to 20 years," the Basel Committee on Banking Supervision wrote in an advisory in September.
New competition for deposits
The increased competition for capital makes one thing certain: more competition for deposits.
July 21 marks the lifting of a longstanding ban on banks paying interest on demand deposit accounts in which businesses frequently place excess balances. The Federal Deposit Insurance Corp. will now allow the money to be swept in and out of an interest-bearing money market account daily, said Cliff Harrison, an attorney with the banking group of Jackson-based Butler Snow.
Bankers will have the freedom to pay unlimited premiums for demand deposits. Regardless of whether bidding wars occur, it's "an expense" that was not there before, Harrison said.
Beyond the money paid to hang on to the demand deposit accounts, the new rule is expect to generate new competition for a business' checking and cash management accounts, all of which means more money going out the door, banking sector representatives say.
In what is hailed as a windfall for community banks, Dodd-Frank lowers FDIC premiums for smaller banks by basing the assessment on total assets less tangible capital instead of total domestic deposits. But the American Bankers Association (ABA) is warning that the windfall from the broadened assessment base may be short-lived.
The ABA says it expects the desire to lower premium assessments will lead to a shift away from non-deposit funding sources toward deposit funding. "Competition for deposits is likely to intensify, pushing deposit rates higher," said the ABA, projecting that even a rise of one-half of a percent in deposit rates would erase the savings on FDIC premiums.
Stiffened competition for deposits arrives just as banks are contemplating new customer fees to help offset a Federal Reserve-ordered cap of 12 cents on each swipe card transaction a bank's customer makes with a merchant. Nationwide, that removes tens of billions of dollars that banks had long used to cover the costs of deposits and other services.
Stiffened competition for deposits arrives just as banks are contemplating new customer fees to help offset a Federal Reserve-ordered cap of from 22 cents to 24 cents on each swipe card transaction a bank's customer makes with a merchant.
Declines in swipe card revenues make building capital through retained earnings that much tougher to do starting Oct. 1, banking professionals say.
In an Securities & Exchange filing made before the Federal Reserve's Board of Governors raised the cap to the 22 cents-to-24 cents range from the previously proposed 12 cents, Jackson-based Trustmark Bank said expected the lower swipe card - or interchange - fees would cost it from $4 million to $6 million in lost non-interest income for the rest of 2011.
Birmingham's Regions Bank says it generated $346 million from swipe card fees in 2010 and expected at the 12 cents cap level it would lose a quarter of that amount through the rest of 2011.
Meanwhile, Tupelo-based Bancorp South had been bracing for a "$9 million to $10 million pre-tax impact" from the lost swipe fees at the 12-cents cap level, said Randy Burchfield, senior VP for corporate marketing. "This is no small matter," he said.
Fewer swipe fee dollars could force banks to limit the size of debit card transactions, said Michael Lindsey, senior VP for retail banking. Limits of from $100 to $500 have been discussed, he said, though those limits were under consideration before the Fed's decision June 29 to raise the cap.
Further, Bancorp South and many other banks are mulling monthly fees for debit card use. Banks are also considering having customers buy "pre-paid" debit cards that would be exempt from the cap.
While Congress intended the interchange fee caps to apply only to banks with assets of $10 billion or more, no one expects small regional banks and community banks to escape the caps. Market forces work against the cap exemption working for smaller banks, Federal Reserve Chairman Ben Bernanke said earlier this year.
He acknowledged that failure of the exemption to work will "stress" community banks and consumers will pay higher fees.
Whether the caps are here to stay is uncertain. The Fed board in setting the new caps June 29 said it is unsure of their impact and will closely watch their effects.
American Bankers Association President & CEO Frank Keating praised the Fed board's change of heart on the cap levels and voiced appreciation for the delay on initiation of the caps from July 21 to Oct. 1. "It is clear that the board benefited from the input of bankers, policymakers and other commentators," Keating said in a press statement.
Assessing costs
The American Bankers Association says a survey of 900 bank compliance officers found that 43 percent expect a decline in customer services for their banks over the next three years. Nearly nine of 10 forecast higher compliance costs, with six in 10 seeing higher consulting and legal fees ahead, the survey found.
You can't get a fix on Dodd Frank's costs without weighing the effect of its single parts taken together, said Cliff Harrison, the Butler Snow lawyer.
" That's one of the things that I'm not sure Congress appreciated - the cumulative effect of this legislation."
