August 19, 2010
Congress recently passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. This is considered the most significant piece of banking legislation since the Glass-Steagall Act was passed in 1932, more than seventy-five years ago. It’s true, the magnitude and scope of this 2,300+ page Act is immense and was intended to address the broad abusive practices made apparent in 2008 – and to prevent such a crisis from occurring again in the future. However, many agree that traditional banks did not cause the crisis and have been crucial to supporting our economy in the aftermath.
During the past two years, traditional community bankers have been supportive of financial industry reform and the core issues that needed to be addressed. However, while it was evident to us all that reform was needed, when the implications for community banks became clear, Piscataqua Savings Bank, and all NH banks, joined our state and national banking trade associations (NH Bankers Association and the American Bankers Association) in strongly opposing much of the final outcome of this legislation. This law directly hits community banks with onerous new regulatory burdens and restrictions. Despite ongoing rhetoric by Congress and the Administration about their concerns for traditional community banks, I believe the end result will be very negative for us and our communities; here’s why:
Legislative Intent #1:
In the words of President Obama…”we’ll crack down on abusive practices in the mortgage industry. We’ll make sure that contracts are simpler – putting an end to many hidden penalties and fees in complex mortgages – so folks know what they’re signing.”
If supervision of those less regulated remains inadequate, the “shadow banking” industry will resume its “business as usual” approach which was not in the best interests of consumers. So even though we never engaged in such malpractices, we are directly targeted to receive the most severe impact on our limited staff and financial resources.
For the big banks, life will become a little more complicated. Some of their past activities will be limited or banned, such as proprietary trading. They will seek new avenues to generate income. The impact of increased expenditures for adding teams of lawyers and compliance specialists will be somewhat inconsequential to these large institutions due to economies of scale while the effect upon small banks will be significant.
Legislative Intent #2:
Fix “too big to fail.” Again, in the President’s words…”the American people will never again be asked to foot the bill for Wall Street’s mistakes. There will be no more taxpayer-funded bailouts. If a large financial institution should ever fail, this reform gives us the ability to wind it down without endangering the broader economy…no firm is somehow protected because it is ‘too big to fail’, so that we don’t have another AIG.”
The law doesn’t really fix the “too big to fail” problem. A handful of mega-banks still dominate the industry. Such banks could never be allowed to fail for fear of inciting public panic. Ultimately, banks such as ours and taxpayers could remain on the hook.
Despite the intent to prevent future bailouts, some of the same practices that contributed to the mortgage crisis are still in effect. For example, the Federal Housing Administration (FHA) continues to actively promote mortgage programs with little or no downpayment as well as modification of existing loans without verification of the borrowers’ capacity to repay. These strike me as the type of practices that got our country into this mess.
The greatest financial scandal was the collapse of Fannie Mae and Freddie Mac in September of 2008. Yet, Fannie and Freddie were not even addressed in the Dodd-Frank financial reform, as their problems were considered “too complicated.” In the meantime Fannie and Freddie continue to exist with liabilities in excess of $5 trillion shored up by more than $150 billion of taxpayer dollars. Losses are continuing each quarter. Ironically, as Congress continues to use Fannie and Freddie as an instrument to gain traction in the home-buying market, these mortgage giants have again become our biggest competitors by flooding the market with 30 year fixed rate loans at artificially low interest rates.
The automobile industry was exempted from the supervision of the newly created Consumer Financial Protection Bureau. It seems a further contradiction that on the day after the Dodd-Frank bill was signed into law by the President that the government allowed General Motors (US taxpayers own 61% of GM) to purchase the major sub-prime auto lending company, AmeriCredit. While perhaps a profitable strategy for GM, doesn’t offering sub-prime auto rates averaging 17% fly in the face of what reform of the financial industry was supposed to accomplish? I can’t imagine the legislative and media outrage if banks were offering car loans at an interest rate in the teens to 20% or more!
Legislative Intent #3:
Legislation that will benefit and protect the consumer.
However, the Dodd-Frank Act, increases costs for regulatory compliance and reporting the additional cost of higher insurance limits, and reduces the income that banks receive from debit transactions. These costs and decreases in income will likely lead to higher fees to consumers.
Much of this legislation does not take effect immediately. Establishment of the Consumer Financial Protection Bureau will take at least another year. It will take months for regulators to draft and promulgate rules for the multitude of issues addressed in the law.
It’s important to understand that community banks are essential to our customers, our staff, and our community. I remain confident that Piscataqua Savings Bank, and other strong-willed community banks, will find solutions to these challenges in the months ahead. In the meantime, our financial results are strong and our customer base continues to grow. Our resolve to work in the best interests of our customers is unwavering.
Jay S. Gibson
President/CEO – Piscataqua Savings Bank, Portsmouth
Board Chairman – New Hampshire Bankers Association