Community Bankers Association of Illinois

Congressional Negotiators Agree on Financial Reform Bill
Friday, June 25, 2010

In the early hours of Friday morning, and after 20 hours of sometimes contentious debate, Senate and House conferees reached agreement on financial regulatory reform. The impact of this legislation is difficult to overstate. "This is about as important as it gets, because it deals with every single aspect of our lives," said Senate Banking Committee Chairman Chris Dodd (D-Conn). The Wall Street Journal said the bill "offers the clearest picture since the financial crisis of how markets and the government will interact for decades to come." The resolution of the various differences between the competing House and Senate versions means the bill is now complete and will be voted on by the House and Senate next week. The President is expected to sign the bill into law by the July 4th recess.

The legislation includes a variety of CBAI/ICBA-advocated provisions, and several policies we oppose were advanced. ICBA has provided the following initial summary of the provisions of the bill which are of particular importance to community banks.

Deposit Insurance
The regulatory reform conference report bases deposit-insurance assessments on assets minus tangible capital instead of on domestic deposits, which will lower assessment rates on the nation's community banks. ICBA was the only national financial trade group to support this initiative, which will save $4.5 billion for the industry over the next three years. CBAI supported this change in the assessment base. The ABA and its' state affiliates did not support this initiative.

The panel also agreed to a two-year extension of the FDIC's Transaction Account Guarantee program, though ICBA/CBAI worked to extend the program permanently. The proposed extensions apply only to non-interest-bearing accounts, not low-interest NOW accounts like the current TAG program. Conferees have also agreed to permanently increase FDIC deposit-insurance coverage to $250,000.

Consumer Financial Protection Bureau
The Consumer Financial Protection Bureau will be housed under the Federal Reserve. Community banks with less than $10 billion in assets will be exempt from primary CFPB examination and enforcement.

Trust-Preferred Securities
Conferees modified an amendment sponsored by Sen. Susan Collins (R-Maine) that would have prevented all financial institutions from including trust-preferred securities in their Tier 1 capital. With the modification, bank holding companies with less than $15 billion in assets as of Dec. 31, 2009, and institutions organized as mutual holding companies as of May 19, 2010, will be able to grandfather the TruPS they issued before May 19, 2010. The new TruPS requirements will be phased in over three years. Additionally, bank holding companies with less than $500 million in assets are exempt from the requirement.

Volcker Rule
The panel also approved a modified version of the Volcker rule, which as originally proposed would have barred large banks from trading with their own capital or sponsoring hedge funds. The new agreement would allow large banks to make investments of up to 3 percent of their capital in private equity funds and 3 percent in hedge funds. ICBA/CBAI persistently advocated for strong Volcker-rule provisions.

Lending Limits
Negotiators also eliminated an ICBA/CBAI-opposed measure that would have subjected state-chartered banks to national lending limits. The provision otherwise would have completely removed state regulators' discretion to set lending limits for state-chartered institutions. Conferees also included a provision to bar state banks from engaging in derivatives transactions until their state lending limit accounts for such transactions.

Thrift Charters
Negotiators also agreed to allow new thrift charters, which ICBA and CBAI have advocated since the beginning of the regulatory reform debate. The Senate bill would have barred new thrift charters. Conferees also agreed to grandfather the Office of Thrift Supervision treatment of mutual holding company dividends previously waived.

SOX 404
House and Senate conferees also agreed to include an ICBA/CBAI-advocated provision to the financial reform bill that would exempt small, publicly held companies from Sarbanes-Oxley Section 404(b). Under the provision, companies with less than $75 million in market capitalization would be exempt from the auditor attestation requirements.

Systemic Risk
The report creates an ICBA/CBAI-advocated systemic-risk council of top regulators, but lawmakers dropped ICBA/CBAI's proposed systemic-risk dissolution fund. Instead of establishing the $150 billion fund, the FDIC will have a line of credit with Treasury to pay for the dissolution of large financial firms. The FDIC could also potentially impose fees on the large firms to help fund the failures.

Fed State-Member Exam Authority
Following ICBA/CBAI's efforts, the financial reform bill preserves the Federal Reserve's examination authority for state-chartered community banks and bank holding companies. The Senate bill would have transferred this authority to the FDIC.

Risk Retention
Negotiators exempted safe residential mortgage loans from the bill's 5-percent risk-retention requirement on loans securitized and sold into the secondary market following ICBA/CBAI outreach. Long-term and fixed-rate mortgages would be among those exempt from the provision. Loans sold by banks to Farmer Mac also would be exempt, another ICBA/CBAI priority.

ILC Moratorium
Lawmakers agreed to a three-year moratorium on new industrial-loan-corporation charters. ICBA/CBAI fought vigorously for completely closing the ILC loophole, which was included in the House regulatory-reform bill.

Interchange
Negotiators reached an agreement to impose interchange price-fixing despite ICBA/CBAI and community bank opposition. The agreement requires the Federal Reserve to establish reasonable fees on debit cards by factoring in their transaction costs compared to those for checks. The agreement also would carve out prepaid cards and state-issued benefits cards, prohibit issuers from having exclusive deals with merchants and bar the Fed from regulating Visa and MasterCard network fees. ICBA and CBAI have been vigorous opponents of interchange price-fixing.

Federal Home Loan Banks
The legislation excludes the Federal Home Loan Banks from a prohibition on institutions lending an amount to any unaffiliated company that exceeds 25 percent of the capital stock and surplus of the lending institution. ICBA and CBAI advocated this change.

Accredited Investors
The final agreement also addresses ICBA/CBAI concerns with stricter standards for accredited investors under the bill. The Senate bill would have increased the annual income test from $200,000 to $450,000 and the wealth test from $1 million to $2.25 million. Under a compromise, the wealth test will remain at $1 million but exclude the value of the investor's principal residence, the Securities and Exchange Commission will review the income test every four years, and the Government Accountability Office will study the issue. The review and study replace a regular, automatic inflation adjustment.

Office of Minority and Women Inclusion
The bill also states that the director of the Office of Minority and Women Inclusion at federal financial agencies would be appointed by and report to the agency administrator, not the president. Additionally, rather than assessing the diversity and inclusion efforts of banks as part of the examination process, the new directors will develop standards for assessing the diversity policies and practices of entities regulated by the agency. ICBA/CBAI supported these recent improvements.

Business Checking
Conferees recently approved provision to allow banks to pay interest on business checking accounts.

We will soon provide a more detailed analysis of the reform measure as well as identify unfinished business for future consideration.

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