Report: Law not impeding smaller banks

Dodd-Frank not fleshed out, more rules due, industry says

— Small community banks have escaped the rising costs that some bankers feared when the Dodd-Frank Act was passed more than two years ago, according to a federal report released this week.

Arkansas bankers at institutions with less than $10 billion in assets were worried about several provisions in the Dodd-Frank Act, including concerns that deposit insurance costs would rise and revenue from interchange fees would fall after the bill became law in 2010.

Debit-card interchange fees, better known as “swipe fees,” account for a large portion of bank income. The federal regulation said banks with more than $10 billion in assets could no longer charge merchants the normal 44-cent fee per swipe and set a new fee of about 23 cents.

Bankers were worried that even though banks with less than $10 billion in assets were allowed to continue to charge an average of 43 cents per transaction, the smaller fee would eventually trickle down to small banks.

But a study by the federal, nonpartisan Government Accountability Office shows that banks with less than $10 billion in assets paid 33 percent less to the regulatory deposit insurance fund and are not seeing a drop in debit-card interchange fees.

Bankers generally agree with the information in the report, but caution that little regulation has been written so far under Dodd-Frank.

Reynie Rutledge, chairman and chief executive of First Security Bank in Searcy, said the law will affect the ability of small banks to make mortgage and consumer loans, as well as offer credit cards.

“In my estimation, not half the regulations have been enacted yet,” Rutledge said. “There’s no doubt that my fears from a couple of years ago were correct.”

The act has already established new capital requirements that banks must meet, Rutledge said.

“Every time we turn around, there are new examinations, new regulations, new things we have to do,” Rutledge said.

The loss of revenue from lower swipe fees has already led banks with more than $10 billion in assets to raise fees for their customers, said Tim Yeager, an associate professor of finance at the University of Arkansas at Fayetteville.

If the lower swipe fees do end up affecting banks with less than $10 billion in assets, those community banks will have to find ways to generate revenue from their customers, Yeager said.

Because community banks aren’t as likely to raise other fees, they may recover the income by paying lower rates on certificates of deposit or charging more for loans, Yeager said.

He likened the changes in banking regulations brought by Dodd-Frank to a homeowner trying to sell his house.

“Say the government has just announced that it might convert the street in front of your home to a four-lane highway but it hasn’t yet decided,” Yeager said. “What does that do to your home’s value? Even though the street has not been expanded, the threat of expansion is sufficient.”

The situation is similar for community banks, Yeager said.

“Although the direct impact on most community banks so far appears to be small, the new authority that the government has over consumer regulations combined with more restrictive capital and interchange rules, gives bankers plenty to worry about in the near future,” Yeager said.

From 1985 to 2010, the number of banks with less than $10 billion in assets dropped more than 50 percent to 7, 551, the report said.

Some banking experts believe that total will continue to fall, in part because of increased regulation from the Dodd-Frank Act.

“From a practical standpoint, it costs a $100 million bank the same amount in overhead costs to comply with regulatory requirements as a $400 million bank,” said Garland Binns, a Little Rock banking attorney.

It is early to assume the act isn’t affecting small banks because “our regulatory agencies have been so slow in writing the regulations,” said Randy Dennis, president of DD&F Consulting Group, a Little Rock bank consulting firm.

The act has a number of hidden costs, Dennis said, such as increased scrutiny on the federal Community Reinvestment Act, fair lending and the Home Mortgage Disclosure Act.

Business, Pages 31 on 10/06/2012

Upcoming Events