Bill Lepley has seen the full pendulum swing when it comes to congressional regulation of industry. From his experiences working in private industry to teaching the next crop of leaders in the classroom, Lepley has usually been able to sort out the impact of the latest wave of regulations.
Then there is Dodd-Frank, the Wall Street Reform and Consumer Protection Act passed by Congress last summer.
It’s been more than two years and two Congresses since the financial crisis hit. Yet, more than a year of debate, drafting and 2,000-plus pages of law later, all Lepley can conclude about the overall impact of Congress’ attempt to prevent a future crisis is that we still don’t know what this all means.
“I think it is still too early to tell,” says Lepley, an associate professor of finance at the University of Wisconsin-Green Bay. “The law itself is more than 2,000 pages, and there is a lot that is left for the rule-making process and interpretation.”
That process is just getting started, and the early returns seem to have little to do with the systemic issues that spawned the financial meltdown the fall of 2008. One of the first pieces of the puzzle to emerge governs the fees between banks, merchants and provider networks for the use of debit cards.
Public comment on the proposed rules, published by the FDIC, closed in late February. In a move billed as pro-consumer, the fees that banks can charge for debit card usage were capped at 12 cents per transaction, while prior to Dodd-Frank, fees floated by institution and the average was 44 cents.
Ironically, some of the same banks now being given billions in guarantees to keep from defaulting on mortgage loans are now being told they will be able to generate less revenue.
That’s a concern to area bankers who worry it is a sign of things to come as the regulators begin to fine-tune the law.
“I’m sure the intent was good when they wrote these things, but if you are going to increase the regulations and increase the costs of compliance, you are going to see the banks offer fewer services,” says Mickey Noone, president of First Business Bank’s northeast region. “Some of the smalls won’t survive. You could wind up with a lot of consolidation and fewer choices.”
Wisconsin banks have been active in trying to get some of the requirements modified or eliminated. In addition to debit cards, another early product of the federal proposals are requirements that banks hold a higher capital cushion than was required prior to the crisis.
That may sound reasonable to many, but the Wisconsin Bankers Association points out it could have some unintended consequences. If banks are required to keep more of their deposits in-house, that means less money available for mortgages and small business loans in the community, says Rose Oswald Poels, WBA’s senior vice president and counsel.
“While the purpose is to make the banks healthier, we want to make sure it does not hinder what most of our banks do, which is make loans in the community,” she says.
What frustrates the bankers in Wisconsin is that they are getting snared in regulatory and compliance requirements that were supposed to be aimed at the practices of large financial institutions and mortgage brokers. Most banks in Wisconsin are defined as community banks, with assets less than $10 billion. Just two banks in the state meet the $10 billion threshold – Associated Bank and M&I. M&I is in the process of being sold.
Michael Mach can see where the frustration is coming from. It’s been more than two years since the crisis erupted, and there are still a lot of undefined fixes coming from Washington.
“There are 243 rule-making processes that will come from the legislation,” says Mach, administrator of the Wisconsin Department of Financial Institutions Division of Banking. “It’s still too early to tell what it will all mean to consumers or the banks.”
Mach agrees that if the requirements are too great, it could lead to fewer choices.
Of course, this would not be the first time congressional efforts to rein in problems led to the regulatory pendulum swinging further than originally intended, says Lepley. He notes that many of the same criticisms were leveled at Sarbanes-Oxley when it went into effect to clean up financial reporting and balance sheets.
There was a key difference, he says: The economy was still booming when Sarbanes-Oxley was passed.
“What will solve some of the problems and help with acceptance is an economic recovery,” says Lepley. “A growing and booming economy can make things look a lot better than they do right now.”