Restrictive Regs | Local bankers play a waiting game as new federal rules head their way
The 2,319-page Dodd-Frank financial reform law promises great change across the financial landscape - but just how much change depends on the interpretation of that law in the form of regulations.
As a result, local bankers say they are in a game of wait-and-see, wondering just what the impact of new rules will be on income statements.
The Scope
The law is “just enormous,” said Kenneth F. Ehrlich, an attorney with the Boston-based law firm of Nutter McClennen & Fish LLP who works with a number of banks in Massachusetts. The over-riding tenor of the legislation, according to Ehrlich, is restriction. The law doesn’t give out a lot of powers, instead it clamps down on a lot of behaviors. But that really shouldn’t be surprising, he said.
“When you have a crisis of this magnitude… it’s not surprising that the law is as restrictive as it is,” he said.
The key areas that are of concern for local community banks include the elimination of a key regulator known as the Office of Thrift Supervision, new restrictions on raising capital, the creation of the Consumer Financial Protection Bureau and the increased oversight of interchange fees.
Regulator Shakeup
One of the most obvious changes headed in the direction of some banks is the elimination of the Office of Thrift Supervision, a much-maligned regulator that was in part responsible for overseeing AIG, which became a symbol of bad financial decision-making in the wake of the economic collapse.
All banks regulated by the OTS will be moved over to a new regulator — the Office of the Comptroller of the Currency — as of July 2011.
There are 19 Massachusetts banks regulated by the OTS, four of which are based in Central Massachusetts (see chart below).
Fitchburg-based Rollstone Bank & Trust, a federally chartered thrift, is one of those institutions that will soon be reporting to the OCC. Rollstone’s president and CEO, Martin Connors, said it’s too soon to tell what the impact of having a new regulator in the mix will mean for his bank, which has more than $500 million in assets and seven branches.
However, Connors said it will likely be an adjustment for the OCC, which has traditionally regulated only commercial, stock-owned banks, which deal with a different set of pressures.
“They (the OCC) are going to have banks that have totally different models,” he said. “We don’t have any shareholders…We’re not driven by quarterly results.”
Another bank with a Central Massachusetts presence that will be moving over to the OCC next year is West Springfield-based United Bank. However, the move won’t be completely alien to at least some of the bank’s staff. United Bank acquired Worcester-based Commonwealth National Bank last year, which as a commercial bank, was regulated by the OCC.
“How much of a change that will be for our bank is difficult to tell,” said Richard Collins, president of United. “But I have to believe that the OTS examiners are still going to be there [at the OCC]. Perhaps they’ll have a separate division.”
Collins said a move to a state charter may be on the table given the regulatory changes on the way.
“At this stage, we’re considering our options,” Collins said, explaining that United Bank is close to being disqualified from its thrift classification because of how much commercial lending it does. To be considered a thrift, a bank must maintain a certain percentage of loans in the areas of home lending, consumer loans and small business.
Raising Capital
Some local banks will see their ability to raise capital impeded due to the new regulations. Specifically, there are limits placed on banks that have a mutual holding company to issue what’s known as trust-preferred securities to raise money. Trust-preferred securities are typically issued by a trust formed by the holding company. The securities are what’s known as a hybrid of both debt and equity, and that dual structure is what has made regulators squeamish about it. However, smaller bank holding companies with assets under $500 million will continue to be permitted to issue trust-preferred under the new rules.
Over the last several years there’s been a flurry of local banks forming mutual holding companies as a first step in broadening capital raising options, the most recent of which was Medway-based Charles River Bank.
Jack Hamilton, president and CEO of Charles River Bank, said that there’s been no market for trust-preferred securities recently, so the restrictions don’t have an immediate impact.
“At this point in time it really hasn’t taken anything away from us,” Hamilton said. “When the markets improve, it may be a different story.”
Worcester-based Bay State Savings is in the same boat as Charles River, having formed a mutual holding company back in 2007. At the time, according to Bay State’s President and CEO Robert Lewis, the ability to offer trust-preferred securities was a factor in the lead up to forming the mutual holding company.
“We built our decision around the idea that in the event that we ever needed additional capital, we could use trust-preferred as opposed to going the equity route,” he said. “That’s been closed out now.”
Fees And Protections
The most common concern from local bankers is the potential fallout from the Consumer Financial Protection Bureau that was formed under the Dodd-Frank law. The bureau will be set up by Harvard Law School Professor Elizabeth Warren, who also oversaw the nation’s troubled asset relief program (TARP).
A new agency charged with protecting the consumer is of concern to Lewis at Bay State Savings, not so much because of the agency’s mission, but for the trickle-down effects.
The new rules will apply “to all banks regardless of good, bad and indifferent,” he said. “The fact of the matter is, we always did things in a manner that we felt was correct and right for the customer… But looking at all these new regs, we’ll see how we’re going to have to alter the way we do business.”
Another major provision of the Dodd-Frank Act gives the Federal Reserve the ability to regulate interchange fees — or the fees that banks and credit card companies charge retailers to use their cards. Every time a customer uses a bank debit card, both the bank and the credit card company (Visa/Mastercard) charge the retailer a fee.
“To us that’s a significant amount of money,” said Brian Thompson, president and CEO of Commerce Bank. However, Thompson said he’s not losing any sleep over the prospect of seeing interchange revenue decline.
“Like anything else, it’ll get adjusted,” he said. “They’re not going to make it unprofitable for us… We’ll have to wait and see, but I’m sure it will be honorable.”
Size Concerns
No matter how the new regulations are implemented, the fact remains that the smaller financial institutions will have the toughest time keeping pace.
At United Bank, which is a substantial institution of more than $1.5 billion in assets, Collins has staff internally and externally to keep tabs on the latest news coming out of financial reform. However, smaller institutions, he said, don’t have the same resources.
“For a smaller community bank faced with this blizzard of changes, it’s hard to afford the people power to deal with it all.”
Connors at Rollstone Bank speculated that more bank mergers will be in the future.
“We’re fortunate we’re over $500 million [in assets],” he said. “I would not want to be under $100 million.”
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