Buddy Roemer is not a happy camper.
Roemer, the CEO and president of Business First Bank, has been watching the scramble to regulate the financial industry amid the current economic recession with a bit of concern, a dash of calculation and a heaping helping of frustration.
The source of Roemer’s frustration is plain—rising premiums from the Federal Deposit Insurance Corporation in combination with a host of financial regulations currently up for debate in Congress that could potentially change the face of the financial industry.
“I don’t mind the increased rates,” he says. “The cost of the insurance has to reflect the cost of the program. It’s the regulators that are the problem. The same people who got us into this mess are the same ones supposed to be bailing them [large national banks] out with our taxes.”
The FDIC charges a premium every quarter in exchange for insuring up to $250,000 worth of individual customer deposits at each member institution. In the past year, Roemer says, those assessments have doubled.
In addition, the FDIC has levied a five-basis-point special assessment due Sept. 30 based on each financial institution’s second-quarter assets. That means a bank with $500 million in assets will be assessed a $250,000 fee on top of the quarterly FDIC assessments, Roemer says.
The special assessments will go to bulk up the FDIC Deposit Insurance Fund, which releases funds when banks fail. The FDIC is authorized to levy a special assessment if the fund reserve ratio falls to a level that would adversely affect public confidence or a level close to or below zero.
“It’s not a problem to have to pay the assessments,” says Gary Littlefield, Baton Rouge market president for Gulf Coast Bank and Trust. “A lot of damage was done and special assessments for FDIC insurance is just a part of that.”
Louisiana banks will pay $25 million in FDIC special assessments, says Robert Taylor, CEO of the Louisiana Bankers Association. But another round of the same is expected in December, bringing the estimated total of special assessments for 2009 to $115 million. That’s a hefty price tag for the 167 banks in Louisiana, very few of which offered subprime loans or other options that have contributed to the current financial environment, Taylor says.
“Louisiana banks feel like victims of the situation because they were not a party to the activity that caused the mess but are expected to pay to fix it,” Taylor says. “It’s frustrating.”
Add to that pending financial regulations, which include allowing the Fed to become a systemic risk regulator and supervisor of “too-big-to-fail” institutions and the creation of a new Consumer Financial Protection Agency among others, and you have bankers on pins and needles waiting for the outcome.
“More regulation is obviously going to mean increased costs,” Littlefield says. “I’m not sure exactly how the pendulum will swing, but more regulation is coming. There’s no question of that.”
A new Consumer Financial Protection Agency is a major concern among Louisiana banks, Taylor says, because it assumes duties formerly given to the FDIC. The FDIC currently links consumer financial protection with safety and soundness of the institution when investigating a bank. An agency that does not take safety and soundness of the institution under investigation into account—along with consumer protection—could have dramatic negative effects, Taylor says.
“I’m not sure that separating consumer protection from safety and soundness is a wise thing to do,” he says. “I can’t see how that wouldn’t have an impact on banks.”
A new agency would also require additional fees being placed on financial institutions, Taylor says.
Littlefield says Gulf Coast Bank and Trust is anxious to see what regulations pass congressional muster, but that additional regulation is not only going to be more costly, it undermines the dual banking system.
“What we are seeing are regulations that are moving the banking industry closer to a public utility,” he says. “I believe that it may be unintended, but it is what it is.”
The dual banking system allows institutions to apply for either a state or federal charter. The type of charter an institution holds determines how it is regulated. In Louisiana, state-chartered banks are regulated by the Office of Financial Institutions and generally are charged lower assessments. They also have more flexibility in investments so long as they do not present a risk to the insurance fund or pose a safety and soundness concern.
With the dearth of federal regulations coming down the pike, state-chartered banks are placed in a situation where federal and state regulations might not coincide. The new regulations also would give the state attorney general’s office and individuals the right to sue banks, Taylor says, which would stifle innovation in the marketplace.
“Banks would no longer come up with new ideas because of the fear of consumer protection litigation,” Taylor says. “They would be plain vanilla. Consumers would have even fewer financial choices.”
While the federal regulations are aimed at targeting institutions that are not banks but also have a stake in the financial industry, Taylor says, they have repercussions for community banks. ?“There are mortgage lenders that are able to broker mortgage loans and then sell them,” he says. “They aren’t responsible for whether it’s a good or bad loan. That’s what got us into trouble in the first place.”
Roemer says his reaction to the regulations is negative simply because they do not require banks that accepted Trouble Asset Relief Program funds or otherwise failed to recapitalize at a higher rate. Community banks are required to have capital between 9% and 11% of its risk-weighted assets, Roemer says, while larger, troubled financial institutions are capitalized between 2 and 6%.
“How about the big guys having the same capital requirements that we do, if not higher?” he says. “The bigger the bank, the higher the capital ratio. That would cut down on the size of some of these banks real quick.”
In the end, Roemer says, regulations are regulations and Business First will comply with them, differences aside.
“It’s all nickels and dimes to us. We could care less and we’ll follow the regulations,” he says. “It’s just that good banks that are smaller and have close ties to their communities are being penalized while the bad banks are huge and aren’t suffering anything. What’s wrong with that picture?”
