Finance Globe

U.S. financial and economic topics from several finance writers.
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Bankers Concerned with Meeting Requirements of New Regulations

The American Bankers Association testified on Thursday about the impact that the economic situation and current regulatory environment are having on small business lending.

Austin Roberts, III, president and CEO of Bank of Lancaster in Kilmarnock, VA, testified before the House Small Business Committee. He said that it is now a critical time for banks - especially for the smaller banks that depend on having good business relationships with their local communities.

“Every bank in this country is working hard to assure that our customers – particularly the small businesses that are our neighbors and the life blood of our communities – get the credit they deserve,” said Roberts. “The success of many local economies, and, by extension, the broader national economy, depends in large part on the success of these banks,” he said.

Roberts noted that while banks are continuing to lend in this difficult economy, both banks and regulators tend to be more cautious during times like these and that the demand for loans is understandably down. Robert said that once the the economy starts growing again, that banks' ability to meet loan demand may be hindered by current regulatory environment and by regulatory restructuring. “Just as too much risk is undesirable, a regulatory policy that discourages banks from making good loans to creditworthy borrowers also has serious economic consequences,” he said.

Specifically, Roberts pointed to the high premiums banks are paying to the Federal Deposit Insurance Corporation, saying that they are the most “immediate threat” to the ability of banks to make new loans, and to increased pressure from regulators for banks to increase their capital level or improve the “quality” of their capital. He also said that new accounting rules – particularly the push to apply mark-to-market accounting as the new model for financial instruments – will increase the cost of lending and reduce the availability of credit.

Roberts suggested modification of the Capital Assistance Program to improve the situation for small business lending, so that community banks are eligible to participate and providing funding to viable banks that have significant, but manageable, issues.

“The comparatively small sums of money that would be invested in these struggling but viable banks would pay big returns for the communities they serve,” said Roberts.

Roberts also urged the Committee to use its oversight authority to encourage regulators to avoid the use of overly conservative asset valuation and underwriting standards when appraising the assets of banks. Finally, Roberts said that comprehensive regulatory reform of the financial services industry is badly needed and that Congress should move to adopt such reforms.

“We are committed to working with the administration, Congress and our regulators to enact strong – and effective – reform legislation,” said Roberts. “We have suggestions for improvements, but we are in general agreement of the need for comprehensive reform in the broad areas the administration has targeted.”

In a separate statement released on Friday, the ABA also expressed concern about recent changes to legislation involving credit cards. Kenneth J. Clayton, senior vice president, card policy of the ABA said that banks are working diligently to implement the new provisions by February - as required by the CARD Act - but that it will be "extremely difficult, if not impossible, for them to meet the new deadline contemplated by this bill."

In March, Obama signed the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009. Obama said upon signing the new legislation, "With this new law, consumers will have the strong and reliable protections they deserve. We will continue to press for reform that is built on transparency, accountability, and mutual responsibility – values fundamental to the new foundation we seek to build for our economy."

Highlights of the CARD Act includes a ban on the practice of universal default, severe restrictions on retroactive rate increases on existing balances due to late payments, and limiting "unfair fee traps." The CARD Act requires card issuers to use "plain sight and plain language" in their credit card disclosures. Also, card issuers who do not abide by the new laws are punished with substantially higher penalties than they were before the CARD Act.

Clayton said in his statement, "Behind every credit card account is a complex network of data systems, risk management systems, pricing mechanisms, and funding sources. The reform measures that Congress has already adopted require credit card banks to completely overhaul all of these systems. This is no easy task, and not doing it right could lead to mistakes in account statements and create confusion and uncertainty for millions of American consumers, not to mention posing significant legal penalties for banks."

"The Federal Reserve and other industry observers have expressed concern that accelerating implementation could reduce the availability, and increase the price, of credit, as banks will be forced to pull back card offers or increase prices to cover the higher risks involved," Clayton said. "Consumers are already protected from unexpected interest rate increases by a provision of the CARD Act that requires 45-day advance notice of any potential rate increase and gives cardholders the right to say “no” to the increase. This provision went into effect last month, raising the real question of whether further action is necessary given the downsides for consumers.”



Sources:
American Bankers Association
The White House
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Tuesday, 15 October 2019

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