Retail banks feel pinch of tougher oversight

Whether wrangling with a new consumer protection agency or being held to stricter underwriting standards for home loans, retail banks are preparing for broad changes because of the financial reform bill.

“To the extent a bank is in the retail consumer business, it gets clobbered the most under this legislation,” said Wayne Abernathy, executive vice-president of financial institutions policies at the American Bankers Association.

Mr Abernathy said banks would now be at the mercy of a consumer tsar, appointed by the president and Congress, to run the newly created Consumer Financial Protection Agency.

Housed within the Federal Reserve, but independently funded, the agency will have broad powers to regulate all kinds of consumer financial products, from credit cards to home loans.

Mr Abernathy called the creation of the agency, “the single most damaging provision in the legislation for retail banks”.

Another change involves “interchange” fees paid by merchants to card issuers. Under the new rules, such fees would be capped by the Federal Reserve at a “reasonable” level.

In an important change to the provision, the Fed will be prevented from regulating network fees charged by Visa and MasterCard, leaving the card-issuing banks to bear the brunt of the new fee caps.

Frustration over the legislation devolved last week into a rare bit of finger pointing, with David Nelms, the chief executive of Discover Financial Services, blaming price hikes by its rival Visa for setting the stage for more restrictive oversight.

“Visa raised prices quite a bit and, I think, took the actions that have led to the legislation in the first place,” Mr Nelms told a reporter. Visa declined to comment.

It is not known yet what the final cost to retail banks will be of these new rules, in part because some of them will not be issued for months.

Some analysts say that community banks could be pushed into the arms of larger players, which are better equipped to handle the additional oversight.

What does seem certain is that banks will look to offset these costs by raising prices elsewhere. Banks have already moved to eliminate free checking and other services in response to restrictions on credit card and overdraft fees enacted earlier this year.

The question is whether that cat-and-mouse game will continue under the new regulatory framework.

Consumer groups said the legislation was a broad win for Main Street. “Finally consumers have a shot at being part of the market place, instead of trying to stay one step ahead of the latest scam,” said Susan Weinstock, the Consumer Federation of America’s financial reform director.

The new consumer watchdog will have help in policing retail banks under new rules that allow state attorneys-general to impose tougher restrictions.

National banks will no longer be able to use federal standards to pre-empt local law. State attorneys-general have tended to be quicker than federal regulators to crack down on predatory lending practices.