The midterm election. Remember that? It was eight weeks ago and the nations' and media's political attention has already shifted--like moths to a brighter light--to the 2008 presidential stakes.
But ABA's Washington team hasn't forgotten. Nor has it lost sight of the fact that the fortunes of banks more frequently hinge on what happens on Capitol Hill, in regulators' offices, and in state legislatures, than on who sits in the White House.
By that measure, the Democratic sweep of the Hill, bringing with it the rise of Sen. Christopher Dodd of Connecticut and Rep. Barney Frank of Massachusetts to the respective banking committee chairmanships might seem to be like the shifting of tectonic plates--bringing deep, fundamental change to the landscape.
That would be overstating it. Change, yes, of course, especially on certain issues. But overall, the effect on financial services of the election results, stunning as they were, is more a matter of shading, than stark contrast.
And although it's widely assumed that most bankers are Republicans, the ABA has always worked both sides of the aisle, partly because its lobbyists know things can change, but also because banking issues are largely nonpartisan.
"I don't know where the partisan divide is on deposit insurance," says Wayne Abernathy, ABA's head of financial institutions policy and regulatory affairs. "There may be slight tendencies one way or another, but the fines aren't sharp."
Or as ABA's chief legislative lobbyist, Floyd Stoner, observes, ABA has seen some odd alliances in the past on certain issues. In the banks' battles with credit unions, Realtors, and the Farm Credit System, he says, "there are Democrats and Republicans on both sides of the conflict."
That's not to say that November's contest didn't have any impact on the industry, however. When votes are close and the issues are crucial, shading can loom large.
To assess the new brushwork laid on the political canvas by voters, ABA Banking Journal Editor-in-Chief Bill Streeter and Executive Editor Steve Cocheo interviewed Stoner and Abernathy. The two men head up the association's government relations effort, and report to ABA CEO Edward Yingling.
Stoner is executive director, congressional relations and public policy. He spent six years in the House of Representatives working for Representatives Dave Obey and Tim Penny, before joining ABA in 1985.
Abernathy joined the staff of the Senate Banking Committee in 1981, and served in various posts there, including senior legislative aide to Sen. Phil Gramm of Texas, and staff director of the full committee, before moving to the Treasury Department as assistant secretary for financial institutions in late 2002. He joined ABA in 2005, where his current title is executive director, financial institutions policy and regulatory affairs.
Not only did the elections change the makeup of the key banking committees, so did retirements. Maryland's Sen. Paul Sarbanes, the ranking member of the Senate Banking Committee, left at the end of the year, as did House Financial Services Committee Chairman Mike Oxley of Ohio. In addition, three Republican members of the House committee were defeated: Representatives Sue Kelly (N.Y.), Jim Ryun (Kan.), and former chairman, Jim Leach (Iowa). On the Senate side, Republican Sen. Rick Santorum, a banking committee member, was defeated, and Democrat Jim Corzine left the committee earlier last year to become governor of New Jersey.
Also notable is the narrow margin of control that the Democrats hold in both houses, which will be a moderating impact on what the majority can expect to pass, particularly in the Senate, where the Democrats have a one-vote majority (subject to the December development described below). And that vote depends on Senator Joe Lieberman of Connecticut, now an independent, voting with his former party; ABA believes he will, on most domestic issues. Republicans are in a strong position to use the filibuster and other delaying tactics, according to an ABA post-election report, and, of course, the President may veto bills that the new majority party does manage to pass.
In a development that occurred after the interview, Sen. Tim Johnson of South Dakota, who would be the number-two Democrat on the Senate Banking Committee, underwent emergency brain surgery on Dec. 13th. At press time, his ability to continue in his senatorial duties was unknown. If he resigns, the governor of South Dakota, a Republican, would appoint his successor, which would bring the balance in the Senate to 50-50, with the Vice-President holding the tie-breaking vote.
With that as background, here is what Stoner and Abernathy said in the interview.
Party politics and legislative gridlock characterized much of the previous Congress. Will that be even more the case now?
Stoner That would be the easiest prescription, given the narrow majorities, a lame-duck President, and with presidential races already started. On the other hand, we are hearing from members on the Hill that they believe the voters clearly do not like gridlock. They want to see some things accomplished. I also believe that both sides of the aisle recognize they need to put some points on the board if they wish to either regain the majority of preserve the majority they have.
Personalities matter. The ability to legislate matters. And in the case of many of our issues, both Senator Dodd and Congressman Frank have demonstrated over the years a willingness and an ability to move legislation.
Many people aren't aware of it, but Senator Dodd was very influential on Gramm-Leach-Bliley--in particular at the end in pulling the deal together. And Congressman Frank was very influential with the Fair Credit Reporting Act in getting a resolution, which included a strong preemption component.
Abernathy A key point is that while you have new leadership, these folks are not new members, because seniority plays such a major role in choosing the leadership. These are members we've known, and worked with, for a long time.
With the people who are freshmen, we have a tremendous opportunity to get to know them.
Stoner One of the things that can hurt you is that members of Congress believe that somehow those of us who work here in Washington are divorced from the people in the states and their districts. That is not the case at ABA. One of the powerful parts of the ABA is our alliance with the state associations and our relationships with bankers. We'll be flying in state association executives and bankers from around the country in the coming weeks, to have them visit with their freshman members--bankers who knew them before they were a member of Congress.
Abernathy Having worked for a senator for a long time, I can tell you they remember who their early friends were before they became well known and had power. They remember who was willing to come up and talk to them and help them be successful.
Senator Dodd is a presidential hopeful. How much of a factor will that be in his work as head of the banking committee?
Stoner It will affect the agenda of the committee. There will be more of a focus than there might otherwise have been on security, particularly in the international sense. A focus on what we are doing on things like cross-border wire transfers, for example. Not necessarily support for more legislation and regulations, but holding hearings on the subject.
How will the change on Capitol Hill play in the agencies?
Abernathy Their job will be more difficult. The senior regulators are either Republicans, or were appointed by Republicans, and they would be correct in assuming that oversight from Congress is going to be more significant, more adversarial than when you had a Republican chairman of a Republican committee.
Stoner The way people address this in the first couple of months will establish whether we have more or less confrontation. It could become like Wayne is suggesting, but I would go back to what I said before, personalities matter. And there were certainly disagreements between Republican chairmen and Administration appointees. There will be opportunities on both sides to demonstrate what kind of working relationship we'll have.
The DOD Grenade
At this point, what issue looks to be the hottest out of the gate?
Stoner That would be the Department of Defense Authorization Bill that passed at the end of the last session. It passed with an amendment attached that was not really vetted through the Congress. It establishes rate caps on loans made to service men and women and members of their families. It makes the Department of Defense the regulator, in consultation with the banking regulators. It's a complicated and tricky issue with many ramifications involving the regulators, the DOD, and the Congress.
Abernathy I'd say it's the most important issue for banks right now. It can become less important if we can get it focused on what the intent was, which is to make sure service men and women aren't getting ripped off--you won't find a banker in America that disagrees with that. It isn't drafted that way, though. And the regulatory authority that's given to the Secretary of Defense is huge. And if it isn't carefully done, you can have ramifications that affect the entire universe of banking. We're trying to get the focus where it belongs. If we can do that, it will become an important--but not earthshaking--kind of change. If it isn't done right, it could be a very significant problem for the whole industry. It's a very high agenda item.
Should there be a legislative fix right away?
Abernathy That might be premature. The problem with the provision is it can't work as drafted--nobody knows what it means. It has to be refined. In the process of trying to draw up the regulations with the focus that everybody had in mind, the regulators and DOD may identify specific changes that they can take to the Hill and say, "We think you ought to do this and that, so we can make this work better."
That's not unusual for a large bill that was done, in the end, fairly hastily.
Should bankers alter their business plans?
Stoner Until we know more about how the rule-writing process is going to develop, and what the possibilities are for legislative corrections, I wouldn't spend a lot of time trying to address it.
Premiums, Overdrafts and CTRs
Regarding the deposit insurance reform law, is there any chance of lowering the FDIC's premium range?
Abernathy We have not given up on the idea that the FDIC can lower premiums. With what they've set in place, banks will have to pay premiums of between five and seven basis points [minus the one-time credits many banks will get].
We think that's way too high, but we're seeing the world differently than FDIC does. We think all of the indicators show that the industry is going to continue to be healthy--the number of problem banks is not increasing, it's actually decreasing. We'll see in the next few months whose vision of the world actually plays out more.
Are overdraft protection plans in trouble? Bankers believe FDIC Chairman Sheila Bair dislikes the product.
Stoner That dislike is shared by some on the Hill. But there is a general recognition that done properly--and a lot of that has to do with disclosure--these programs can be very useful for consumers.
Abernathy I don't hear many policymakers saying they want to go back to the days of bounced checks.
If you understand that there is a real place for this kind of product, the key, then, is this: to talk about how do we make sure that these remain good products, and that opportunities for abuse are not being exploited. The answer is not to close doors on legitimate use of these products. And that is a conversation you can have with Sheila Bair.
There is an element of Kansas populism that Sheila was born with and that stays with her, and that I think motivates her to continually ask the question, "What does this mean for the customers?"
In the end, that is not a bad thing. Frankly, to the extent you really do focus on the consequence for customers, that's good for us, too.
Stoner And that is also a conversation you can have with members of Congress. The concern is abuse, but I'm detecting an increasing recognition of the fact that you don't write onerous laws in every case in order to achieve the goals of having products that make sense.
Several times the House has passed legislation that would reduce currency transaction reports. But it never got past the Senate. Will it be introduced again?
Stoner Congressman Spencer Bachus [R.-Ala.] worked with Congressman Frank on that and they both said they intend to do it again. On the Senate side it has been more of a problem, but with the new lineup we will see what can be done. Sen. Mike Crapo [R.-Ida.] who was the Republican sponsor of reg burden relief last Congress, was very interested in including it then. I think he would be interested in doing it again.
The Realtors didn't get the permanent ban of banks from their business that they wanted. How does the next round shape up?
Stoner I don't think the Realtors were planning on Barney Frank and Chris Dodd as chairs of the banking committees. Congressman Frank has been a strong supporter of former Chairman Oxley's position--and on his own--that Gramm-Leach-Bliley authorized precisely what the regulators proposed. And it's our understanding Senator Dodd has similar views. So it will be interesting now to see whether there is a change in the climate.
We have said for years we would be happy to sit down with the Realtors and negotiate a resolution to take this out of what is a very difficult venue for members of Congress, and we will make that offer again. Sometimes such meetings can be brought about by the chairmen.
Abernathy At the same time I see no letup on the part of the Justice Department or of the Federal Trade Commission in their view that there is a need for increased competition in real estate brokerage. It's our view that by bringing bankers into that field you'll increase competition, and the benefits will flow to the customers. The various calculations I've seen say tens of billions of dollars a year of benefits would flow to homeowners, home buyers, and sellers, if you had greater competition in real estate brokerage.
Credit Unions--Growing Recognition ABA gained some ground in the struggle with credit unions over the last two years. What reception will this effort get in a Democratic Congress?
Stoner There is growing recognition that credit unions can, if they choose, become cooperatively owned banks by simply changing to a mutual savings bank charter Under that, they become taxed and regulated like everyone else. Congressman Frank has made clear that he believes that that is a very reasonable avenue for credit unions who wish to exercise all of the powers of the bank, but also accept the responsibilities that go with it. That would include a regulatory scheme that's like their competitors, taxation that's like their competitors, and CRA obligations like their competitors.
Abernathy The competitive arguments for doing that are very persuasive, but I think there are also some safety and soundness issues. As credit unions start doing more things that banks do, there is a question of whether the credit union supervisor really has the background to regulate and supervise those activities. The argument is, if you want to offer bank-like products-business lending, specifically--you ought to be supervised by the folks who have the experience supervising those kinds of activities. The National Credit Union Administration does not have a track record in appropriately supervising business lending. It's always been statutorily a small part of the business for credit unions, mainly to facilitate some of the activities of their members.
Stoner If you are a credit union and you want to make a multi-million-dollar development loan three states away, that's a different game.
Abernathy There's a way to do that. You become a bank. And then you are supervised by people who understand proper commercial loan underwriting--and recognize bad underwriting.
We've seen what happens when there is a mismatch between the regulatory system and the activities of the institutions it is supervising. You don't want to create the groundwork for that to happen again.
Legislators who are strong believers in credit unions should support a system that says, "Let credit unions be credit unions by focusing on their mission--serving the low- and moderate-income people they were given a special charter to serve." But if they want to be a bank, then be a bank. [Editors' note: Recent federal studies demonstrated that banks actually do a better job serving these segments.]
FCS' Bold Grab
There has been a divide of sorts between banks that feel credit unions have an unfair edge and those that feel likewise about the Farm Credit System. With the rollout, several months ago, of the Horizons blueprint for expanding the FCS, it seems like the two issues may be overlapping. Do you agree?
Stoner If you're not competing with the Farm Credit System today, you should be concerned about the Horizons project, because if FCS is successful in getting it approved, you will be competing with them tomorrow. And they would bring their advantages with them, just as credit unions do when they branch out beyond the mission for which they were created. In particular, Farm Credit wants to make commercial loans everywhere, and they want to be able to make housing loans in communities of up 50,000, which covers most of the land mass of every state.
This Horizons project seems almost like a wish list ...
Stoner Judging from our experience with them, they throw all the spaghetti at the wall, and see what will stick.
Abernathy And each piece that sticks takes them away from the original mission; and more and more into sectors that are already being well served and where they will use government-provided benefits to compete unfairly. Wanting to do new things is alright if you are in the private sector, out there competing with one another, but not by virtue of a subsidy.
Stoner This will be a major issue for us and others in the farm bill. Both Senator Tom Harkin of Iowa, new chairman of the Agriculture Committee and Minnesota's Collin Peterson, new chairman of House Ag, have indicated they want active consideration of the farm bill this year.
Basel: This is the Year
The Basel capital reform proposals seem to have picked up some momentum.
Abernathy We are getting to where they are shooting with real bullets. All the planning is done and they're into the implementing regulations. The proposed Basel 1A regs were issued in December. The regs will finalized in 2007. Part of that process will include a timetable for implementation.
Aren't there still some major issues to resolve among the various versions--Basel 1, Basel 2/advanced approach, Basel 2/standardized approach, and Basel 1A?
Abernathy Competitive balance is the key issue. We want to make sure that banks get the capital program that is most appropriate. And make sure also that your program doesn't put you at a disadvantage to the capital regime that your competitor has. The way you do that is you make sure that the level of program complexity matches the level of complexity in your operations, but with any one particular asset having more of less the same capital charge regardless of who holds it.
Is that actually going to be doable?
Abernathy You won't know until you see the regulations side by side to see if it has been achieved. But I believe it can be achieved, because the difference between, let's say, the standardized approach, the advanced approach, and Basel 1A is not so much in what the capital charge will be, but it's what you have to go through to evaluate your portfolio.
And so if you're a fairly simple bank, and you're not laying off risk with a bunch of derivatives, your calculation of what your capital ought to be should be simpler. But if you are a big organization using derivatives, swaps, and other arrangements, you need to have a capital program that recognizes what you are doing so that your capital charge again is appropriate for the business you are in. Can you get those to line up? I think so.
Even with overseas-based competitors?
Abernathy That's a bigger challenge. The standardized approach may be the glue that brings them all together, because the standardized approach that we've been talking about in the U.S. would not be significantly different from the standardized approach that's available overseas. But you're not going to have total harmony. Even under Basel 1 you had in actual practice significantly different approaches.
New Climate for ILCs
The FDIC is set to decide this month if Wal-Mart and other commercial companies can operate an industrial loan company. If FDIC says yes, will there be legislation to stop it?
Stoner Having Barney Frank as chairman certainly raises the possibility of a legislative resolution. In the Senate, Senator Johnson [D.-S.D.], is very interested in an approach similar to Congressman Frank's and Congressman Paul Gillmor's [R.-Ohio] in the House. The fact that Senator Robert Bennett from Utah [who opposed ILC legislation] is now in the minority has an impact.
Our view has been that we should address the policy issue of should commercial firms be able to own insured depositories? Congress has already made several decisions that separate commerce and banking. ILCs happen to be the latest, and perhaps last, avenue for such commercial ownership. We have to close it going forward and that would certainly include Wal-Mart. We will have to see how it plays out, but the climate has definitely changed.
Bill Streeter, editor-in-chief, email@example.com, and Steve Cocheo, executive editor, firstname.lastname@example.org.…