The government's know-your-customer proposal took a nose dive last week.
Many bankers had looked forward to the anti-money-laundering plan, even asked for it. Compliance officers believed it would help them refine existing know-your-customer policies, which are required even in the absence of a rule. Bank chief executive officers hoped to become more competitive when all financial companies had to monitor suspect activity under the same rules.
Then in early December the bank regulators' proposal came out, full of requirements bankers say they never expected. Supervisors of brokerages, credit unions, and other nonbank firms failed to issue parallel rules.
A flood of angry comment letters and caustic media reports ensued. On Jan. 17, the New York Post published a column titled "Warning: Your Bank May Become A Government Spy." Few banking regulations in history have so captured the attention of average citizens.
But not everyone believes the proposal should be abandoned and left for dead.
Rep. Marge Roukema, chairwoman of House Banking's financial institutions subcommittee, said the rule, which she called "overreaching," should be rewritten, not killed.
Privacy and law enforcement are both legitimate concerns, and these competing interests can be reconciled, she said. The New Jersey Republican is planning an April 15 hearing on the issue.
By then, the rule may have crashed and burned.
Last week, the American Bankers Association announced that it would reverse course and oppose the know-your-customer rule, arguing that it went far beyond what regulators had promised. Federal Deposit Insurance Corp. Chairman Donna A. Tanoue said the proposal was flawed and needed to be redrawn, or even withdrawn.
This week, said House Banking Committee member Ron Paul, he plans to introduce bills that would not only invalidate the know-your-customer rule but also repeal the Bank Secrecy Act.
"I don't think they've made the case at all that this is going to help law enforcement," the Texas Republican said in an interview Friday.
The announcements added to the growing drumbeat of opposition begun by the Independent Bankers Association of America, America's Community Bankers, and others.
In part, this is a story about a grass-roots revolt.
Small banks and thrifts nationwide are furious. They say the proposal would add new financial burdens, make them less competitive versus nonbanks, and wreck their reputations with customers.
But the real story here may be about the power of the Internet and the privacy movement.
Eclipsing all records, the FDIC has received 14,200 comments so far. Nearly two-thirds of these arrived via e-mail.
The Internet also helped privacy advocates, mainstream and otherwise, spread their anti-know-your-customer gospel fast and far.
Intel Corp. experienced a similar shock last week. On Jan. 20, the chipmaker announced plans to put a different number on each Pentium III chip. Two days later, a member of Congress objected. On Jan. 25, a boycott formed. Hours later, the company canceled its plan.
"America is supposed to be the land of the free," said Joe DeHaven, executive director of the Community Bankers Association of Indiana. "Know your customer is a classic example of what this country revolted against."
