The question of whether an exemption for banks with less than $10 billion in assets is sufficient protection from the Federal Reserve Board’s proposed new rules for debit-interchange pricing loomed larger than ever during a May 12 Senate Banking Committee hearing during which a lawmaker grilled the nation’s top two banking regulators.
Sen. Jon Tester, D-Mont., asked Fed Chairman Ben Bernanke and Federal Deposit Insurance Corp. Chair Sheila Bair whether the small-bank exemption, which is part of the Durbin amendment to the Dodd-Frank Act, “would work,” and he wondered whether the Fed has “enough information” to craft a final rule.
Tester in March introduced a bill to delay implementation of the Fed’s proposed rule for two years while regulators study its impact (
The Fed in March asked Congress for more time to study public comments on the proposed rule, which observers say will cut debit issuers’ interchange revenue by as much as 75% by capping the fee at 12 cents per transaction for banks with more than $10 billion in assets (
At the May 12 hearing, Bernanke said the board is “still not sure whether (the small-bank exemption) will work,” adding, “I think there is good reason to be concerned about it.” (
Although “a number” of card networks have expressed their interest and willingness in creating a two-tiered interchange fee system with different rates for smaller and larger banks, the law does not require it, Bernanke said.
Some observers have suggested that the Fed could require the networks to make interchange rates public, and while that would be of some value, “there are market forces that would work against the exemption” for small banks, Bernanke said.
Pressed by Tester to explain how small banks might be affected if the exemption fails to shield them and they are forced to adopt the Fed’s proposed lower debit interchange rates, Bernanke said it would likely affect small banks’ revenues, “and it could result in some smaller banks being less profitable or even failing.”
Bernanke agreed with Tester that its proposed rule was “put in quickly,” adding that he would “have to defer to Congress” on whether more time or “what kind of information” is needed before the Fed crafts the final rule.
The Fed has made “considerable progress” in wading through the 11,000 comments it has received on its proposed rule, and a lack of information “is not our problem,” Bernanke told Tester.
Tester then asked Bair if she felt the exemption would protect small banks.
“I think it is questionable,” Bair said. The Fed possibly could use its authority under Regulation E of the Electronic Funds Transfer Act to require networks to create a two-tier interchange pricing scheme, but the question of whether the Fed has legal authority to do that could make such an option “problematic,” she said.
Without a two-tier debit-interchange system, “I do think it will reduce revenues at a number of smaller banks, and they will have to pass it on to consumers in terms of higher fees, primarily for transaction accounts,” Bair said. “So I think that is going to happen, and again, is that the right result? Is that the result Congress wanted? You need to determine that, but I think that is what will happen.”
Bair said she did not think the Fed’s proposed rule would cause smaller institutions to fail, “but clearly it would stress them. And if there are other challenges confronting (the) community banking sector, it’s probably something they don’t need to be dealing with now.”
The American Bankers Association immediately called attention to the Fed officials’ comments in a May 12 statement and asserted that the small-bank exemption will not work because “having two prices for the exact same product is simply not sustainable in a free market,” noting that such a concept would overturn a basic law of economics.
“More time to study the impact of the Fed’s rule is definitely warranted,” Frank Keating, association president and CEO, said in the statement.
A spokesperson for U.S. Sen. Dick Durbin, D-Ill., said the senator was at work on a letter he plans to send to Bernanke addressing statements he made at the hearing. The letter was not available at press time.
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