Iowa Banking Law Blog

See Who Is Meeting with the Fed About Dodd-Frank

The Federal Reserve’s website has a section for Dodd-Frank implementation matters.  On this part of the site, the Federal Reserve posts summaries of its meetings with banks, trade associations, consumer groups, and other members of the public.  This is a great way to see what is brewing in regulatory reform and what may soon come to a boil.  New posts are generally made on Mondays.   

For more information, please contact Allyn Dixon at adixon@dickinsonlaw.com / 515-246-4520 or any member of Dickinson's Banking Law Group.

Senate Fails to Delay Implementation of Interchange Fee Caps

- Posted by L. Allyn Dixon, Jr.

In a closely watched vote, legislation in the Senate that would have delayed the Federal Reserve’s implementation of the interchange (card swipe) fee caps of 12 cents per transaction beginning July 21 failed to muster the required 60 vote to force a delay.  The final vote was 54-45 in favor of the legislation, just six votes shy of the number needed.

Current estimates show that the average swipe fee is 44 cents per transaction, and estimates of the cost to banks of the new caps are between $10 and $15 billion.  Banks large and small worked hard to see the interchange fee provisions of Dodd-Frank changed.  Although banks with less than $10 billion in assets are exempt from the caps, from a competitive standpoint, most small banks believe they will have to reduce fees to be in a position to compete with bigger banks for customers.

The Fed indicated it is set to introduce the new rules in a matter of days and has given no indication yet that it is inclined to set the fee cap higher than the earlier-proposed 12 cents per transaction.

For questions about the interchange fees, please contact Allyn Dixon at adixon@dickinsonlaw.com.

Federal Reserve Issues Proposed Rule on Interchange Fees and Network Routing

On December 16, 2010, the Federal Reserve issued proposed rules implementing the Durbin Amendment to Dodd-Frank.  The Durbin Amendment sought to cap debit interchange fees and prohibit exclusivity in network routing rules. 

The Durbin Amendment requires that debit interchange fees be “reasonable and proportional to the cost incurred by the issuer with respect to the electronic debit transaction.  The proposed rule gives two proposed alternatives for compliance with this language.  The first alternative is a simple cap restricting interchange fees to no more than 12 cents per transaction.  The second alternative, dubbed the Issuer-Specific Standard with Safe Harbor and Cap, limits fees to either the safe harbor of less than 7 cents per transaction or to the average allowable costs for all debit transactions involving an interchange fee, but in no event exceeding 12 cents.  Allowable costs include certain variable costs and incremental costs; it does not include the issuer’s fixed costs, network processing fees, and costs relating to customer service.  Under the second alternative issuers would have to report the maximum interchange fee it can charge if it exceeds 7 cents per transaction. 

There are exemptions to the interchange fee caps for small issuers (issuers with less than $10 billion in assets), general use reloadable prepaid cards, and cards issued pursuant to government programs.  It is not clear, however, if these exemptions will have any teeth.  First, with regard to the small issuer exemption, market forces may force small issuers to restrict interchange fees to stay competitive.  Second, it is not clear if payment networks will establish higher interchange fees for exempt issuers.  The proposed rule has no such requirement for payment networks.

The proposed rule on network routing restrictions contains two options.  Under the first, issuers and networks could no longer restrict processing of any card transaction to less than two unaffiliated networks.  Under the second option, issuers and networks would be required to offer at least two unaffiliated networks for each possible method of authorization available to the cardholder. 

Finally, the Federal Reserve requested comment on whether ATM transactions and networks should be covered under the Durbin Amendment.  The possible inclusion of ATM networks could have a big impact on the banking industry.

Comments on the proposed rule will be open until February 22, 2011.

For more information, please contact Allyn Dixon at adixon@dickinsonlaw.com / 515-246-4520. 

Dealing with the Unresolved "Too-Big-to-Fail" Problem

Articles that appeared recently in The Financial Times and on Bloomberg.com highlighted the systemic problems that arise when financial entities are deemed too big to allow to fail.  As the first anniversary of the failure of Lehman Brothers Holdings, Inc. is being observed, there seems to be no plan to address this aspect of the financial crisis.  Ironically, the financial crisis has resulted in even greater concentration.  There is a danger that the new motto of market participants will become “Being too-big-to-fail means never having to say you’re sorry. . . and never having to admit you were wrong.”    

 

In their opinion article in The Financial Times, John McFall (Chairman of the Commons Treasury Committee) and Philip Augar (a former investment banker and the author of Chasing Alpha) advocate breaking up “a defective business model,” which they described using the following colorful language:

               

"Conflict of interest is embedded and this is unfair on other market users.  It is 'heads we win, tails you lose' as the banks make off like bandits in the good times and become pious onlookers as the taxpayer foots the bill when it all goes wrong." 

 

The article in Bloomberg.com is entitled “Lehman Monday Morning Lesson Lost with Obama Regulator-in-Chief," and it points out that the Obama Administration’s Plan for a financial regulatory overhaul would not force the largest financial entities “to shrink or simplify their structure.”  The article includes the following interesting quotations:

• Niall Ferguson, a professor of history at Harvard University, is quoted as follows: “The system is essentially unchanged, except that post-Lehman, the survivors have ‘too big to fail’ tattooed on their chests.”

• Simon H. Johnson, a former chief economist at the IMF, described the Obama Administration’s proposal as follows:  “The biggest problem is it doesn’t deal with too-big-to-fail.  It doesn’t say anything.  You have to make things a lot smaller.”

• Former Federal Reserve Chairman Paul A. Volcker argued in a speech delivered on April 8, 2008, that a “demonstrably fragile financial system that has produced unimaginable wealth for some, while repeatedly risking a cascading breakdown of the system as a whole, needs repair and reform.”

• FDIC Chairman Sheila Bair told the Senate Banking Committee in May of 2009 that a financial system “characterized by a handful of giant institutions with global reach and a single regulator is making a huge bet that those few banks and their regulator over a long period of time will always make the right decisions.”   

• Camden R. Fine, President of the Independent Community Bankers of America, asked “Does anyone think it’s a coincidence that less than 10 years after they repealed Glass-Steagall, the financial markets collapsed?”

If you have questions, please contact Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.

Turf Battles May Impede Financial Regulatory Reform

The global credit crisis, the global recession, the decline in real estate values and the negative effects of these events on the banking industry have stimulated interest in regulatory reform of the financial sector.  The existence of complex interactions among participants and products in the global financial markets has become more apparent.  Unprecedented measures have been taken to address frozen credit markets, the collapse of massive financial firms and the spreading contagion associated with “toxic” assets.   Questions have been raised about the adequacy and effectiveness of many existing regulatory structures and about whether regulation should be extended to activities that currently are unregulated.  There are perceived advantages and risks associated with concentrating regulatory authority in a single regulator.  There has been discussion of the possibility of having a panel of regulators deal with systemic risk issues. Such an approach would be similar to the proposed European Systemic Risk Council, which would include the president of the European Central Bank and central bank governors from the European Union’s 27 member countries. 

 

Although there is general recognition that disruptions in financial markets cannot be eliminated, the need for more effective safeguards against systemic risk is clear.  Despite statements that something must be done, there is considerable disagreement about the exact nature of the changes that should be made.  Reform will be politically difficult because of the interests of market participants, regulators and Congressional committees in preserving existing regulatory jurisdictions and objectives. Any financial industry regulatory reform raises questions about who should be performing particular kinds of regulation and how that regulation should be performed. Set forth below are some of the more contentious issues:

• Should there be one or more than one systemic risk regulators?

• Should hedge funds be regulated?

• Should currently unregulated derivatives be regulated?

• Should there be increased regulation of the mortgage industry?

• Should there be regulation of the sale of securitized assets?

• Should there be federal regulation of the insurance industry?

• Should some or all federal bank regulatory agencies be consolidated?

• Should failing non-bank financial companies be placed into receivership?

• Should there be a reallocation of jurisdiction between the SEC and the CFTC?

• Should there be a clearinghouse for over-the-counter derivatives?

• Should credit default swaps be regulated?

• Should short selling be more tightly regulated?

• Should there be more countercyclical capital requirements?

• Should the use of leverage be more tightly regulated?

• Should there be more regulation of money market funds?

• Should the role of state banking regulation be diminished?

• Should there be more robust enforcement of consumer protection laws?

• Should there be more disclosure of positions of larger market participants?

• Should regulatory changes extend to compensation and corporate governance?

Whether or not all of these issues are resolved in the near future, it seems clear that substantial changes in the operation of financial market regulation lie ahead. What is also clear is that the outcome of turf battles will have a major role in determining the future of the financial regulatory structure.

 

Recent news reports highlight some of the problems that can arise in the context of turf disputes.  According to a recent article in The Economist, “The stiffest resistance to change is coming not from Wall Street but from Washington, DC, where government officials, regulators and congressional leaders are locked in turf wars and ideological battles.”  Bloomberg reports that because of “resistance on Capitol Hill” and “pushback from entrenched interests,” a merger of the SEC and the CFTC may not be pursued.   An article in The Wall Street Journal comments on the FDIC’s “increasingly tough position” toward the management of Citigroup Inc. leading to “a bitter clash between regulators” about the speed and adequacy of efforts to improve the firm’s capital position.  In an earlier article The Wall Street Journal reported on Congressional committee disputes over jurisdiction of the regulation of over-the counter derivatives.  As the most traumatic aspects of the financial crisis pass into memory, it seems increasingly likely that bureaucratic infighting will play a major role in limiting the scope of any reform of the financial sector.  

 

If you have questions, please contact Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.

False Claims Act Liability and the Economic Stimulus Package

The Federal Deposit Insurance Corporation (the “FDIC”) has received over 400 comment letters on its new program for the purchase of legacy loans (the “Legacy Loans Program”).  A review of several of these comments letters reveals the complexity of the issues that will be involved in the implementation of the Legacy Loans Program.  The comments address a large number of issues, including the role that would be played by the FDIC in making the Legacy Loans Program work. 

 

Some basic terms of the Legacy Loans Program are already rather clear. Under the Legacy Loans Program, the Department of the Treasury (“Treasury”) and private investors would contribute equity capital on a 1-for-1 basis to form Public-Private Investment Funds (“PPIFs”).  A PPIFs would purchase loan pools.  Such purchases would be funded using the PPIF’s equity capital and the proceeds of debt issued by the PPIF.  The PPIF could have a debt to equity leverage ratio of up to 6-to-1 with FDIC approval.  The FDIC would provide various managerial oversight services, including conducting auctions of the loan pools, and would guarantee the debt financing issued by the PPIF.  As currently proposed, the FDIC guarantee would be made on a non-recourse basis (secured only by the PPIF’s assets).  In connection with each completed transaction under the Legacy Loans Program, Treasury would receive warrants and the FDIC would receive an annual guarantee fee.  

 

Encouraging Participation.  A number of suggestions were made concerning the manner in which the FDIC could encourage participation in the Legacy Loans Program.  Some of these suggestions emphasized the importance of (1) promoting clarity and consistency with respect to the manner in which the Legacy Loans Program would operate and avoiding retroactive changes, (2) establishing reserve prices that would both encourage seller participation in auctions and assure potential buyers that if the reserve price were met there would be a commitment to complete the sale, (3) giving private investors as much flexibility as possible in deciding how to operate the PPIFs, (4) avoiding the imposition of executive compensation restrictions on private parties who participate in the Legacy Loans Program,  (5) minimizing certain regulatory issues relating to ERISA and the Investment Company Act of 1940, (6) the resolution of certain tax issues that may arise depending on the structure of each PPIF, and (7) using standardized documents to make participation more attractive to smaller financial institutions.

 

The Auction Process.   Suggestions were made concerning the manner in which the FDIC should conduct auctions for loan pools.  Among these suggestions were (1) requiring assurance that transactions (as opposed to mere pricing exercises) would result from the auctions by use of reserve prices or other means, (2) allowing bidding on separate sub-pools within a loan pool, (3) using an initial round of preliminary indication of interest bidding, (4) using sealed bidding, and (5) considering use of privately negotiated transactions in some situations. 

 

If you have questions, please contact Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.

Ideas About the FDIC's Role in the Legacy Loans Program

The Federal Deposit Insurance Corporation (the “FDIC”) has received over 400 comment letters on its new program for the purchase of legacy loans (the “Legacy Loans Program”).  A review of several of these comments letters reveals the complexity of the issues that will be involved in the implementation of the Legacy Loans Program.  The comments address a large number of issues, including the role that would be played by the FDIC in making the Legacy Loans Program work. 

 

Some basic terms of the Legacy Loans Program are already rather clear. Under the Legacy Loans Program, the Department of the Treasury (“Treasury”) and private investors would contribute equity capital on a 1-for-1 basis to form Public-Private Investment Funds (“PPIFs”).  A PPIFs would purchase loan pools.  Such purchases would be funded using the PPIF’s equity capital and the proceeds of debt issued by the PPIF.  The PPIF could have a debt to equity leverage ratio of up to 6-to-1 with FDIC approval.  The FDIC would provide various managerial oversight services, including conducting auctions of the loan pools, and would guarantee the debt financing issued by the PPIF.  As currently proposed, the FDIC guarantee would be made on a non-recourse basis (secured only by the PPIF’s assets).  In connection with each completed transaction under the Legacy Loans Program, Treasury would receive warrants and the FDIC would receive an annual guarantee fee.  

 

Encouraging Participation.  A number of suggestions were made concerning the manner in which the FDIC could encourage participation in the Legacy Loans Program.  Some of these suggestions emphasized the importance of (1) promoting clarity and consistency with respect to the manner in which the Legacy Loans Program would operate and avoiding retroactive changes, (2) establishing reserve prices that would both encourage seller participation in auctions and assure potential buyers that if the reserve price were met there would be a commitment to complete the sale, (3) giving private investors as much flexibility as possible in deciding how to operate the PPIFs, (4) avoiding the imposition of executive compensation restrictions on private parties who participate in the Legacy Loans Program,  (5) minimizing certain regulatory issues relating to ERISA and the Investment Company Act of 1940, (6) the resolution of certain tax issues that may arise depending on the structure of each PPIF, and (7) using standardized documents to make participation more attractive to smaller financial institutions.

 

The Auction Process.   Suggestions were made concerning the manner in which the FDIC should conduct auctions for loan pools.  Among these suggestions were (1) requiring assurance that transactions (as opposed to mere pricing exercises) would result from the auctions by use of reserve prices or other means, (2) allowing bidding on separate sub-pools within a loan pool, (3) using an initial round of preliminary indication of interest bidding, (4) using sealed bidding, and (5) considering use of privately negotiated transactions in some situations. 

 

If you have questions, please contact Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.

Initial Actions Relating to FDIC's Legacy Loans Program

On March 26, 2009, the Federal Deposit Insurance Corporation (the “FDIC”) issued a press release seeking comments on its new program for the purchase of legacy loans (the “Legacy Loans Program”).  The comment period extends until April 10, 2009.  Under the Legacy Loans Program, the Department of the Treasury and private investors would form Private-Public Investment Partnerships (“PPIFs”) that would purchase loan pools using their equity capital combined with debt financing to provide leverage guaranteed by the FDIC.   

 

It is worthwhile to review the questions on which the FDIC is seeking public comment.  Those questions demonstrate the scope of the issues presented and provide some idea about the ways in which the FDIC may implement the Legacy Loans Program.  FDIC Chairman Sheila C. Bair and members of the FDIC staff have been hosting telephone conference calls to discuss the Legacy Loans Program.  These conference calls also provide some preliminary indications of the policy choices that may be made by the FDIC. 

 

The FDIC is seeking public comment on questions relating to eligible asset categories, the extent of government equity participation, ways to encourage participation, issues relating to the permissible structure and operation of the PPIFs and PPIF auctions, servicing requirements, the appropriate role of asset managers and independent valuation consultants, pooling arrangements involving multiple banks, the oversight role of the FDIC and FDIC guarantee fees.  Discussion of some of these issues on telephone conference calls suggests that the FDIC intends to follow certain broad principles but that many details may depend on the FDIC’s evaluation of public comments.  

 

Some of the principles to which the FDIC already seems committed include (1) assuring the ability of all banks not in receivership to participate in the Legacy Loans Program, (2) encouraging participation by many private investors, (3) seeking transparency, arms-length transactions and competitive auctions of pools of loans, (4) placing an initial emphasis on residential and commercial real estate loans, (5) permitting risky loans and loans that do not have a positive cash flow to be included, (6) imposing reasonable limitations on the manner in which purchased loans are handled, (7) determining separately the amount of leverage to be provided for each transaction, and (8) providing a way for bidders to evaluate each pool of loans in advance of the auction.   

 

If you have questions, please contact Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.

FDIC's Challenging Role in Legacy Loans Program

On March 23, 2009, the Department of the Treasury (“Treasury”), in conjunction with the Federal Deposit Insurance Corporation (the “FDIC”) and the Federal Reserve, announced the Public-Private Investment Program.  The Public-Private Investment Program has two separate aspects, the purchase of legacy loans and the purchase of legacy securities. 

 

FDIC Chairman Sheila C. Bair issued a statement welcoming the purchase of legacy loans (the “Legacy Loans Program”) as “a critical step forward in the process of restoring clarity to the markets.”  She noted the existence of “inherent challenges to implementing a program of this magnitude quickly” but indicated that the FDIC would begin immediately and would move forward “in a methodical and transparent fashion.”  It is no secret that from the inception of the credit crisis FDIC Chairman Bair has advocated addressing problems in the mortgage market, and she may see the Legacy Loans Program as a way of advancing that agenda. 

 

The operation of the Legacy Loans Program will depend to a great extent on actions to be taken by the FDIC.  Among other things, the FDIC’s ability to guarantee the debt of the Private-Public Investment Partnerships (“PPIFs”) that would purchase loan pools would be used to add leverage to the Legacy Loan Program.  Important practical issues include uncertainties about the details of the FDIC’s responsibilities and the difficulties the FDIC may encounter in attempting to carry out its responsibilities on a timely basis.  The challenges of implementation to be addressed by the FDIC include following actions:

 

·         Establish loan pool purchase criteria

·         Oversee formation, funding and operation of PPIFs

·         Agree with Treasury about allocation of costs and responsibilities

·         Evaluate whether particular loan pools meet criteria

·         Oversee initial due diligence and preparation of required marketing materials

·         Select third party evaluation firms to advise the FDIC

·         Determine appropriate leverage level for each sale

·         Pre-qualify private investors to bid at auction of loan pools

·         Establish criteria for information banks provide to the FDIC and to bidders

·         Conduct auctions of loan pools and select winning bid

·         Determine timeframes for banks to accept or reject winning bids

·         Issue guarantees of PPIF debt

·         Issue a “Guaranteed Secured Debt for PPIFs Term Sheet”

·         Establish and collect administrative fees and guarantee fees

 

If you have questions, please contact Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.

Fed Approves Energy Managment and Tolling

The Royal Bank of Scotland submitted an application with the Board of Governors to engage in physical commodity trading, energy management services, and energy tolling.  The Board stated that it had previously found physical commodity trading and energy management services to be complementary to the financial activity of engaging in commodity derivatives transactions and investment advisory services.  The Board had not considered energy tolling before.  it found that energy tolling is an outgrowth of the financial activity of commodity derivatives transactions and allows the Financial Holding Company to hedge its energy positions and those of its clients.  The vague "complementary to a financial activity" standard has seemingly been interpreted broadly; it will be interesting to see where the lines will be drawn.