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Dear Community Banker:

It is finally here. After over a year of speculation, months of academic debate, a blue-ribbon commission report and several congressional hearings in which ICBA participated, financial regulatory restructuring is officially off and running in Washington.

Last week President Obama unveiled his administration’s sweeping proposal to revamp and recreate major components of our nation’s financial regulatory system. The 85-page white-paper proposal, which the president unveiled at a White House event I attended representing the nation’s community banks, serves as the official starting point for Congress to begin enacting regulatory restructuring legislation. More than any other recent studies or legislative proposals, the administration’s plan frames the debate going forward. Much is on the line—for community banks, for Main Street and for every American.

ICBA supports and has worked tirelessly for the president’s goals of making the overall financial system more resilient and less vulnerable to “too-big-to-fail” institutions that were a key factor in the recent financial turmoil. The president’s proposal offers community banks both constructive measures that ICBA will energetically promote and initiatives that ICBA must and will vigorously oppose.

Significantly, the proposal addresses a longtime ICBA priority by dealing with the risks created by too-big-to-fail institutions. It is a good, strong step in the right direction, but final legislation needs to go further. We are also very pleased the administration accepted ICBA’s calls to reject the creation of a monolithic federal banking regulator, a dangerous notion that would create a cyclopic regulatory authority with no checks and balances on its power over the financial industry. Instead, the proposal endorses ICBA’s recommendation to maintain multiple federal banking agencies and the regulatory system of dual state and federal bank charters. The administration heard us on this vital issue.

What ICBA Strongly Supports in the Proposal

• Too-big-to-fail regulation. ICBA won the administration’s support to provide consolidated systemic-risk supervision for banks and nonbanks. The proposal would impose higher capital and liquidity requirements on too-big-to-fail institutions. It also backs ICBA’s recommendation to give the FDIC special resolution authority to resolve and unwind systemically dangerous financial firms.

These are extremely important first steps to putting regulatory teeth behind preventing too-big-to-fail banks or nonbanks from ever threatening the financial system again. However, ICBA will continue to vigorously advocate for the creation of systemic-risk regulations that include downsizing the mega financial institutions that currently exist and for establishing a separate systemic-risk fund to resolve too-big-to-fail problem institutions so that community banks are never again asked to pay for the sins of Wall Street.

• Regulatory and charter diversity. The administration endorsed ICBA’s recommendation to maintain multiple federal banking agencies and the dual system of state and federal bank charters. We have worked hard for years to explain to Congress and administration officials how vital this existing structure is in promoting the consumer choice and innovation that comes from allowing financial institutions of various complexities and sizes.

• Banking and commerce. The administration proposes closing the industrial bank holding company loophole to strengthen the separation of banking and commerce. ICBA commends the administration for heeding ICBA’s longtime calls to close the ILC loophole. If enacted, this measure would give community banks their final victory in blocking Wal-Mart, Home Depot and other mega commercial firms from acquiring FDIC-insured financial firms and entering the banking business.

What ICBA Strongly Opposes in the Proposal

• New consumer agency. ICBA is deeply concerned about and will strenuously oppose the administration’s proposal to create a separate and co-equal bank regulatory agency that would conduct consumer compliance examinations and have review and approval authority over bank products and services provided to customers. The proposed Consumer Financial Protection Agency is perhaps the single most dangerous element of the administration’s plan.

As the proposal now stands, this agency would disconnect consumer protection policies from safety and soundness enforcement. Consumer protection activities should not operate in a vacuum. Creating such a powerful agency separated from safety and soundness supervision would impose another bureaucratic layer on community banks, increase regulatory burdens and have little or no impact on enhanced consumer protections. Its decisions would create counterproductive and potentially damaging conflicts with banks’ safety and soundness obligations—and, I assure you, bankers will be caught in the middle, a lose-lose proposition.

Only through close coordination between the compliance arm and the safety and soundness arm of the same regulatory agency will consumer and investor interests be balanced and a healthy and vibrant financial system maintained. ICBA will work hard to educate policymakers on this issue, and we will forcefully oppose the creation of the Consumer Financial Protection Agency as presently proposed.

• Thrift charter and regulator. The administration has proposed consolidating the federal thrift charter with the national bank charter and eliminating the Office of Thrift Supervision. Doing away with the federal thrift charter is unacceptable to ICBA—period! Those organizing financial institutions, as well as financial consumers, should have the opportunity to choose what charter form they wish their financial institution to take.

This aspect of the administration’s proposal would also unnecessarily reduce the diversity in our financial services system and eliminate the only charter that specifically specializes in home mortgage lending. Why would we want to do that? Answer, we don’t. ICBA will vigorously work to preserve the thrift and mutual charters.

The financial regulatory restructure debate will dominate the political agenda in Washington for months (and perhaps for years) to come. Lawmakers in Congress will consider, weigh and debate these and other issues in detail before final legislation will be written and voted on.

The administration is asking Congress to pass legislation this year. The House Financial Services Committee could begin marking up legislation as early as next month. And the Senate Banking Committee is expected to begin working on a bill this fall. However, what the final product will look like and when it will be passed by Congress and sent to the president is still very much in doubt.

We do know that policymakers must take a thoughtful approach so that reform works for the long term. We also know regulatory restructuring will be a difficult battle because of the political climate of anger and frustration over the financial crisis, but ICBA will work hard to ensure that every policymaker involved clearly knows how important your views and your concerns are.

Community bankers aren’t the ones who engaged in the risky practices that led to our current economic crisis. You pride yourselves and base your livelihoods on the safety and soundness of the loans you make. ICBA will work tirelessly to ensure that you don’t pay a heavy price for the poor practices of a few.

America now stands at a historic crossroads with financial regulatory reform. The stakes are very high. The process presents both opportunities and risks. We have an opportunity to address too-big-to-fail and finally free our financial and economic markets from its dangerous grip. But we also face the unintended consequences and risks of creating a dangerously powerful new bureaucracy with almost unchecked power that would intrusively probe nearly every product and service you offer to your customers.

The final outcome of all this will determine what kind of banking system we pass down to America’s future generations. I hope all community banks will work with ICBA to ensure that Washington gets it right. 

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