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SPRING 2011 CENTRAL NEWS AND VIEWS FOR EIGHTH DISTRICT BANKERS FEATURED IN THIS ISSUE: Meet the New Advisory Council | District, Peer Banks Still Navigating Difficult Waters What if Debit Card Transactions Exchanged at Par? By Gary Corner S ince the passage of the Dodd-Frank Act in July 2010, which required the Federal Reserve Board to establish standards for determining whether debit interchange fees are “reasonable and proportional” to the cost of the transaction, one argument in favor of this section of the legislation has been that debit cards are essentially “plastic checks.” Many merchants, in particular, have suggested that the swipe of a debit card should translate to a par payment like paper checks. To understand the reasonableness of this assertion, it’s helpful to explore the development of the check platform that began during the national banking era (from the Civil War to World War I). Over this more than 50-year period, checks emerged as a more efficient payment medium than bank notes and drafts. Initially, checks could clear at either par or par less an exchange fee, the latter a precursor to what is called an “interchange fee” today. Rules associated with exchange fees were not standard in the late 19th and early 20th centuries, and the imposition of a fee could depend on whether local banks had agreements in place to clear each others’ checks at par. As railroads expanded and regional commerce increased, check clearing at par became more problematic. Checks drawn on distant banks cost more to clear and were riskier. Critics at Explore More See the following for further information on the Dodd-Frank Act debit interchange fees rulemaking: • The article “Debit Card Interchange Fees and Routing Proposals” in the online version of this issue (www.stlouisfed.org/publications/cb/) gives a macro overview of the proposals. • The Regulation II proposed rule can be read at http://stlouisfed.org/regreformrules/ rules/2010-32061.cfm on the St. Louis Fed’s Dodd-Frank Regulatory Reform Rules web site. the time claimed exchange fees were “excessive” and even “monopolistic” on the part of banks. Common law, however, provided that check cashers could receive face value if they presented the check in-person at the check payer’s bank, thus creating a market distortion that led to less-thanoptimal pricing. In 1915, the Federal Reserve entered the check clearing business partly in response to the concerns over notat-par banking. The Fed set up a national system for check clearing and continued on Page 7 T H E F E D E R A L R E S E R V E B A N K O F S T. L O U I S : C E N T R A L T O A M E R I C A’ S E C O N O M Y® | STLOUISFED.ORG CENTRAL VIEW News and Views for Eighth District Bankers Vol. 21 | No. 1 www.stlouisfed.org/publications/cb EDITOR Scott Kelly 314-444-8593 email@example.com Central Banker is published quarterly by the Public Affairs department of the Federal Reserve Bank of St. Louis. Views expressed are not necessarily official opinions of the Federal Reserve System or the Federal Reserve Bank of St. Louis. Sign up for Central Banker e-mail notices at www.stlouisfed.org/publications/cb/. Follow the Fed on Facebook, Twitter and more at stlouisfed.org/followthefed. To subscribe for free to Central Banker or any St. Louis Fed publication, go online to www.stlouisfed.org/publications/subscribe.cfm. To subscribe by mail, send your name, address, city, state and ZIP code to: Central Banker, P.O. Box 442, St. Louis, MO 63166-0442. The Eighth Federal Reserve District includes all of Arkansas, eastern Missouri, southern Illinois and Indiana, western Kentucky and Tennessee, and northern Mississippi. The Eighth District offices are in Little Rock, Louisville, Memphis and St. Louis. 2 | Central Banker www.stlouisfed.org Broadening the Dialogue By Julie Stackhouse T his issue of Central Banker contains two articles on the recent Federal Reserve rulemaking that would limit debit interchange fees. (See articles on Page 1 and online at stlouisfed.org/ publications/cb.) Banks from across the country have voiced their opinions on this controversial rulemaking by using a public comment process that Julie Stackhouse is closed in late February. More than senior vice president 7,000 comments were received by the of the St. Louis Fed’s Board of Governors. division of Banking The formal comment process on Supervision, Credit proposed regulations is one channel and the Center for open to bankers to express opinions. Online Learning. There are many other channels, as well. Clearly, much communication occurs through the supervisory process. Moreover, it is not uncommon for Fed economists and regulators to speak at community and industry events in which bankers, community groups, academics and members of the general public are in attendance. More recently, the Board of Governors announced a new communication vehicle for depository institutions, created through the formation of Community Depository Institutions Advisory Councils. (See article on Page 4.) These councils, which have been established in all 12 Federal Reserve Districts, will be comprised of senior executives from community lending institutions (commercial banks, thrifts and credit unions with less than $10 billion in assets). At least twice per year, council members will meet to discuss a variety of issues, including local economic and banking conditions, and regulatory matters. The leader of each council will travel to Washington, D.C., twice per year to share the view of his or her District council with the Board of Governors. Information sharing and dialogue is important for bankers and regulators alike. We view it as critical that the voice of “main street” lending institutions be considered in the formulation of good supervisory policy. We will do our best to improve and grow the dialogue process. We hope you will feel comfortable contributing your voice! Q U A R T E R LY R E P O R T District, U.S. Peer Banks Still Navigating Difficult Waters By Michelle Neely P rofitability at the nation’s banks made quite a turnaround in 2010, but asset quality issues—linked primarily to commercial real estate—are still weighing heavily on the industry. Return on average assets (ROA) averaged 0.53 percent at District banks at year-end 2010, up 44 basis points from a year ago. ROA at U.S. peer banks— those with average assets of less than $15 billion—also rose substantially in 2010, but remains below the District’s average at 0.28 percent. The year-over-year improvement in profitability is due in large part to marked upticks in the net interest margin (NIM), which rose 20 basis points in the District and 25 basis points at peer banks. Rising NIMs are due entirely to decreases in interest expense that exceed decreases in interest income. A substantial reduction (13 basis points) in net noninterest expense provided another boost to ROA at District banks in 2010. Earnings also increased because of significant declines in loan loss provisions in 2010 at both sets of banks, even though asset quality has improved modestly, if at all. The ratio of nonperforming loans to total loans at District banks held basically steady between the third and fourth quarters at 3.27 percent, a worsening of 41 basis points from a year ago. In contrast, the nonperforming loan ratio fell 13 basis points in the fourth quarter at peer banks; the yearend ratio of 3.95 percent is 20 basis points below its year-ago level. Real estate loans remain the driver for the performance of the overall loan portfolio both in the District and nationally, and market conditions—both residential and commercial—have not improved appreciably. Within the real estate portfolio, there were declines in nonperforming construction and land development (CLD) loans in the fourth quarter. In Steady as She Goes1 2009: 4Q 2010: 3Q 2010: 4Q RETURN ON AVERAGE ASSETS 2 District Banks 0.57% 0.53% -0.37 0.32 0.28 District Banks 3.67 3.84 3.87 U.S. Peer Banks 3.65 3.87 3.90 District Banks 1.07 0.82 0.86 U.S. Peer Banks 1.60 1.06 1.06 U.S. Peer Banks 0.09% NET INTEREST MARGIN LOAN LOSS PROVISION RATIO NONPERFORMING LOAN RATIO 3 District Banks 2.86 3.30 3.27 U.S. Peer Banks 4.15 4.08 3.95 SOURCE: Reports of Condition and Income for Insured Commercial Banks NOTES: 1 Because all District banks but one have assets of less than $15 billion, banks larger than $15 billion have been excluded from the analysis. 2 All earnings ratios are annualized and use year-to-date average assets or average earning assets in the denominator. 3 Nonperforming loans are those 90 days or more past due or in nonaccrual status. the District, the proportion of CLD loans that were nonperforming fell 21 basis points to 12.27 percent, while it fell 33 basis points at U.S. peers to 14.81 percent. Though this is certainly good news, these ratios remain near historic highs. Nonperforming rates in the nonfarm nonresidential segment continue to rise at District banks of all sizes; the proportion of nonfarm nonresidential loans that were nonperforming at yearend was 2.93 percent, up 17 basis points from the third quarter. The nonperforming rate for these loans at peer banks actually declined slightly in the fourth quarter but remains well above the District’s average at 3.61 percent. Although delinquency rates remain steady in the consumer segment, they continue to edge up in the commercial and industrial (C & I) portfolio; the nonperforming C & I ratio hit 2.19 percent at District banks and 2.40 percent at peer banks at year-end 2010. continued on Page 7 Central Banker Spring 2011 | 3 IN-DEPTH Community Banking, Credit Union Execs Meet To Discuss Top Financial Industry Issues T he condition of the current banking and credit markets and the outlook for regional economies were among the key topics discussed at the inaugural meeting of the St. Louis Fed’s Community Depository Institutions Advisory Council (CDIAC) on March 1-2. Twelve executives representing community banks, thrifts and credit unions from across the Eighth District met at the St. Louis Fed with President James Bullard to discuss the top issues currently facing community financial institutions and their customers. Key findings from the St. Louis session will be included in a discussion with Federal Reserve Chairman Ben Bernanke when St. Louis Fed CDIAC Chairman Dennis M. Terry meets April 1 with the CDIAC leaders of the System’s 11 other District banks in Washington, D.C. for the first of two annual System-wide meetings. “Community financial institutions are vital in creating and sustaining economic growth in our nation’s communities,” said Bullard when he announced the nomination of the 12 regional members to the council on Jan. 20. “As a key source of credit for small businesses, these institutions provide an important perspective on the relative health of the U.S. economy.” The St. Louis Fed’s council will also meet twice a year. The next meeting is scheduled for Oct. 5-6, with the next System-wide meeting scheduled for Nov. 4. Meet the 2011-2012 Council Dennis M. Terry (council chairman) is president, CEO and director of First Clover Leaf Financial Corp. of Edwardsville, Ill. He has been president and CEO of First Clover Leaf Bank, FSB, since 2000. Previously, Terry served as president of Mark Twain Bank of Edwardsville, as well as its predecessor, Edwardsville National Bank and Trust Co. 4 | Central Banker www.stlouisfed.org Kirk P. Bailey is chairman, president and CEO of Magna Bank, based in Memphis. He is a founding director of Magna and has served on the bank’s board of directors since Magna’s inception in 1999. Glenn D. Barks has served since 2001 as chief executive officer of First Community Credit Union, based in Chesterfield, Mo. He joined the company 25 years ago as executive vice president following a 12-year career in the savings and loan industry. H. David Hale is chairman, president and CEO of Louisville-based First Capital Bank of Kentucky, which was founded in 1996. Previously, he served as chairman, president and CEO of Cumberland Federal Savings Bank in Louisville. D. Keith Hefner has served as president and CEO of Citizens Bank & Trust Co. of Van Buren, Ark., since 2004 and has been with the bank since 1990. He also serves on the board of directors of the Arkansas Bankers Association. Gary E. Metzger has served as chairman, president and CEO of Liberty Bank and Liberty Bancshares Inc. in Springfield, Mo., since 1995. Previously, Metzger was president of Southwest Bank in Springfield, and vice president at Southwest Bancshares Inc. William J. Rissel has been the president and CEO of the Fort Knox Federal Credit Union in Radcliff, Ky., since 1991. During Rissel’s tenure as CEO, Fort Knox has been recognized as the “Best Credit Union in the Army,” and the National Association of Federal Credit Unions has named it Credit Union of the Year. Mark A. Schroeder is the chairman and CEO of German American Bancorp, based in Jasper, Ind. Schroeder is a member of the board of directors for ICBA Bancard and the Indiana Department of Financial Institutions. Eighth District Bank Data 4Q 20101 COMPILED BY DAIGO GUBO 2009: 4Q 2010: 3Q -0.21% 2010: 4Q RETURN ON AVERAGE ASSETS 2 All Eighth District States 0.46% 0.39% 0.58 0.86 0.81 Illinois Banks -0.60 0.34 0.15 Indiana Banks -0.19 0.49 0.49 Kentucky Banks 0.49 0.92 0.84 Mississippi Banks 0.42 0.59 0.55 Missouri Banks -0.49 0.29 0.38 Tennessee Banks -0.42 0.21 0.07 Arkansas Banks Gordon Waller has been president and CEO of First State Bank & Trust Company of Caruthersville, Mo., since 2004. He serves as a member of First State Bank’s board of directors and vice chairman of the First State Bancorp Community Development Corporation. Larry T. Wilson is chairman, president and CEO of First Arkansas Bank & Trust, based in Jacksonville, Ark. He serves as a director of the Association of Military Banks of America, is a member of Team 21 for the American Bankers Association, and has held several positions with the Arkansas Bankers Association. Vance Witt is chairman and CEO of BNA Bancshares and BNA Bank, based in New Albany, Miss., where he has worked for more than 40 years. He is a past chairman of the Mississippi Bankers Association. Larry Ziglar is the president and CEO of First National Bank in Staunton, Ill., which he joined in 1976. He has been president of First Staunton Bancshares since 2002. NET INTEREST MARGIN All Eighth District States 3.55 3.76 3.80 Arkansas Banks 3.99 4.13 4.16 Illinois Banks 3.29 3.65 3.67 Indiana Banks 3.74 3.77 3.78 Kentucky Banks 3.88 4.04 4.00 Mississippi Banks 3.87 3.89 3.92 Missouri Banks 3.34 3.51 3.67 Tennessee Banks 3.61 3.79 3.81 All Eighth District States 1.36 0.92 0.97 Arkansas Banks 0.92 0.72 0.85 Illinois Banks 1.82 1.19 1.28 Indiana Banks 1.19 0.90 0.89 Kentucky Banks 0.61 0.54 0.58 Mississippi Banks 0.86 0.82 0.80 Missouri Banks 1.51 0.86 0.85 Tennessee Banks 1.31 0.89 0.94 All Eighth District States 3.72 3.88 3.76 Arkansas Banks 2.65 3.27 3.47 Illinois Banks 5.26 5.05 5.04 Indiana Banks 2.99 3.13 3.08 LOAN LOSS PROVISION RATIO NONPERFORMING LOAN RATIO 3 Kentucky Banks 2.43 2.49 2.39 >> M O R E O N L I N E Mississippi Banks 2.34 3.13 2.97 Additional CDIAC Information and Extended Member Biographies www.stlouisfed.org/cdiac/ Missouri Banks 3.83 3.98 3.29 Tennessee Banks 2.79 3.49 3.54 All Eighth District States 4.82 5.38 5.28 Arkansas Banks 3.92 5.05 5.45 Illinois Banks 6.34 6.48 6.54 Indiana Banks 3.51 3.80 3.81 Kentucky Banks 3.17 3.55 3.56 Mississippi Banks 3.42 4.56 4.61 Missouri Banks 5.27 6.01 4.86 Tennessee Banks 4.17 5.37 5.52 NONPERFORMING LOAN + OREO RATIO 4 SOURCE: Reports of Condition and Income for Insured Commercial Banks NOTES: 1 Because all District banks but one have assets of less than $15 billion, banks larger than $15 billion have been excluded from the analysis. 2 All earnings ratios are annualized and use year-to-date average assets or average earning assets in the denominator. 3 Nonperforming loans are those 90 days or more past due or in nonaccrual status. Central Banker Spring 2011 | 5 IN-DEPTH Bankers Invited to Exploring Innovation Conference on Community Development Finance meeting CRA requirements by creating products, making investments and delivering services that meet their community’s most pressing needs. By Faith Weekly D uring lean times, problems get magnified, but opportunities can arise—especially if you look at things a little differently. Difficult times can help reveal new paths to community development finance. You can discover the possibilities at Exploring Innovation: A Conference on Community Development Finance on May 9-11 in St. Louis. This will be the third biennial Exploring Innovation conference sponsored by the Federal Reserve Bank of St. Louis, along with the Federal Reserve Banks of Atlanta, Dallas and Minneapolis. Organizers want to provide bankers and other conference-goers with realworld examples of innovative models that will address the financing of all aspects of thriving communities—from housing and infrastructure to community engagement and leadership development. Each of those contributes to vibrant, desirable places to live, work and play. Bankers and CRA officers will learn about the latest in financial product innovations, investment platforms and green strategies being implemented by peer financial institutions, all geared to help enhance their institution’s CRA performance. Top community bankers from across the nation will share the secrets to being a top-notch community bank. Former community banker Governor Elizabeth Duke of the Fed’s Board of Governors will be one of the main speakers. Sessions of interest for bankers include: • The Role of a Healthy Community Bank – Community banking experts from across the country will share their secrets in this panel discussion for 6 | Central Banker www.stlouisfed.org • Changing Savings Behavior with Workplace Loans & Personal Financial Coaching: A Sustainable, Scalable Solution – Learn sustainable and scalable strategies aimed at changing savings behavior among low-income, underbanked workers to transition them to savings and mainstream bank products. • Innovations in Community Investing: Make Your Money Matter – Learn how a bank has leveraged technology to work with unbanked and underbanked individuals and families. Bankers will see how they might implement similar strategies to meet the needs of low- and moderateincome populations in their communities, stabilize neighborhoods and position themselves for favorable CRA consideration for their efforts. See full details and register at http://2011.exploringinnovation.org. Highlights from the 2009 conference can be found at www.stlouisfed.org/ exploringinnovation/default09.html. Faith Weekly is a community affairs specialist in the Louisville Branch of the Federal Reserve Bank of St. Louis. >> R E L AT E D O N L I N E Exploring Innovation Speaker Gov. Elizabeth Duke Talks about Her Community Banking Experience www.stlouisfed.org/publications/cb/ What if Debit Card Transactions Exchanged at Par? continued from Page 1 mandated check collection at par. At first, thousands of banks resisted, but over time, their numbers dwindled. Up until 1980, the Fed shouldered the cost of this national check-clearing platform. In 1980, however, Congress passed the Depository Institutions Deregulation and Monetary Control Act. One feature of this legislation required the Fed to charge banks fees to recover its check processing costs and price its services to be more competitive with the private sector. Banks absorbed the Fed’s new fees, and par checking, now firmly entrenched in society, continued. Today, the volume of check usage has declined dramatically, while use of debit cards has exploded. Payment card networks have emerged and, like the early days of paper checks with exchange fees, interchange fees are seen by banks and card networks as necessary charges that enhance infrastructure investment and processing of electronic payments by the private sector. For today’s banking industry, interchange fees have become an increasingly important source of income in the face of ever-shrinking revenue streams. The Federal Reserve Board estimates that approximately $11 billion of industry revenue is sourced to debit card interchange and another $5 billion of debit interchanges goes to support card networks annually. The profits generated by banks have, in District, U.S. Peer Banks Still Navigating Difficult Waters continued from Page 3 Declining loan loss provisions and rising nonperforming loan levels in 2010 led to a 528 basis point drop in the average loan loss reserve coverage ratio at District banks. At year-end 2010, District banks had about 61 cents reserved for every dollar of nonperforming loans compared to 66 cents at year-end 2009. The average coverage ratio increased at U.S. peers in 2010 by more than 300 basis points, but it remains below the average at District banks at 56 cents. turn, made interchange fees a source of contention with merchants. And while it’s true that merchants today bear the direct costs of these fees, it is likely that some portion of the interchange fee finds its way into the price of goods and services consumers purchase, regardless of their chosen payment mechanism. A modern, well-functioning payment system network is not cost free. The bearer of costs will play out as the Federal Reserve’s debit interchange rulemaking moves toward completion and subsequent market adjustments occur. Gary Corner is a senior examiner at the Federal Reserve Bank of St. Louis. Capital ratios rose at both sets of banks in 2010. The average tier 1 leverage ratio was 9.05 percent at District banks and 9.46 at U.S. peer banks at year-end 2010, significantly above the regulatory minimum level of 4 percent. Michelle Neely is an economist at the Federal Reserve Bank of St. Louis. Central Banker Spring 2011 | 7 FIRST-CLASS US POSTAGE PAID PERMIT NO 444 ST LOUIS, MO Central Banker Online S E E T H E O N L I N E V E R S I O N O F T H E S P R I N G 2011 C E N T R A L B A N K E R F O R M O R E I N S I G H T S, R E G U L ATO RY S P OT L I G H T S A N D F E D N E W S. VIEWS PAYM E N T S • Debit Card Interchange Fees and Routing Proposals • Nearly 80 Percent of U.S. Noncash Payments Are Now Electronic • Gov. Elizabeth Duke Shares Community Banking Experience • Final Dates Set for Electronic-Only Federal Benefits Payments RULES AND R E G U L AT I O N S • What’s Coming Next for Dodd-Frank Rule Implementation? • CRA Changes Aimed at Supporting Stabilization Efforts • Guidance Issued on Who May Apply to Small Business Lending Fund Program >> O N LY O N L I N E Read these features at www.stlouisfed.org/ publications/cb/ printed on recycled paper using 10% post-consumer waste Use Fed Sites to Track FOMC and Dodd-Frank Act Rulemaking FOMC Speak www.stlouisfed.org/fomcspeak Keep track of what St. Louis Fed President James Bullard and other members of the Federal Open Market Committee (FOMC) are talking about via this comprehensive repository of participants’ speeches, testimony, interviews and commentary. Dodd-Frank Regulatory Reform Rules www.stlouisfed.org/rrr Use this site to follow and comment on the rules being written to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The various federal regulatory agencies (the Fed, FDIC and nine other agencies) are writing approximately 200 rules to implement Dodd-Frank directives. The web site is updated frequently as new rules move their way through the rule-making process. Users can search rules by agency and topic, such as investor protection. C E N T R A L B A N K E R | S P R I N G 2 0 11 https://www.stlouisfed.org/publications/central-banker/spring-2011/how-we-arrived-at-the-debit-card-interchange-fees-androuting-proposals Views: How We Arrived at the Debit Card Interchange Fees and Routing Proposals Jane Anne Batjer The new law on debit card interchange fees represents the culmination of efforts in Congress to address concerns that have been under discussion since 1980 about fees charged to merchants by the payment card networks. In Section 1075 of the Dodd-Frank Act, Congress directed the Board of Governors to write regulations applicable to interchange fees. The Board published its notice of proposed rulemaking on Dec. 28, 2010. Interchange fee issues have multiplied over the years proportionate to growth in the volume of credit card and debit card transactions, as well as increases in interchange fee rates. In an early case decided in 1984, a federal district court determined that interchange fees were a legitimate mechanism to transfer costs from the side of the market that the court found to have lower costs (merchants) to the side with higher costs (card issuers), thereby inducing the side bearing the greater cost to participate. Other lawsuits since then have attempted to address growing concerns between merchants and card issuers. In 2005 and 2006, retail merchants and trade associations filed numerous lawsuits against card issuers alleging that interchange fees were too high and that the collective setting of interchange fees by the payment card associations amounted to illegal price fixing under antitrust laws. Attempts at direct regulatory intervention began in 2008, when the U.S. House and Senate introduced legislation aimed at interchange fees and various practices of payment card networks. Rep. Peter Welch (DVt.) introduced H.R. 6248, the Credit Card Interchange Fees Act of 2008, to prohibit certain electronic payment system network practices and require payment networks to disclose contract terms to merchants without restricting a merchant's use of such information. Rep. John Conyers (D-Mich.) introduced H.R. 5546, the Credit Card Fair Fee Act of 2008, which sought to authorize merchants and card networks that met a market share threshold to negotiate network fees and other terms associated with merchant access to a card network. Bills introduced in the Senate in 2008 included Sen. Dick Durbin's (D-Ill.) similar companion bill to H.R. 5546 (S. 3086), which included standards applicable to setting interchange fee rates. Under Sen. Durbin’s proposal for setting fees, consideration had to be given to the costs incurred in authorization, clearance and settlement activities necessary to provide and access an electronic payment system. The bill provided that fees could vary based on cost-based differences in types of credit and debit card transactions, including whether the transaction type was signature-based, PIN-based or “card-not-present.” However, fees could not vary based on the type of merchant or volume of transactions (in either number or dollar value). Lastly, Sen. Chris Dodd (D-Conn.) introduced S. 3252, the Credit Card Accountability Responsibility and Disclosure Act of 2008, which directed the OCC to study and report to Congress on the extent to which interchange fees are required to be disclosed to consumers and merchants, and how such fees are overseen by the federal banking agencies. Both Conyer's bill (Credit Card Fair Fee Act) and Welch’s bill (Credit Card Interchange Fees Act) were reintroduced in 2009. However, the key legislation on financial reform during the 2009-2010 sessions of Congress became the Dodd-Frank Act, which was introduced in the House at the end of 2009 (H.R. 4173). Section 1075 of the Dodd-Frank Act, which was added to the Senate companion bill (S. 3217) in May 2010 by Durbin, provides that the amount of any interchange transaction fee that an issuer may receive or charge with respect to an electronic debit transaction must be reasonable and proportional to the cost incurred by the issuer with respect to the transaction. Congress directed the Board of Governors to prescribe regulations to establish standards for assessing whether the amount of any interchange fee is reasonable and proportional to the issuer's cost with respect to the transaction. The law requires that the Board consider the functional similarity between a debit card transaction and a payment made by a check, as well as the incremental cost incurred by an issuer in the authorization, clearance, or settlement of a debit card transaction. The Board may not consider other costs incurred by an issuer that are not specific to a particular debit transaction. This approach is substantially similar to Durbin’s 2008 proposal, which required consideration of the costs incurred in authorization, clearance and settlement activities necessary to provide and access an electronic payment system when setting interchange fees. In the Dodd-Frank Act, Congress also authorized the Board to consider allowing an adjustment to the interchange fee amount if the adjustment is reasonably necessary to make allowance for costs incurred by the issuer in preventing fraud in relation to debit card transactions involving that issuer. The Board must publish a final rule establishing standards by the end of April this year. C E N T R A L B A N K E R | S P R I N G 2 0 11 https://www.stlouisfed.org/publications/central-banker/spring-2011/fed-governor-elizabeth-duke-talks-about-her-communitybanking-experience Views: Fed Governor Elizabeth Duke Talks about Her Community Banking Experience Federal Reserve Governor Elizabeth Duke, one of the keynote speakers at the upcoming Exploring Innovation conference, earlier this year spoke of her experience as a community banker—experience that she says “adds value” to her service on the Board of Governors. Speaking to an audience at her alma mater, the University of North Carolina-Chapel Hill, Duke said, “Much of my time as a community banker was spent lending to small businesses. In many banks today, small business lending is an automated process that relies on computers to analyze data and determine a borrower's creditworthiness. “For me, the process was personal. It involved sitting eyeball to eyeball across the table from my customer. More often than not, the customer was someone I knew well, and had been lending to for years,” she said. “Occasionally, he or she represented the second or even third generation to run the business. Or the business itself was the second or third venture that I had financed for the same borrower. There were financial statements to be gathered and analyzed. Usually it was difficult, if not impossible, to separate the business and personal finances. But understanding the borrower's ability to successfully run a business was just as important as analyzing the numbers. “I spent a lot of time talking to business owners about their businesses. In fact, sometimes I thought they came in looking for a sounding board for their ideas as much as they were looking for money. And I couldn't always make the loan,” she said. You can meet Duke at this year’s Exploring Innovation: A Conference on Community Development Finance, scheduled for May 9-11 in St. Louis. See the Exploring Innovation site for more information and to register. C E N T R A L B A N K E R | S P R I N G 2 0 11 https://www.stlouisfed.org/publications/central-banker/spring-2011/whats-next-for-doddfrank-implementation What's Next for Dodd-Frank Implementation? So far, the Federal Reserve System has completed dozens of initiatives between August 2010 and March 2011 for compliance with provisions of the Dodd-Frank Act. Some of the proposals that the Fed will seek public comment on between April and June 2011 include: Registration of Nonbank Financial Companies Designated for Consolidated Supervision The Board will request comment on a proposed rule to prescribe the forms and information requirements for nonbank financial companies designated for enhanced, consolidated supervision by the Federal Reserve to register with the Board. Credit Rating Alternatives The Board will request comment on changes to existing rules to implement the requirements of section 939A of the Dodd-Frank Act relating to use of credit ratings in agency rules. Credit Rating Alternatives for Bank Financial Subsidiaries The Board will request comment on a proposed rule, developed with the U.S. Department of the Treasury, to replace the investment grade rating requirement that applies to financial subsidiaries of national and state member banks with an alternative standard. Supervisory Standards Applicable to Savings and Loan Holding Companies The Board will request comment on a proposed rule to apply certain requirements of financial holding companies to savings and loan holding companies that engage in financial activities permissible only to a financial holding company. These requirements will include companies being well capitalized and well managed, as well as adhering to the Community Reinvestment Act. Volcker Rule: Activity Restrictions The Board, along with other federal financial regulatory agencies, will request comment on a proposed interagency rule to implement the Volcker Rule’s restrictions on proprietary trading, hedge fund and private equity fund activity by insured depository institutions and their affiliates (including bank holding companies). Resolution Plan (“Living Will”) Requirement The Board will request comment on a proposed rule developed jointly with the FDIC to implement the “living will” requirements for nonbank financial companies supervised by the Board, as well as BHCs with $50 billion or more in assets. Credit Exposure Reporting Requirement The Board will request comment on a proposed rule developed jointly with the FDIC to require nonbank financial companies supervised by the Board and bank holding companies with $50 billion or more in assets to report to the Board, FSOC and FDIC on the credit exposures between the company and other “significant” nonbank financial companies and bank holding companies. Remittance Transfers The Board will request comment on a proposed rule to: require new disclosures from remittance transfer providers, including written notices, receipts and statements detailing transaction specifics; establish standards for remittance transfer errors, cancellations and refunds; establish standards for liability of remittance transfer providers, including agents; and address the issue of how remittance transfer providers should disclose the amount of currency to be received in a foreign country when that amount is unknown. Stay up to date on the latest in the Dodd-Frank rule-writing process at the St. Louis Fed’s Dodd-Frank Regulatory Reform Rules site. C E N T R A L B A N K E R | S P R I N G 2 0 11 https://www.stlouisfed.org/publications/central-banker/spring-2011/nearly-80-percent-of-us-noncash-payments-are-nowelectronic-fed-study Nearly 80 Percent of U.S. Noncash Payments Are Now Electronic: Fed Study Following the pattern established in the early 2000s, American consumers continue to adopt electronic means for making noncash payments, according to the Fed’s 2010 Payments Study, released in segments in late 2010 and early 2011. The use of paper checks continues its steep decline. In 2001, paper checks accounted for approximately 60 percent of noncash payments, where today they account for only about 20 percent. The number of electronic payments is up 9.3 percent, or three-quarters of all payments, since the Fed’s 2007 study, which concluded that roughly two-thirds of payments were made electronically. From 2006 to 2009, all types of electronic payments included in the study grew with the exception of credit cards. Highlights of the study also include: Of the nearly 109 billion noncash payments in 2009, approximately 84.5 billion were electronic and about 24.4 billion were checks paid. Debit card use now exceeds all other forms of noncash payments and represents approximately 35 percent of total noncash payments. Payments made with prepaid cards increased at the highest rates of all payment instruments, reaching a total of 6 billion transactions in 2009. The electronification in clearing interbank checks has more than doubled between 2006 and 2009 as image exchange between banks has expanded. Said Richard Oliver, executive vice president at the Atlanta Fed, “Not only does this study show the continued move from checks to electronic means of making payments, but we also see the extraordinary progress the industry has made in electronifying the clearing process for the 27.5 billion checks still being written.” In addition to the 2010 study, the Fed conducted studies in 2001, 2004 and 2007 to measure the changing nature of the nation’s noncash payments system and inform future investment decisions facing the payments industry. C E N T R A L B A N K E R | S P R I N G 2 0 11 https://www.stlouisfed.org/publications/central-banker/spring-2011/final-dates-set-for-electroniconly-federal-benefits-payments Final Dates Set for Electronic-Only Federal Benefits Payments As announced in December, the U.S. Department of the Treasury issued a final rule to extend the safety and convenience of electronic payments to all Americans receiving federal benefit and non-tax payments. Anyone applying for benefits on or after May 1, 2011, will receive payments electronically, while those already receiving paper checks will need to switch to direct deposit by March 1, 2013. C E N T R A L B A N K E R | S P R I N G 2 0 11 https://www.stlouisfed.org/publications/central-banker/spring-2011/use-fed-sites-to-track-fomc-and-doddfrank-act-rulemaking Use Fed Sites to Track FOMC and Dodd-Frank Act Rulemaking FOMC Speak www.stlouisfed.org/fomc-speak/ Keep track of what St. Louis Fed President James Bullard and other members of the Federal Open Market Committee (FOMC) are talking about via this comprehensive repository of participants’ speeches, testimony, interviews and commentary. Dodd-Frank Regulatory Reform Rules www.stlouisfed.org/rrr Use this site to follow and comment on the rules being written to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The various federal regulatory agencies (the Fed, FDIC and nine other agencies) are writing approximately 200 rules to implement Dodd-Frank directives. The web site is updated frequently as new rules move their way through the rule-making process. Users can search rules by agency and topic, such as investor protection. C E N T R A L B A N K E R | S P R I N G 2 0 11 https://www.stlouisfed.org/publications/central-banker/spring-2011/rules-and-regulations Rules and Regulations CRA Changes Aimed at Supporting Stabilization Efforts The federal bank and thrift regulatory agencies have announced changes to the CRA regulations to support stabilization of communities affected by high foreclosure levels. The final rule encourages depository institutions to support eligible development activities, including loans, investments and services, in areas designated under the Neighborhood Stabilization Program administered by the U.S. Department of Housing and Urban Development. Guidance Issued on Who May Apply to Small Business Lending Fund Program The federal banking agencies have issued guidance on underwriting standards for lending conducted under the Small Business Lending Fund Program as administered by the U.S. Department of the Treasury. Pursuant to the Small Business Jobs Act of 2010, the Treasury is authorized to purchase up to $30 billion in preferred stock and other financial instruments from eligible financial institutions to create the availability of credit for small businesses. Small institutions with assets of $10 billion or less may apply for the program and are encouraged to submit their applications to the Treasury by March 31, 2011.