Cliff McCauley has made it his duty to inform other community bankers of an overlooked component of the Dodd-Frank Act.
Specifically, he is worried that a provision of the law would allow for the payment of interest on commercial checking accounts, something he believes could hurt margins and send commercial clients to the highest bidder.
McCauley, a senior executive vice president at the Cullen/Frost Bankers Inc. unit Frost Bank and a former chairman of the Independent Bankers Association of Texas, has spent several months talking to bankers about the law's repeal of Regulation Q. "The main thing we are trying to do is bring awareness to the issue," he said in an interview Tuesday.
"The repeal was one paragraph in 2,300 pages of legislation that was introduced at the 11th hour," McCauley said. "It was buried and ignored, but turns around a 75-year-old regulation that is at the foundation of a lot of banks' business plans. That calls for some discussion and debate."
While this cause has gained momentum in Texas, other community bankers have responded in a myriad of ways. Some are anxious, while others said they were largely indifferent.
Chris Cole, senior regulatory counsel for the Independent Community Bankers of America said the group is running a survey on the repeal. "The preliminary results so far show that there is a split of opinion among our members as to whether they feel like they are going to be impacted by the repeal," Cole said. "Some are telling us that they don't think it is going to be a big deal at all, while some are really worried about it."
Bankers concerned about the change said apathetic counterparts might not be considering the long-term impact.
"In this rate environment, it doesn't have an immediate effect because of how low rates are," said Frank Sorrentino 3rd, the chairman and CEO of the $602 million-asset North Jersey Community Bank in Englewood Cliffs. "Rates have nowhere to go but up. Once they go up 200 to 300 basis points, what is that going to do to viability?"
McCauley said smaller banks' no-interest deposits, on average, make up about 20% of all deposits. That is true for Sorrentino's bank and for HCSB in Plainview, Texas. J. David Williams, the CEO of the $360 million-asset HCSB, said the repeal could raise his interest rate risk.
"This would have a significant effect on our ability to make fixed-rate loans like mortgages," Williams said. "How can you make a long-term fixed-rate loan when your interest-bearing liabilities would be so volatile?"
Williams said that while he would pay interest, he would have to charge for services that are now free. "I would have to recover that money somewhere," he said.
While smaller community banks are bemoaning the change, it seems to be less of an issue for larger community banks.
Mark Hoppe, the president and CEO of Taylor Capital Group Inc. in Rosemont, Ill., said he was aware of the change, but doesn't see it bothering his business much. The $4.5 billion-asset company focuses on middle-market lending, offering products to help clients use excess cash. In other words, Taylor's clients are not looking for interest on demand accounts.
"Our commercial customers are pretty sophisticated, so there isn't a lot of money that is just kept sitting idle," Hoppe said. "The market has already gotten around this issue of not paying interest on checking accounts."
Rex Copeland, the chief financial officer of the $3.4 billion-asset Great Southern Bancorp Inc. in Springfield, Mo., expressed similar confidence about his company's products and the acumen of its clients, but said Great Southern is keeping a watchful eye. "We don't really think it is going to have much of an impact on us. It is going to change some things, so we've been looking at our product offerings, though," he said.
Hoppe said raising rates could affect net interest income; he said he didn't see big banks offering high rates to woo commercial clients away from smaller banks. "The largest banks have the major designation of 'too big to fail.' With that, they are never going to need to chase deposits," he said.
An American Bankers Association spokesman said anxiety over the repeal is enhanced by a lack of regulatory guidance as the July 21 implementation date nears. "There are many outstanding questions from an operational perspective. Also the lack of guidance offers no lead time for product development," the spokesman said in an email.