Should state governments have the power to impose tougher regulations on big national banks within their borders?
A debate over that and other bank regulations is about to play out on the public stage -- as bankers, consumer advocates and members of Congress wrangle over what is considered the most dramatic expansion of the government's policing powers of financial institutions since the Great Depression.
U.S. Bancorp CEO Richard Davis said in an interview Tuesday that state regulatory power is the banking industry's "number one concern" in the 1,336 pages of financial regulations proposed this week by Senate Democrats. U.S. law now preempts states from imposing a checkerboard of rules on national banks. The Senate bill would change that.
"If we had one thing to fight for, it would be to protect preemption," said Davis, who is chairman of the Financial Services Roundtable, one of the banking industry's most powerful lobby groups.
Davis, in a question-and-answer session with the Star Tribune editorial board, said he expected Congress to pass a financial regulatory bill by May or June. He said the industry doesn't oppose everything in the measure.
"We will not gather over the next couple of days and pick apart everything that's wrong," he said. "We'll identify all the things we really, really like, and then we'll go to the nuances and say, 'If you can adjust these few things, this would be preferred.' That's a little different than, you know, standing around, putting your arms out and saying, 'I'm not going to do it.'"
In December, President Obama lashed out against "fat-cat bankers" on "60 Minutes" and exhorted a group of bankers who gathered at the White House to become more involved in the reform process -- without letting lobbyists control it.
Davis said the banks agreed "to change the dialogue, to start supporting things and not fighting things .... It's more becoming, and more productive."
One goal of the legislation is to limit the possibility of future bailouts by expanding the Federal Reserve's power over giant financial institutions. The bill would give the Fed authority over nonbank financial institutions large enough to "pose risks to the financial instability of the United States." It would also create a $50 billion fund financed by the nation's largest financial institutions for liquidating insolvent ones.
Another proposal in the bill would create a new consumer financial protection bureau within the Fed that would have the power to prohibit abusive lending practices.
Davis said he has concerns about the consumer protection bureau, calling it "an additional level of inconsistent and unrelated oversight," but said the industry is not against consumer protection. He added that the industry is prepared to negotiate.
Thorny turf battle
Preemption is a thorny regulatory issue.
Currently, the Office of the Comptroller of the Currency, a federal agency, has sole authority to regulate nationally chartered banks such as U.S. Bancorp and Wells Fargo. The banking industry has fought to preserve preemption, arguing that a patchwork of state rules and regulations would make it difficult to offer standard products across the country. For many banks, federal regulations are less burdensome.
Consumer advocacy groups and state regulators argue that the comptroller and other federal agencies are slow to react to marketplace changes. State governments, they say, should have authority to regulate risky practices like subprime lending.
In November, attorneys general from 40 states, including Minnesota's Lori Swanson, urged Congress to end preemption of state consumer protection laws.
Under existing law, the comptroller ruled in 2003 that federally chartered banks need not comply with a Georgia law to protect low-income and elderly people from predatory lending. In an earlier case, ordinances banning ATM surcharges passed by two California cities in 1999 didn't survive objections from Bank of America and Wells Fargo on grounds of preemption.
"A bad practice starts locally," said Gail Hillebrand, a senior attorney with the nonprofit advocacy group Consumers Union. "And if states aren't allowed to stamp it out, it spreads. The feds typically wait to react until it's a forest fire. By then, it's too late."
The banking industry counters that patchwork regulations hurt consumers, who could find that a service offered in one state isn't available in another. Banks might choose to eliminate services or increase fees for them in the face of state regulations, the industry argues.
"If you allow for 50 states to create a patchwork quilt of regulation ... where every one of them has a different type of rule on the same product, all of a sudden you have hundreds of different regulatory structures for the same thing," said Ken Clayton, senior vice president at the American Bankers Association in Washington. "That puts a real limitation on the ability of banks to serve customers on a nationwide basis at the lowest cost and with the least amount of complexity."
Chris Serres • 612-673-4308