Spokane-area bankers have widely varying opinions on the merits of the recently approved legislation to revamp the nation's financial regulatory system. One belief at least several of them share, though, is that the thousands of pages of coming new regulations will add substantially to their compliance burden and ultimately will translate into higher costs for their customers.

President Obama signed the measure into law last week. The bill puts tighter reins on mega-banks and nonbank financial companies, raises deposit-insurance coverage limits, alters the way debit-card transaction fees are set, and establishes a new agency called the Consumer Financial Protection Bureau. Among other things, it also enables banks to pay interest on business checking accounts.

The legislation now is entering the complex, multiagency process of being converted to written rules as part of the sweeping industry overhaul. Bankers here who were interviewed say that process will determine how onerous the new regulations will be—and also how effective they will be at preventing future nationwide financial crises.

The bill includes a number of provisions benefiting community banks, or exempting them from some of the new rules targeting large institutions, which led the Independent Community Bankers of America organization not to oppose the legislation, even though it contained some rules the ICBA didn't like.

The Wall Street Journal last week quoted ICBA President Camden Fine as saying in notes to members: "If you are Main Street, you got most of the curbs on Wall Street that you wanted, and a few other nice breaks for community banks as well."

However, Randall L. Fewel, president and CEO of Inland Northwest Bank, of Spokane, and its holding company, Northwest Bancorporation Inc., says, "I see it as a negative for all banks, including community banks. Our trade group is telling us to anticipate 5,000 pages of new regulations out of the bill. There's going to be enormous new compliance burdens for community banks."

He says, "Frankly, most of us don't have a full-time compliance person, and I think I'm going to have to hire one. I see that as a major negative."

The new rules will require banks to gather additional data from small-business loan applicants, for example, including whether the applicants' businesses are women- or minority-owned, which will add to the banks' recordkeeping duties, he says.

New rules restructuring debit card fees will apply directly just to banks that have more than $10 billion in assets, but Fewel says, "I think we're going to lose money on debit cards. We're all going to be forced to meet the lowest-priced product, or we're going to lose revenue. That's what enables us to offer free checking. I see free checking disappearing over the next few years."

Given those and other new mandates that will cut into community bank revenues, he says, "I think the legislation will lead to as many as 3,000 banks disappearing over the next five years (out of about 8,000 banks total). I don't see how a bank under about $200 million in assets will be able to survive with this regulation ... and I get the feeling the government doesn't want all of these banks."

Meanwhile, he says, "To me, they didn't do anything to address the 'too big to fail' issue. I've not seen anything in this bill that really addresses that very well."

That issue, central to the financial reform debate, involves the argument that some companies are so large that they will take down the nation's economy if they fail, and that they warrant government and other preferential financial assistance, as needed, to prevent their failure. As a result of that view, assistance to the nation's biggest banks has been controversial, though, because critics view it as insulating them from the natural, and deserved, consequences of engaging in risky financial transactions and giving those institutions an unfair advantage over smaller banks.

Noting that a relative handful of banks control about three-quarters of all U.S. deposits, Fewel says, "That's just not healthy in my opinion. Any time you have that (type of concentration), you expose yourself to something down the road."

"Many things missed"

Jack Heath, president and COO of Spokane-based Washington Trust Bank, is less critical of the reform bill, but echoes some of Fewel's concerns.

"There's some good things in it, but many things were missed," he says.

The nation's recent financial woes largely were created by the actions of big investment banks, rather than community or national banks, he says, but adds, "I didn't see that there were far-reaching changes" that necessarily will curb such reckless behavior in the future.

"It morphed into much more legislation around community and national banks that didn't cause the issues we face today," he says.

On the plus side, he—like other bankers here—applauds the bill's permanent raising of Federal Deposit Insurance Corp. deposit-insurance coverage to $250,000 per depositor, per insured bank, which all of those interviewed say more accurately reflects depositors' net worth today.

"Protecting deposits is a critical part of our banking system," he says.

The impact of the planned Consumer Financial Protection Bureau and how well it will work at safeguarding against financial abuses remains to be seen, Heath says. That agency, however, won't have direct supervision or enforcement powers over banks with less than $10 billion in assets, and only five banks that do business here—Wells Fargo Bank, Bank of America, U.S. Bank, Chase, and Sterling Savings Bank, the latter barely—fall within that targeted larger size.

The new debit-card fee rules, which put the Federal Reserve in charge of determining reasonable fees, "will impact profitability of the interchange" by pushing fees downward, Heath says, referring to the system under which a merchant pays fees to the card issuer and credit-card network when a customer uses a debit card to make a purchase.

"The debit card rules have been a hotly contested issue for a number of years. Retailers have seen huge increases" in fees, which have driven a push for system changes, he says. He adds that he views the new rules as "a reflection of pricing becoming more competitive in all electronic channels," and says, "I think electronic delivery is going to continue to get less expensive for the consumer and the retailer over time as the channel becomes more efficient."

Like Fewel, Heath worries about the added regulatory burden on an already highly regulated industry, saying, "Most of that regulation we don't fundamentally disagree with, but we believe a lot of that consumer legislation that comes out is so complex that in the end, does it help consumers make an intelligent buying decision?" He also asks whether it truly will prevent abuses and fraud.

As for this latest bill, he says, "When you have that much legislation come out in a short period of time, it's hard to sort out at this point in time what the real impact will be. We're still sorting through that. The key is the implementation and interpretation."

Disagreeing with Fewel on one point, he says, "I don't see that it's going to threaten smaller institutions," but he adds, "It's just a question of what the cost is, and the cost eventually is going to get passed on to the customer. There's no question there's going to be an increased cost."

Greg Deckard, chairman, president, and CEO of Spokane Valley-based State Bank Northwest, says, "My take on this is there's much more good than bad (in the bill) for community banks."

Overall, the legislation levels the playing field between large and small banks in a way "we've not seen the likes of since the Great Depression," Deckard asserts.

"The best part of it to me is it really begins to curb the 'too big to fail' dilemma. That's a very good thing," he says, adding that it also rightly brings oversight of the so-called shadow banking industry, or nonbank financial institutions, under the umbrella of regulatory reform.

"Wall Street definitely is the loser," he says. The bill has some elements that will cut into banks' bottom lines, and it no doubt will create some added paperwork, he says, but he adds nevertheless, "I think it's a step in the right direction."

Kelly McPhee, spokeswoman for Spokane-based AmericanWest Bank, says, "I think it's pretty fair to say that community banks are in support of regulatory reform when it benefits consumers while allowing banks enough room to operate."

The financial reform bill, though it includes some burdensome measures, also appears to offer some welcome benefits both to consumers and to community banks, she says.

Among the pluses, the legislation directs the FDIC to base deposit-insurance assessments on a bank's assets minus tangible capital, instead of on domestic deposits, she says. That has the potential to make the largest banks in the U.S. pay a more proportionate amount into the FDIC fund, easing the strain on community banks that up until now have been carrying an unfair share of that expense, she says. The ICBA estimates that change will save the small banks $4.5 billion over the next three years.

"At the end of the day, banks are a business, and as we all know, businesses throughout our country are under tremendous stress during this recession," McPhee says. "It just so happens that our industry is one that Congress can significantly impact by modifying and changing the ground rules. Time will tell if this bill will serve to strengthen our industry or bog it down."