Financial Reform’s Effect on Indiana-Based Banks

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act). While much of the Act focuses on regulating "too large to fail" financial institutions, the provisions described below are among those that will affect Indiana-based community banks.

Consumer Financial Protection Bureau

The Act creates the Consumer Financial Protection Bureau (the CFPB) with broad powers to enforce federal consumer financial protection laws to ensure that markets for consumer financial products and services are fair, transparent and competitive. While not subject to CFPB's supervisory authority, community banks will be subject to CFPB's rules, which among other things, will prohibit "unfair, deceptive or abusive" acts or practices.

Deposit Insurance

One of the more beneficial provisions of the Act for community banks is the change to the formula for determining the amount of federal deposit insurance premiums. Previously, assessments were based solely on U.S. account deposits, but the Act provides that assessments will be based on the difference between average total assets and average tangible equity. This change shifts the assessment burden toward those depository institutions that rely heavily on funding sources other than U.S. deposits.

The Act also increases the minimum reserve ratio for the federal deposit insurance fund from 1.15 to 1.35 percent over a 10-year period, which will be funded by assessments on insured depository institutions with total consolidated assets of less than $10 billion. The Act also permanently increases the deposit insurance limit to $250,000 per account and provides that noninterest bearing transaction accounts will be fully insured.

Interchange Fees for Debit Transactions

The Act grants the Federal Reserve the authority to prescribe rules to regulate the reasonableness of interchange fees charged by financial institutions with $10 billion or more in assets with respect to electronic debit transactions. The Act provides that the amount of interchange fees that issuers may charge must be “reasonable and proportional” to the cost incurred by the issuer.

For more information regarding the Act and how it may affect banks and other Indiana financial institutions, please contact Anthony Aaron.

Sept. 8, 2010

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.