Bernanke: Debit Interchange Proposal May Cause Banks to Fail

May 12, 2011

Bloomberg reports that Federal Reserve Chairman Ben Bernanke told lawmakers that there was “reason to be concerned” that the debit interchange exemption for smaller financial instructions wouldn’t be effective and may even result in bank failures.

“I can’t say with certainty, but I think there is good reason to be concerned about it,” responded Bernanke at a Senate Banking Committee hearing.

The Fed’s proposed debit interchange regulation caps swipe fees at 12 cents for transaction except for issuers with assets under $10 billion. If the exemption doesn’t produce the intended results, Bernanke warned, “it’s going to affect the revenues of the small issuers, and it could result in some smaller banks being less profitable or even failing,” he said.

Federal Deposit Insurance Corporation (FDIC) Chairman Sheila Bair also commented at the hearing that, should the exemption be ineffective, it will “stress” smaller financial institutions and result in more fees for customers, American Bankers Association CEO and President Frank Keating wrote in a press release.

“We had suggested that the Fed perhaps could use authority under Reg. E to require that the networks accept two-tier pricing, and our lawyers probably have a different perspective on that, and obviously that’s the Fed’s call as it is the Fed’s rule,” ABA reports that Blair responded. “So, if their view is that there is no reasonable authority to require that, I think it does become even more problematic. I do think that this is going to reduce revenues at a number of smaller banks and they will have to pass that on to customers in terms of higher fees, primarily for transaction accounts. That’s going to happen and again, is that the right result, is that the result Congress wanted? You need to determine that but I think that’s going to happen.”

Smaller financial institutions, including community banks and credit unions, have expressed concern they would be forced to accept the same debit swipe fees caps in order to stay competitive.

“The ABA has long held the view that the small-bank exemption will not work and cannot be made to work because having two prices for the exact same product is simply not sustainable in a free market.  As much as some in Congress might like to, they cannot overturn this basic law of economics,” wrote Keating following the hearing. “The potential harm to community banks and the consumers they serve resulting from the Fed’s debit interchange rule were not fully explored by Congress before it passed the Durbin amendment, which was never the subject of any hearings or studies. If the rule is allowed to go forward, the consequences for everyday Americans – especially lower-income consumers – will be detrimental to their financial bottom-line.” (Click here to read the full press release.)

The Electronic Payments Coalition commented that both Chairmen Bernanke’s and Bair’s testimony reinforces statements made in previous hearings this year expressing concern about possible consequences for community banks and credit unions.

“The nation’s senior economic policymakers continue to express concerns that small financial institutions and their customers will be harmed by the Durbin amendment, on the eve of intended implementation,” said Trish Wexler, spokeswoman for the Electronic Payments Coalition. “Why the rush? Slow this down and get it right before it’s too late.”

Also opposed to the Fed’s debit proposal are some of the country’s biggest banks and lenders, such as Bank of America Corp. and JPMorgan Chase & Co., which Bloomberg reports could lose more than $12 billion in annual revenue if the limit is enacted.  

The Fed pushed back the initial April 21 deadline for completing its debit interchange proposal in order to fully review the deluge of public comments on the regulation that were submitted. A bipartisan group, led by Sen. Jon Tester (D-MT) have submitted a bill that would delay implementation of debit interchange caps in order to allow the impact of any potential changes to be further examined.

When asked about the issue of further study, the National Retail Federation reports Bernanke stated, “We have plenty of information. That is not a problem.”

“Chairman Bernanke has made it clear not once but twice now that there is no need to delay swipe fee reform and the savings it will bring to American consumers this summer,” NRF Senior Vice President and General Counsel Mallory Duncan said. “The big banks claim they want a study, but the truth is that they want to kill reform. The Federal Reserve and the merchant community are committed to carrying out Congress’ intent to bring these fees under control. Big banks should not be allowed to take these savings away from retailers and their customers.” (Read full statement)

Click here to watch a video of Bernanke’s full testimony.

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