[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
UNDERSTANDING THE EFFECTS OF THE
REPEAL OF REGULATION Q ON FINANCIAL
INSTITUTIONS AND SMALL BUSINESSES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
MARCH 1, 2012
__________
Printed for the use of the Committee on Financial Services
Serial No. 112-104
----------
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HOUSE COMMITTEE ON FINANCIAL SERVICES
SPENCER BACHUS, Alabama, Chairman
JEB HENSARLING, Texas, Vice BARNEY FRANK, Massachusetts,
Chairman Ranking Member
PETER T. KING, New York MAXINE WATERS, California
EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois BRAD SHERMAN, California
GARY G. MILLER, California GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California JOE BACA, California
MICHELE BACHMANN, Minnesota STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan BRAD MILLER, North Carolina
KEVIN McCARTHY, California DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico AL GREEN, Texas
BILL POSEY, Florida EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK, GWEN MOORE, Wisconsin
Pennsylvania KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee
James H. Clinger, Staff Director and Chief Counsel
Subcommittee on Financial Institutions and Consumer Credit
SHELLEY MOORE CAPITO, West Virginia, Chairman
JAMES B. RENACCI, Ohio, Vice CAROLYN B. MALONEY, New York,
Chairman Ranking Member
EDWARD R. ROYCE, California LUIS V. GUTIERREZ, Illinois
DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York
JEB HENSARLING, Texas RUBEN HINOJOSA, Texas
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
THADDEUS G. McCOTTER, Michigan JOE BACA, California
KEVIN McCARTHY, California BRAD MILLER, North Carolina
STEVAN PEARCE, New Mexico DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri GREGORY W. MEEKS, New York
BILL HUIZENGA, Michigan STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin JOHN C. CARNEY, Jr., Delaware
FRANCISCO ``QUICO'' CANSECO, Texas
MICHAEL G. GRIMM, New York
STEPHEN LEE FINCHER, Tennessee
C O N T E N T S
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Page
Hearing held on:
March 1, 2012................................................ 1
Appendix:
March 1, 2012................................................ 21
WITNESSES
Thursday, March 1, 2012
McCauley, Cliff, Senior Executive Vice President, Frost Bank, on
behalf of the Independent Bankers Association of Texas......... 3
Pollock, Alex J., Resident Fellow, American Enterprise Institute. 5
APPENDIX
Prepared statements:
Maloney, Hon. Carolyn:....................................... 22
McCauley, Cliff.............................................. 24
Pollock, Alex J.............................................. 29
Additional Material Submitted for the Record
Maloney, Hon. Carolyn:
Written statement of John Durrant, Managing Vice President,
Small Business Banking, Capital One Financial Corporation.. 33
Renacci, Hon. James:
``The Hamilton Financial Index: A semi-annual report on the
state of our financial services industry,'' dated February
2012....................................................... 35
Written statement of the Independent Community Bankers of
America.................................................... 86
UNDERSTANDING THE EFFECTS OF THE
REPEAL OF REGULATION Q ON FINANCIAL
INSTITUTIONS AND SMALL BUSINESSES
----------
Thursday, March 1, 2012
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 9:34 a.m., in
room 2128, Rayburn House Office Building, Hon. Shelley Moore
Capito [chairwoman of the subcommittee] presiding.
Members present: Representatives Capito, Renacci,
Luetkemeyer, Canseco; Maloney, Hinojosa, and Scott.
Also present: Representative Green.
Chairwoman Capito. We will go ahead and get started. Mrs.
Maloney is busy elsewhere, but she said to go ahead and get
started.
Would the witnesses to take their seats?
I want to thank everybody for coming today, and the hearing
will come to order. We are scheduled to have a vote between
10:15 and 10:30, so we will see what happens.
I am going to give my opening statement.
In the wake of the stock market crash and the financial
crisis leading up to the Great Depression, many steps were
taken to enhance regulation of the financial sector. One such
item was the Federal Reserve prohibition on banks paying
interest on demand deposit accounts, commonly referred to as
Regulation Q or Reg Q.
In the years leading up to the crash, there was an
increasing trend of financial institutions competing with each
other by offering higher interest rates on demand deposit
accounts.
In 1933, Federal regulators responded by promulgating Reg
Q, which prohibited the payment of interest on demand deposits.
That is a little history lesson there for me and for you.
Since then, banks have utilized tactics to avoid the
effects of Reg Q. In some cases, banks effectively paid
interest to businesses by offering them sweep arrangements in
which business deposits were transferred from business checking
accounts, invested into commercial paper or repurchase
agreements or mutual funds at the end of each day, and then
transferred back the next day.
The Dodd-Frank Act included the repeal of Section 19(i) of
the Federal Reserve Act in its entirety, thereby striking the
statutory authority under which the Federal Reserve issued Reg
Q. Since July 21, 2001, banks have been able to pay interest on
business checking accounts on a voluntary basis.
The repeal of Reg Q has been debated in the House of
Representatives over the last decade. In fact, the House voted
almost unanimously several times to move legislation that would
have included a repeal of Reg Q.
That said, we are in a much different environment coming
out of the financial crisis, and our witnesses will provide
important insight into the effect the repeal of Reg Q is having
on financial institutions and small businesses.
Since Mrs. Maloney is not here for the purpose of giving an
opening statement, I would like to recognize Mr. Canseco for 2
minutes.
Mr. Canseco. Thank you, Madam Chairwoman. And I thank you
and welcome our witnesses here today.
Mr. McCauley, it is always good to have someone from San
Antonio here as a witness. So thank you for being here today on
this panel.
And thank you, Mr. Pollock, for coming.
Today, we examine the impact of banks now being allowed to
pay interest on demand deposit accounts, the last vestige of a
law that Congress passed during the Great Depression.
While the repeal of this last vestige of Reg Q has, by and
large, been supported by industry participants for years, there
is now concern amongst a number of community banks that Reg Q's
repeal could leave them at a further disadvantage versus their
larger counterparts.
I believe it is important today to hear the merits of both
sides of this argument. While we, as Congress, should take
measures that responsibly lift the burdens off of community
banks, we must also make sure that we foster a competitive
marketplace that takes into account the capabilities of banks
of every size, as well as small businesses.
Again, I thank Mr. McCauley and Mr. Pollock for being here
today, and I look forward to our discussion on Reg Q. I yield
back.
Chairwoman Capito. Thank you.
Mr. Scott, would you like to make an opening statement or--
Mr. Renacci, do you wish to make an opening statement? No?
Mr. Luetkemeyer? No?
We are having a dearth of opening statements, so back to
you again, Mr. Scott.
Mr. Scott. Oh.
Chairwoman Capito. I am sorry to rush you. Take your time.
Mr. Scott. No problem. This is a very, very important
hearing. And I certainly want to thank you, Madam Chairwoman,
for holding this hearing to get the impact of the repeal of
Regulation Q.
As we know, Dodd-Frank rescinded Regulation Q, which had
prohibited banks from paying interest on business checking
accounts. And after its repeal, member banks and Federal
savings associations could pay interest on demand deposit
accounts, but they are not required to do so.
Some supporters of Regulation Q's repeal have stated that
small banks have been put at a competitive disadvantage due to
their inability to cut fees in contrast with larger banks. And
supporters for the repeal also include some small businesses
that claim that they could not earn interest on their fee
deposits, nor could they negotiate fee reductions.
So repeal of Regulation Q brings with it significant
changes to the calculation of the account analysis for banks.
In response to the passage of Dodd-Frank and Regulation Q's
repeal, banks have several options in choosing to respond. One
option is paying hard interest on the entire average account
balance and thereby eliminating the soft interest credit.
Another option is to proceed with paying a soft earnings credit
on that portion of the average balance required to offset
service charges, then paying hard interest on excess balances.
And of course, banks could opt for no change and pay no
interest at all. I would be interested during this hearing to
discover both the benefits and the risks of each of these
options and what effect each of these options would have on the
affected institutions as well as on the economy in general.
Thank you, Madam Chairwoman. I look forward to the
witnesses.
Chairwoman Capito. Thank you.
I think that will conclude our opening statements. So I
would like to take the opportunity to introduce the panel of
witnesses for the purpose of making a 5-minute presentation,
and then we will begin questioning.
First, we have Mr. Cliff McCauley, senior executive vice
president of the Frost Bank of Texas.
Hold on just a second here. I see Mrs. Maloney is here.
Without objection--
Mrs. Maloney. My apologies.
Chairwoman Capito. No problem.
Mrs. Maloney. I thought it was at 10:00. Like Pavlov's dog,
whatever the usual time is, is when I show up.
Okay. Thanks.
Chairwoman Capito. I was just recognizing Mr. McCauley. He
is going to make his statement. Welcome.
STATEMENT OF CLIFF MCCAULEY, SENIOR EXECUTIVE VICE PRESIDENT,
FROST BANK, ON BEHALF OF THE INDEPENDENT BANKERS ASSOCIATION OF
TEXAS
Mr. McCauley. Chairwoman Capito, Ranking Member Maloney,
and members of the subcommittee, my name is Cliff McCauley. I
am senior executive vice president of Frost Bank, headquartered
in San Antonio, Texas.
For the last 20 years, my primary area of responsibility
has been leading our correspondent banking line of business. I
appreciate the opportunity to testify on behalf of the
community banking industry about the potentially devastating
effects of the repeal of Regulation Q.
In my role of working with community banks for over 30
years, I have become very familiar with the balance sheet
structure and business model that has developed over the
decades as they serve their communities and customers.
One very important part of this basic structure is the
relationship that exists between banker and small-business
owner. This model is built on relationship, service, close
knowledge of the business, and credit support. This has been
possible because of the longstanding effects of Regulation Q
and is the foundation of the banker-business relationship.
The demand deposit account, or DDA, is the primary
transaction account and repository for working capital of
virtually every small business. It has been argued that for too
long banks have denied paying interest on DDAs and that it
would only be fair for small businesses to earn that interest
on their daily balances.
There are many ways to measure value, and certainly
investment dollars should be paid an expected return. But as
mentioned previously, DDA transaction accounts are not
investment accounts. They are working capital accounts with
significant movement of funds to meet the needs of the
business.
With the other account type restrictions of Reg Q being
lifted many years ago, savings or investment funds have had the
ability to earn a return and that process is very mature. The
business DDA also has a value on a return, not just on interest
dollars earned. It helps to support the relationship to cover
service costs and to provide credit support for that business
in a way that is meaningful.
Without these balances to support the relationship,
businesses will be faced with higher service fees and increased
borrowing costs.
These business DDA volumes also provide the pool of fixed-
rate deposits that are so critical for the community bank
model.
These business DDA deposits that are competed for based on
service and relationship support are the vital source of funds
that community banks use to make fixed-rate loans and purchase
fixed-rate securities. These fixed-rate loans allow small
businesses to enter into new ventures with borrowing cost
certainty and thus create the new jobs that are so critical to
our communities and our national economy.
Community banks are also the largest purchasers of local
municipal and public entity debt issues that are so critical to
the progress of our rural and less populated communities.
If a community bank no longer has a stable fixed-rate
source of deposits to use to purchase fixed-rate local bonds
without incurring unreasonable interest rate risk, it will
require local entities to pay a higher interest rate to attract
purchasers, further hurting their already strained budgets.
If the repeal of Reg Q is allowed to stand, and business
DDA accounts succumb to the enticements of the highest bidder,
the negative effects to community banks and small business are
clear.
So who will be the beneficiary? It is my opinion that the
too-big-to-fail institutions will utilize this new tool to
attract deposits in the future since FDIC insurance premiums
are now calculated on total assets rather than domestic
deposits.
With their incentive to fund their balance sheets with
wholesale funding now gone, paying interest on business
checking will be an option to replace those dollars with a more
stable source of funding.
If this does happen, it is unlikely that those funds will
remain in the community for local purposes and small businesses
will find themselves on their own in times of unforeseen need.
There is another side effect to the repeal that must be
considered and that is the Transaction Account Guarantee
program, or TAG, that gives unlimited FDIC coverage to non-
interest-bearing balances. The irony of the repeal of Reg Q is
that once interest is paid on these balances, the guarantee
reverts to the $250,000 limit, which is not adequate for many
businesses' primary transaction account.
With the unquestionable support of the Federal Government
of these too-big-to-fail institutions, the community bank is at
a significant disadvantage. I have heard many times that the
desire is to eliminate too-big-to-fail, but actions such as the
repeal of Reg Q play right into the vantage of those
institutions.
For those businesses that from time to time do have
investable funds, there is a better way to meet their needs and
keep the funds in the local community banks without the repeal
of Reg Q. Amending Regulation D to increase the number of
allowable transactions in a money market account to not more
than 30 per month would allow those banks and businesses
desirous of an interest paying and earning relationship to do
so without destroying the foundation of most community banking
franchises.
There is still time to fix the problematic effects of this
repeal while interest rates are at historic lows by reinstating
Reg Q and passing Chairman Neugebauer's H.R. 2251 that
accomplishes the amendment to Regulation D previously
mentioned.
I appreciate the opportunity to be here today, and I will
be happy to answer any questions.
[The prepared statement of Mr. McCauley can be found on
page 24 of the appendix.]
Chairwoman Capito. Thank you.
Our next panelist is Mr. Alex J. Pollock, resident fellow,
American Enterprise Institute.
Welcome.
STATEMENT OF ALEX J. POLLOCK, RESIDENT FELLOW, AMERICAN
ENTERPRISE INSTITUTE
Mr. Pollock. Thank you, Madam Chairwoman, Ranking Member
Maloney, and members of the subcommittee.
While I am not from San Antonio, Congressman, I am from
banking. I have lots of friends in the business from many
decades.
In the past, during the 1970s, when I criticized the theory
and effects of Regulation Q to one of those friends, these
effects being to transfer huge amounts of money from small
savers and from small businesses to banking profits, this
friend who was a bank lobbyist memorably told me: ``You have to
understand, Alex, that Regulation Q is so embedded in the
American banking system that it is permanent!''
This was a poor prediction, of course, as it turned out,
although it took until 2011 to be completely falsified.
Because under Regulation Q banks were prevented by the
government from paying interest on business demand deposits for
so long, cumbersome methods were developed to compensate for
this regulatory rigidity, as the chairwoman pointed out in her
opening remarks. The Regulation Q effect on business demand
deposits was also to encourage complex, implicit pricing
arrangements, instead of clear, explicit pricing. This made
things more difficult for small companies, which didn't and
don't have internal bureaucracies.
As a small-business witness testified to the Senate Banking
Committee, for example: ``When I started my first business, I
can recall vividly my astonishment at being told a business
could not earn interest on its checking account. Later, as the
business prospered, my banker suggested a sweep account. Boy,
was it a paperwork nightmare.''
This witness rightly asked why the government should force
this complication on small business. Why indeed? It shouldn't.
Last year's repeal of the final remaining vestige of
Regulation Q's 1930s thinking, as the chairwoman pointed out,
at long last completed a pro-competitive process, which began
with the Monetary Control Act of 1980. This final repeal was
and is a good idea. We can easily see this by asking and
answering half a dozen simple questions to clarify the
economics of the matter.
If we want to have a competitive market economy, should
Congress engage in price-fixing to benefit banks? Obviously
not.
Should Congress prevent depositors from getting interest
income that banks would be willing to pay? Obviously not.
Is it the business of Congress to try to prop up banking
profits, for any kind of bank? Obviously not.
Should Congress force depositors to subsidize borrowers?
Obviously not.
Does Congress know the right price for a business checking
account? Obviously not. Only the competitive market can
determine this, and it might determine multiple varieties of
answers to that.
Should Congress promote competition in banking to the
benefit of customers? Obviously, yes. That could hardly be more
clear.
Moreover, the whole history of Regulation Q, as discussed
in my written testimony, displays the folly of such regulatory
schemes.
Customers are better served by encouraging competition than
by suppressing it. This is especially true for smaller
customers who lack negotiating power and are price-takers in
the market, not price-makers.
To address quickly the specific questions asked by the
committee:
``Has competition for business checking accounts
increased?'' To some extent, but because the Federal Reserve,
as we all know, is manipulating short-term interest rates to
approximately zero, I wouldn't expect to see major results at
this point. We will see more when interest rates rise, as they
inevitably will. But since we are in a time of zero interest
rates, it is in fact a good time to do this transition--it
makes it easier.
The subcommittee asks, ``Are you concerned with unintended
consequences?'' No.
``Will small businesses benefit?'' Yes. Regulation Q
certainly caused subsidies to be extracted from small business
depositors and transferred to banking revenues. This should be
removed.
``How about the Federal Reserve's statement that this will
get greater clarity in pricing?'' I do believe that explicit
pricing is clearer and better than implicit pricing.
In conclusion, Madam Chairwoman, about 35 years after my
bank lobbyist friend told me it was impossible, we have finally
arrived to the truly post-Regulation Q world, and this is a
good thing.
Thank you again for the opportunity to be here.
[The prepared statement of Mr. Pollock can be found on page
29 of the appendix.]
Chairwoman Capito. Thank you. I want to thank you both.
I am going to put a general question out, and then I would
like to hear both of your responses.
I guess I would like an assessment, if you have an
assessment now, of how many institutions are actually offering
interest on demand. I think Mr. Pollock addressed the fact that
it is probably very low because of interest rates in general.
Mr. McCauley, you talked about the relationship between the
repeal of Reg Q and the TAG program with the FDIC and what kind
of relationship there is and might be because the TAG program
is set to expire, I believe, at the end of this year.
Do we really have a complete picture, because of the low
interest rates and maybe the TAG program as well, what the
landscape will really be under the repeal of Reg Q?
So, Mr. McCauley, if you could kind of generally respond to
those questions?
Mr. McCauley. Sure. I think you are exactly right. Right
now, there is very little movement because rates are at
artificial lows and the entire banking system is awash in
liquidity. So there is very little competition for deposits
right now.
We will not see the effects of the repeal of Reg Q until
monetary policy changes the excess reserves that are in the
system and we start seeing an increase in interest rates.
At that point down the road is when it is going to become
very critical and it is going to really--the effects of it are
going to be seen within the banking community.
The TAG program is--the irony is that it is only for non-
interest-bearing balances. And when you pay one basis point of
interest on there, the TAG goes away.
Chairwoman Capito. Right.
Mr. McCauley. It was put in place to help the community
banks compete with the too-big-to-fail institutions with the
implicit guarantee of the Federal Government.
Chairwoman Capito. Do you have any idea of how many
institutions are currently choosing to pay interest on--
Mr. McCauley. There are very few. Some of the large
national institutions that have huge advertising budgets and
are in need of deposits to fund credit card portfolios have
made some moves in this regard.
And that further, by being able to do that, they have the
possibility of disintermediating the funds from community
banks. In today's world of electronic banking, you can bank
anywhere. And so once those funds to chase interest earned on
those demand deposit balances leave the community bank, then
they are not going to be used in that local community.
Chairwoman Capito. Mr. Pollock, do you have a response to
my questions? How many? And have we really seen the full effect
and will we see it going forward in relationship to the TAG
program?
Mr. Pollock. As I said in my testimony, Madam Chairwoman,
we wouldn't expect to see a big effect now. This actually is a
good time, as I said, to do the transition, so people can get
ready.
As far as TAG goes, Mr. McCauley rightly said that there
are a lot of things you are, as a customer, evaluating when
deciding who to do any kind of business with, including banking
business. You might like the local knowledge of a local bank.
You might like the relationship. You are going to weigh that
against the way it prices its deposits, the way it prices its
credit.
You might include the fact that if I just forego interest,
I can get an unlimited government guarantee on my money. You
will put that into your decision.
What we ought to be doing always, in my opinion, in public
policy is letting that competitive market work out those
various tradeoffs because there is no way for anybody to sit in
the central place and say this is how it should work. It is why
we have a competitive market: to figure out the right answer.
Chairwoman Capito. In terms of, you mentioned the
electronic banking, and certainly that is the way things are
done now, will continue to be done in such a rapid-fire manner.
And I think that is a good thing, because it really does move
to the ease of customer satisfaction and it creates more of a
national or international banking scenario when you can move
your funds around rather quickly.
Do you think that--so you are envisioning, Mr. McCauley, a
situation where the money is just going to be chasing the
highest rate without the relationships that are born in a
community bank. Is that essentially--
Mr. McCauley. Yes, my experience in working with community
banks for a long, long time is that the rate sensitivity of
their customers is one of the highest things that they worry
about. Customers will move for 5 basis points, 10 basis points,
not really looking at the long-term ramifications of that.
That is fine with investment dollars because you are going
to put those into a term investment and you are going to try to
maximize your return.
When you start taking the transaction account so you have a
community banker and a small business there, and they are
enticed to move that money to the highest bidder, and say it is
a credit card bank from out of territory that wants to fund a
credit card portfolio, they can obviously pay a higher interest
rate than the community banker can because of the returns on
our credit card portfolio.
Once those funds leave that community bank to be deployed
by that other bank, and those deposits are made electronically,
they come out of that community in which they were originally
deposited, that small-business owner then loses the support.
I hear many, many times from community bankers that this
foundation of the relationship with the DDA is the reason that
they stand behind their customers, because they support the
balance sheet of the local community bank.
Chairwoman Capito. My time has expired here so--
Mr. McCauley. Okay.
Chairwoman Capito. --I don't want to violate my own rules
here.
Mrs. Maloney is recognized for 5 minutes for questioning.
Mrs. Maloney. Thank you. And I thank both panelists. And,
Madam Chairwoman, thank you.
First, I request unanimous consent to place into the record
testimony from John Durrant, managing vice president of small
business banking at Capital One Financial Corporation.
Chairwoman Capito. Without objection, it is so ordered.
Mrs. Maloney. Capital One introduced clear interest banking
checking. And this is the first bank, as I understand it, to
market a business checking account that will offer high
interest checking rates for the first 12 months and a market
competitive rate thereafter. So thank you for accepting it.
And I would first like to respond to your testimony, Mr.
McCauley. You characterized this action with Regulation Q as
sort of a last minute, 11th hour action. But legislation has
been pending, as Mr. Pollock mentioned, for many, many years.
Since 1979, I found legislation calling for the repeal of Reg
Q, possibly even before that.
And several times, literally several times, it has been
debated on the Floor of Congress and passed by a wide margin on
the Floor of Congress. And the longer I stay here, the more I
really respect anything that can get a majority vote on the
Floor of Congress, much less a wide margin.
I recall, along with many of my colleagues, having sat
through numerous, numerous, numerous hearings, one chaired by
your predecessor, Sue Kelly, who was Chair of this committee at
one point, on this legislation of which she was the lead
sponsor.
So clearly, this is not a new, undebated issue. It was
offered on the Floor of Congress when Dodd-Frank was being
debated. But I just wanted to clarify that it wasn't an 11th
hour amendment. It had passed this body numerous times, passed
out of this committee numerous times.
I would like to ask you about the sweeps process and if you
could elaborate on it. As Mr. Pollock mentioned and others
mentioned, there have been numerous attempts to try to go
around Regulation Q prohibition since it was enacted in Glass-
Steagall, one of which is the sweeps, the automatic transfer of
one's savings accounts to one checking accounts. And many
financial institutions have benefited from this practice,
offering the service to their customers and collecting fees.
So I would like to know, has your bank taken advantage of
these sweep activities and those like them? What are the fees
for the sweep activities? How prevalent are they in your bank?
Is it prevalent throughout the system?
If you could comment on the sweeps, the automatic transfer,
and what the fees are and exactly how it works? Is it
automatic? Do they opt into it--exactly how it works and have
you been benefited from this and what the fees are?
Mr. McCauley. Sweep accounts have been around for a long
time, as already previously stated. Sweep accounts are mainly
available to larger corporate entities, more sophisticated
depositors that have larger amounts to sweep. There is a cost
to that, the fees associated with it on a daily basis. It can
either be a hard dollar figure, or it can actually be a spread
of a few basis points.
Mrs. Maloney. But how much is it usually, like $100, $35?
What is the usual average sweep fee?
Mr. McCauley. As far as hard dollars on a monthly basis?
Mrs. Maloney. Yes.
Mr. McCauley. It varies from institution to institution. I
would say it would be less than $100 per month from the
standpoint of a hard dollar fee if you looked at an average.
However, those sweep accounts have not been really
available to smaller businesses, to smaller entities and to
smaller financial institutions. That is the main concern, that
they have never been able to do that, they didn't have the
sophisticated systems to be able to do that, nor did they have
the size of customers that would benefit from that.
And that is why we suggest the amendment of Regulation D to
allow on-balance-sheet sweeps, if you will, to keep that money
in the community bank.
Mrs. Maloney. Okay. My time is almost up. I would like to
ask Mr. Pollock, the main concern that I hear from my
constituents, the small-business owners, is that they are
forced to dedicate time and energy to transferring funds from
one account to another to earn interest, and they say that they
could better use this time serving clients and helping them
grow their businesses.
How will this help them grow and create jobs, the number
one concern before Congress, this elimination of Reg Q? And why
do you think it has taken so long for this to happen, and why
did they put it in there in the first place? I know you are a
historian, too.
Mr. Pollock. Thank you, Congresswoman.
Of course, your small-business customers are right. They
are engaging in this bureaucracy and trying to move things back
and forth only because Congress put in this prohibition, which
was then mirrored in the Federal Reserve's regulation. Congress
caused this complication and expense to happen.
If you go back to 1933, in the banking act of that year,
you will find that among the things Congress was trying to do
with what became Regulation Q was to prop up banking profits by
giving banks what seemed like free--or interest-free at least--
money.
There was a lot of cartel-like thinking in the 1930s, which
was displayed in a lot of the New Deal regulation. The
regulators were viewed as a sort of cartel manager, as the
Federal Reserve was in this case, to preside over a deposit
product cartel where we fix the prices by regulationin order to
try to prop up baking profits. This is not a good reason, I
think we can say.
Mr. Renacci [presiding]. Thank you.
I am now going to recognize myself for 5 minutes.
First off, I want to say that I am concerned about
community banks being able to meet the requirements of many of
the regulations of Dodd-Frank and being able to compete. But on
this issue, I am trying to get a handle on it, and the way I
have spelled it out is pre-repeal, small community banks did
not pay interest. And large banks already sidestepped the issue
by having sweep accounts.
Post-repeal, small community banks are not paying interest
because interest rates are too low. And large banks are still
sidestepping the issue by having sweep accounts.
So in essence, I think I heard, Mr. McCauley, in your
testimony that nothing has really changed at this point till
liquidity gets back into market.
But I question, even after the repeal, if pre-repeal, the
large banks were already doing this, then post-repeal, aren't
the small community banks really just going to be competing
with themselves, between themselves, as the first institution
maybe starts to put an interest on that account, and then the
small community bank down the street has to do it?
I realize it is a cost. I was a small-business owner for 28
years. But I also believe in competition. So I am trying to
just sort through that. And maybe you can tell me your thoughts
on that.
Mr. McCauley. Historically, community banks have competed
with each other, but it has been based on a level playing field
of a zero interest rate for transaction accounts. They had to
compete on the basis of service, relationship, knowledge of the
business, and credit support. So there is no pure form of
competition in that. When you get into a bidding war, it is an
auction. It is going to the highest bidder.
As was already previously mentioned, the number one player
so far has been Capital One, it is on the record, and they are
doing that to fund a displaced credit portfolio that is not
part of the local community.
So it is not only the competition within the community--
sure, there is going to be competition between community
banks--but now, with the outside competition coming in and
being able to pay a much higher rate than any community bank
could.
The other part of it is that the downside of that is it is
going to result in higher borrowing cost. Everybody focusing on
just the interest earned, that is one side of it. But when you
take a bank and you make their entire balance sheet floating
rate as far as their liabilities--the deposits--it is going to
be very problematic for them to make fixed-rate loans. They are
not going to be able to do it.
And so without those fixed-rate loans and that borrowing
cost certainty, it is going to have a major impact on the
small-business borrower who, many times, is also the small-
business depositor. And so, there is another side to this with
the borrowing cost and also investment in supporting local
communities and their bond issues. Community banks, excuse me.
Mr. Renacci. I was going to say, ultimately, I do
understand that and I agree. The loser in this will always be--
and it is sad to say--the consumer because as costs go up, as
you increase your interest, you are going to have to charge a
higher cost in the banking system to pay a loan. So I do
understand that. That is why it is interesting to hear this.
But ultimately, I am still trying to go back to the small
banks versus the large banks because I think you made that
statement earlier. Do you believe, based on the system pre-
repeal, that there is a real difference since the large banks
are already using sweep accounts?
Mr. McCauley. The large banks have historically used it for
larger customers. They didn't necessarily use that with small--
it really has to do with the volume of funds that the customer
has. A small customer in a larger bank did not utilize a sweep
account.
Mr. Renacci. Mr. Pollock, your thoughts on this?
Mr. Pollock. Congressman, I am with you on competition. The
winners from competition are consumers and customers of all
kinds. That is always true.
When we talk about money trying to be channeled in one
place or another by regulation, we typically end up with
inefficiencies and consumers losing. If the people in small
towns, let us say, choose to put their money in a demand
deposit with a credit card bank, at the same time those people
are using the credit cards of that bank and spending the money
in the local stores.
If we sit back, as I said before, from the center and try
to say, we are going to design a set of rules to make all these
flows work out the way we want, we will make them work much
worse than a competitive market will.
Mr. Renacci. Thank you. I am running out of time. So I will
recognize Mr. Hinojosa for 5 minutes.
Mr. Hinojosa. Thank you, Congressman Renacci.
I want to acknowledge Chairwoman Capito and Ranking Member
Carolyn Maloney. I commend them for holding today's
congressional hearing on the effects of Regulation Q.
I believe the repeal of Regulation Q has the potential to
have a damaging effect on our community banks, which in turn
may hurt the small businesses, some of our local school
districts, and other entities that overwhelmingly rely on
community banks for small-business loans.
I appreciate the concerns of my colleagues that Regulation
Q represents an intrusion into the banking practices. I would
counter, however, that we also should listen to the small banks
that fear the effects of this repeal.
They are the banks serving rural America and other
underserved areas which larger banks deem unprofitable. They
are the banks making the loans to small businesses. They are
the banks with relationships forged in those communities.
I would ask my colleagues on both sides of the aisle to
listen to and consider the concerns expressed today.
My question for Mr. McCauley is, in my district in deep
south Texas, community banks and credit unions are very
important to the small businesses and to the families who have
taken advantage of the low fixed mortgage rates that community
banks are able to provide. Variable-rate mortgages were one
component of the subprime crisis and encouraging fixed-rate
mortgages, especially in underserved areas, as I mentioned.
It is important to protect the future health of the housing
market. I would like to hear your prediction, sir, for how the
repeal of Reg Q will affect the ability of community banks to
provide fixed-rate loans to home buyers, and also tell me how
this might affect the operations of community banks in those
underserved areas in general.
Mr. McCauley. Thank you, Congressman.
Yes, I am very familiar with your district and the
community banks. I work with very many of them in your
district.
Mr. Hinojosa. We are pleased to have your chain of banks in
deep south Texas. You all do a wonderful job.
Mr. McCauley. Great. Thank you.
The fixed rate at zero deposit base that community banks
have, statistics will show that it is about 20 to 25 percent,
and most community banks have a non-interest-bearing deposit
base of about 20, 25 percent. They have historically used this
to make those fixed-rate loans, many of those to home buyers in
those rural areas where no mortgage company is going to make
that loan. And you are very aware of that. It is very
problematic.
Without community banks making those fixed-rate home loans
to those borrowers, it would be very difficult for them to get
a mortgage and thus to purchase a home.
With the inability to have with certainty, rate certainty,
to know that you have this base of fixed-rate deposits at zero
to margin off of or make a reasonable spread on and make those
mortgage loans, the banks won't be able to do it.
They could utilize higher cost Federal Home Loan Bank
borrowings to match fund off of that, but it will be a higher
cost to the borrower because those funds do have a cost to them
versus the base of DDA deposits that they have always had.
So it is not only just the fixed-rate loans that they are
able to make to the businesses, but also every community bank
that I know does support their local community by making these
mortgage loans and they are able to use fixed-rate funding
because of that deposit base that they have with certainty.
And without that, the cost of borrowing will go up or they
will go to variable rate mortgages which can be quite
problematic in a rising rate environment.
And I think it is where we are right now. You are going
to--the downside to community banking is, is to put them in a
liability-sensitive position with rising rates and the deposit
side of their balance sheet increasing in rate.
If they do have fixed-rate loans on the books, it is going
to put them into a negative spread reminiscent of the S&L
crisis. So they are going to be very cautious about making
those.
Mr. Hinojosa. In your opening remarks, you said that it
would be some time--and I don't know exactly how long--before
we really see what financial effect it would have on our
community banks. Give me a timeline in your opinion of how long
that would be?
Mr. McCauley. That is anybody's guess. The Federal Reserve
has put out that they are proposing to hold rates near zero
through 2014. But we know if inflation does return or
unemployment does reduce at a rate, that the Federal Reserve
will have to start moving to control those, and it could move
some predictions, the rates will move up very fast to control.
When that will be, I don't know. But if you look at just
when you return rates to anywhere, the Fed funds rate and a
normal rate between 3 and 5 percent, which is very normal over
time, it will be devastating as far as the marginability of the
banks, not from a profit standpoint, but being able to provide
those loans at a fixed cost to the borrower, fixed-rate loans
whether it be mortgage or a small business.
Mr. Hinojosa. Thank you. My time has expired. I yield back.
Mr. Renacci. Thank you.
Before I recognize Mr. Luetkemeyer, I would like to ask
unanimous consent to insert 2 items into the record: a
statement from the Independent Community Bankers of America;
and the Hamilton Financial Index.
With that, I recognize Mr. Luetkemeyer for 5 minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
I would just like to start out with a quick story. In our
local bank, the local officer, loan officer one day was
confronted by an elderly gentleman who had a large deposit, a
lot of money in the bank, and he wanted to ask him for a higher
interest rate on his deposits because he thought he had enough
money in there that he deserved more interest on his deposits.
And so the loan officer said, ``I would love to give that
to you, John, but your son, Robert has a loan with us on his
car, a loan with us on his house, and a loan with us on his
farm. And if you take the money out, we are not going to be
able to loan him that money, number one. And number two, if we
pay you more, we have to charge him more. Now, what do you want
us to do?''
And that, to me, is what is going on here, is that while
Reg Q was there initially for a stated purpose, of which I am
not sure--I would like to have a discussion with Mr. Pollock in
1 minute here about profits on it, but at some point the
dollars that we are using to make loans to small businesses and
individuals come from the deposits of the community generally.
And the rates that are charged on those loans are
reflective of what deposits are being paid so that there is a
margin there. And if you pay more for deposits, you are going
to charge more for the other services. That is the way it
works. You have to maintain a margin on your interest rates as
well as a profit margin to be able to keep your doors open.
So I am not sure exactly why they think this is a good deal
because I think we are taking from one group and giving to
another. We are picking winners and losers here over who has
checking balances with us and who has loans with us. And I am
not sure we need to be in the middle of doing that.
And so I guess a quick question for you, Mr. McCauley, is
what percentage of your business deposits or what percentage of
your deposits or business deposits versus personal deposits
that you have in your bank?
Mr. McCauley. Within our organization, we are primarily a
commercial bank and so it would be predominantly commercial
deposits versus retail.
Mr. Luetkemeyer. Okay. Does your loan portfolio reflect the
same amount of commercial loans versus personal loans then as
well?
Mr. McCauley. Absolutely.
Mr. Luetkemeyer. So you have tied them together pretty
well?
Mr. McCauley. Absolutely. And I think almost every banking
franchise does.
Mr. Luetkemeyer. Right. So as a result, if you pay more for
the deposits for your commercial deposits--or pay more for your
commercial deposit--you are going to have to charge more for
your commercial loans. Is that not right? It is pretty
reflective.
Mr. McCauley. Right. It is a simple yes.
Mr. Luetkemeyer. Okay. With regard to the transactional
account guarantee, how impactful do you think it will be if we
allow this thing to expire, to your bank in particular?
Mr. McCauley. I think it would be devastating to the
community bank market. The implicit guarantee of too-big-to-
fail has not been eliminated. And if you have any depositor who
has any concerns, it is easy for the too-big-to-fail bank to
say simply you don't have to worry about insurance limits with
us because we know the government is not going to let us fail.
It will be devastating. It has leveled the playing field.
We would like to say it is a level playing field, but we know
it is not, and that the sovereign support credit given to the
too-big-to-fail banks is very real. And customers are very,
very educated about that.
So, deposits will flow out of the community bank market to
those too-big-to-fail institutions in excess of the $250,000
limit when and if it is allowed to expire.
Mr. Luetkemeyer. So as a result of that, do you feel that
the dollars that are generated in a local community, that the
local businesses are making, and then they would take those
dollars out, and you would have less money to loan back to
create more businesses and help more local folks?
Mr. McCauley. Absolutely. Most businesses require more than
$250,000 to maintain the transaction of their business.
Mr. Luetkemeyer. Mr. Pollock, would you agree with that?
Mr. Pollock. I am not sure what ``that'' is, Congressman. I
am sorry.
Mr. Luetkemeyer. Mr. McCauley and I were discussing the
transaction account guarantee and that if it expires at the end
of the year, it is going to have a significant effect on
especially small institutions as a result of the fact that the
too-big-to-fail guys are able to point to that fact and the
deposits will sort of gravitate that way. Do you feel that is
accurate?
Mr. Pollock. Thank you, Congressman.
I do think there is in depositor behavior a looking to the
bigger banks as safer. With respect to TAG, I do think there is
an argument that if you are going to have the government
guarantee the liabilities of banks, that such a deposit
insurance system might have an unlimited amount for demand
deposits, as opposed to investment accounts, as Mr. McCauley
says. There is a reasonable argument to that. It all ought to
be priced fairly.
Mr. Luetkemeyer. Are we not--do the banks pay insurance on
these accounts?
Mr. Pollock. Absolutely.
Mr. Luetkemeyer. So in other words, the larger accounts are
already insured by the FDIC?
Mr. Pollock. Yes.
Mr. Luetkemeyer. And you are paying insurance on that?
Mr. Pollock. Yes, this is a totally bank-funded--
Mr. Luetkemeyer. Okay.
Mr. Pollock. --insurance program.
And it should be, and that insurance premium, Congressman,
needs to be a fair price. The government learns over and over
that underpricing government guarantees of private liabilities
is a big mistake, including in deposit insurance. We have
learned that lesson.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
Mr. Renacci. Thank you.
We have votes in about 10 minutes, so if the Members would
be amenable, what I will try and do is, we have two Members
left. We will get the two Members in, and then close the
hearing.
So I recognize Mr. Scott for 5 minutes.
Mr. Scott. Thank you very much.
Mr. McCauley, Mr. Pollock, let me ask you, for those banks
that are adjusting to this repeal of Reg Q, what would each of
you recommend that they do to ensure that access to capital
does not diminish while at the same time making sure that their
operations are sound and stable?
Mr. Pollock. Is that to me, Congressman?
Mr. Scott. Yes, to each of you. I would like to get both of
your responses. What are the recommendations to those that are
adjusting so that they can stay viable?
Mr. Pollock. Congressman, that is, in my view, a variation
on asking about the relationship of depositors and lenders. As
I said in my testimony, we should not be trying to force
depositors to subsidize borrowers. That is a mistake. We
shouldn't force borrowers to subsidize depositors. That is why
we want competitive markets, to establish prices among all of
the actors in the markets.
I don't think we ought to be about, as a matter of public
policy, guaranteeing that any particular competitor has funds
at any particular price. I don't think trying to fix the price
of funding or of any product in any business by the government
is a good idea. That takes away the amazing power of
competitive markets, which is what we ought to want to have in
banking, as well as everyplace else.
Mr. Scott. Okay. Yes, sir?
Mr. McCauley. How does a bank respond? How do they stay
viable? What could they do to prepare? That is going to really
depend upon market forces. There is very little that a
community bank can do if interest rates rise and there is a
huge increase in the price of those deposits. They are going to
have to be very reactionary. The market forces will drive that.
I will say that the clarity issue question of the Fed and
their comment that it will bring clarity as far as implicit
interest versus explicit, that it is our understanding and
learning from peer discussions and other software vendors and
developers of systems that it is not going to get more simple.
It is actually going to get more complex.
Mr. Scott. Do you think that this repeal will cause a sharp
decline in the profitability of banks? I represent a State that
has gone through just a tremendous onslaught of bank closings
and failures of banks. So I am very, very concerned about what
we do up here to make sure we are not hurting these banks.
Do you think the repeal of Reg Q will cause a sharp decline
in the profitability of banks?
Mr. McCauley. In a rising rate environment for a bank that
has a high percentage of their deposits and non-interest-
bearing DDA that become interest-bearing, their interest
expense is going to go up very rapidly. And thus, yes, they are
going to have to raise the cost of loans to maintain the same
profitability. And if they can't do that, profitability will be
diminished.
Mr. Scott. Do you think they should raise the cost of loans
so that they can generate sufficient revenue to cover the
increased cost of paying interest?
Mr. McCauley. Absolutely.
Mr. Scott. All right.
Let me ask you, do you think, do you anticipate the banks,
particularly small community banks, will lose deposits due to
the increased competition of interest rates?
Mr. McCauley. I believe that they will. I believe there
will be a disintermediation to the larger institutions such as
Capital One that has been previously mentioned that has obvious
huge advertising budgets, and also an incentive to pay up for
deposits to fund a very high price as far as interest rate
credit card portfolio.
For instance, they can pay a high interest rate for
deposits because of the high interest rates on a credit card
portfolio versus a community bank that is making loans within
the community.
Mr. Scott. Is there anything that could be done by the
banks, by us, or by anyone to mitigate this damage?
Mr. Pollock, I think you wanted to--
Mr. Pollock. I would. Thank you, Congressman.
I think what is not to be done is to have the Congress, as
I said in my testimony, try to support the profitability of
banks or of any business. If they are losing business, it is
because they are not competitive. We have to let customers,
consumers, small businesses, all businesses decide what is the
most valuable package of price, service, relationship, and
quality among the various competing banks.
A big mistake, in my judgment, is for the Congress to say,
we are going to pick one kind of competitor and try to make
sure they are profitable.
Mr. Scott. I will yield back so we can have enough time. My
time has expired.
Mr. Renacci. Mr. Green, I know that you just stepped back
in. We are going to go 5 and 5, but with you coming back, if
you would like more than 1 minute, we will have to recess today
or now and then come back after votes.
Mr. Green. Mr. Chairman, I am honored to take whatever is
available.
[laughter]
Mr. Renacci. Mr. Canseco for 5 minutes.
Mr. Canseco. Thank you, Mr. Chairman. I appreciate the
opportunity to ask these questions.
Mr. Pollock, you bring some very interesting points in your
testimony regarding Reg Q's history and negative consequences
that the policy has led to in the past, such as deposits
leaving savings and loans in the 1960s when Reg Q was intended
to keep them there.
We can all agree that there are good regulations and bad
regulations. But in your opinion, why specifically is a
prohibition on paying interest a bad regulation? And how can it
further lead to negative consequences?
Mr. Pollock. Congressman, in my judgment, among the worst
kind of regulations are price regulations where the government
tries to fix the price of any product or service. That is all
that Reg Q was and would be if we had it back. It is a price-
fixing regulation, which is a bad idea and always turns into
creating distortions which are unfortunate over time.
Mr. Canseco. Thank you for that.
But, Mr. Pollock, do you think that a prohibition on
interest on demand deposit accounts is price fixing?
Mr. Pollock. Absolutely, I do, sir.
Mr. Canseco. And Mr. McCauley?
Mr. McCauley. No, it is absolutely put in place for a
purpose. And I think that you look at the past 70 years of it
being in place, how it has really helped support the community
banking industry. It unequivocally leads to the ability to make
those fixed-rate loans and purchase those fixed-rate securities
to support those communities.
Mr. Canseco. Let me ask you specifically, could you, Mr.
McCauley, explain how community banks specifically would become
more liability-sensitive in the wake of Reg Q's repeal?
Mr. McCauley. Sure. The liabilities of a bank are their
deposits, what they owe back to their customers. And if your
sensitivity is really related to rates moving one way or the
other, if you are liability-sensitive, that means that as
interest rates rise, your costs are going to go up; or as
interest rates lower, your costs are going to go down as far as
your deposit cost. There is nowhere for rates to go but up from
where we are right now.
It puts community banks in an incredibly difficult
position. It can be purported that it is a great time to do it.
I think it is a terrible time to do it because you put
community banks in a very intensely liability-sensitive
position that they have never had to deal with on asset-
liability management. So their interest rate risk volatility
becomes extreme.
Mr. Canseco. You mentioned in your testimony that demand
deposits require a 10 percent reserve requirement at the
Federal Reserve. Could you explain how that would hurt lending,
especially by community banks, to the local areas that they
serve?
Mr. McCauley. Transaction accounts require a 10 percent
reserve at the Federal Reserve. Today, those monies that are in
money market accounts or other non-transaction investment
accounts do not have a reserve requirement.
With the repeal of Reg Q, interest rates paid on demand
deposit accounts that are transaction accounts to attract
funding into that, those funds that did not have a reserve
requirement will now have, which will take 10 percent of all of
those deposits out of the system to be loaned and to support
the local communities.
Mr. Canseco. So let us assume I am a small businessman who
has a working relationship with a community bank and I keep my
checking accounts there. What side should I be on here? Should
I be in favor of Reg Q or against Reg Q?
Mr. McCauley. I think you should be in favor of Reg Q with
the amendment of Reg D because we have a solution. There is a
better way than repealing Reg Q. It is to reinstate Reg Q and
amend Reg D. That way we can keep those funds on a balance
sheet of a community bank without the machinations of a sweep
or the expense of a sweep account.
Mr. Canseco. Mr. Luetkemeyer pointed out something very
interesting, that if I am getting interest payments on my
demand deposit account, it is also going to affect the loan
rate that I am going to get on any loan that I have, whether it
is a car loan or a business loan. Is that correct?
Mr. McCauley. That is correct. There is a direct
relationship.
Mr. Canseco. Let me pursue some of that. I have 40 seconds
left. But you touched upon something that I need to have
elaborated here.
I know from being in business in Texas and banking in
Texas, many of our community banks go out there and bid on
government accounts to attract those deposits in there. It is
certainly not a lending relationship; it is a depository
relationship with schools, city, county, etc.
Tell me how that would affect you one way or the other with
or without Reg Q.
Mr. McCauley. Most community banks do this as an
accommodation to their local municipal governments to support
them on their accounts. They have investment accounts they pay
an interest on. If they are now going to get in a competitive
environment and pay an interest rate on the demand accounts, it
is going to further deteriorate their ability to do that,
because it is not a profitable account for them.
Mr. Canseco. And one more question, if I may. So therefore,
it is going to affect those consumers other than governmental
depositors when they ask for loans from the institution.
Mr. McCauley. Absolutely, the cost will be higher.
Mr. Canseco. Thank you.
Mr. Renacci. Thank you.
Mr. Green for 1 minute.
Mr. Green. Thank you, Mr. Chairman.
Let me speak quickly. Let me thank you, Mr. McCauley, for
being here today. I claim a little bit of you in Houston,
Texas. And community banks are especially important to us in
the State of Texas, to have banks with the owner in the
community. They know the people in the community. It means
something to have community banks.
With reference to competition, I support competition, but
there are some concerns that I will have to raise. When the big
box stores come in, they drive out the mom-and-pops. Community
banks are the equivalent of mom-and-pops. If we don't do
something, we have to protect them to make sure that we have
what we know to be a viable institution that helps communities.
I would add only this as I close. With these community
banks, we have an opportunity to make sure that small
businesses can work with small banks so that they can continue
to thrive. I will do what I can to be helpful. I have some
thoughts, and perhaps I will get a chance to share them at a
later time.
Thank you very much, Mr. Chairman.
Mr. Renacci. Thank you, Mr. Green.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 30 days for Members to submit written questions to these
witnesses and to place their responses in the record.
This hearing is adjourned.
[Whereupon, at 10:32 a.m., the hearing was adjourned.]
A P P E N D I X
March 1, 2012
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