CPG's March/April 2011 Wire Newsletter
Fees on the Rise
“…The nation’s lawmakers should consult Murphy’s Law before making new laws of their own. Two federal dictates, the so-called CARD Act and Dodd-Frank financial reform, have turned consumer banking upside down. As with any sweeping attempt to control a complex system, unintended consequences abound.”
-Chicago Tribune Editorial, March 25, 2011
Unsurprisingly, in response to recent regulation and the loss of fee income, many banks are changing their product lines and adding new fees. Free checking appears to be a thing of the past at most large banks, as does the ability for customers to receive free paper statements. Some banks are looking for additional revenue from the ATM channel while others are adding new fees to credit and debit cards. Below is a sample of some of the new bank fees that have popped up in recent months:
1. Checking Account Fees: Last summer, Bank of America started offering an eBanking checking account that is free as long as customers bank online. If eBanking customers want to receive paper statements or interact with a teller, however, they are charged $8.95 per month. The bank is also currently testing a new checking account fee structure in which monthly fees range from $6 to $25 in Arizona, Georgia, and Massachusetts.
2. Paper Statement Fees: More and more banks are charging fees to customers who receive paper statements in an attempt to offset the higher costs of producing and distributing those statements. TD Bank recently redesigned its checking product suite and took a different approach to incenting customers to forego paper statements. Instead of charging a fee to customers that choose to receive paper statements, the bank now offers customers in five of its six new consumer checking accounts a $1 discount off their monthly maintenance fees if they opt for electronic statements.
3. ATM Fees: PNC is keeping its most basic checking accounts free, but it will no longer reimburse foreign ATM fees for customers in those accounts. And those foreign ATM fees are rising. For example, Chase is currently testing a $4 ATM fee in Texas and a $5 fee in Illinois for non-Chase customers who use a Chase ATM.
4. Card Fees: In 2010, Citigroup began charging some of its credit card customers a $60 annual fee unless they charge at least $2,400 on the card. Bank of America recently added a credit card fee of its own, but the bank’s $59 annual fee is only applied to a small group of customers that is considered high risk. Some banks are looking at debit card fees as well: Chase is testing a new account aimed at less affluent customers that includes a $3 per month debit card fee.
5. Other Fees: For a satirical look at bank fees (which, we agree, are no laughing matter) see a recent Onion article (www.theonion.com/articles/hidden-bank-fees,19438/). One example: HSBC Bank USA now gets a 10% cut of the customer’s deposited birthday money.
A Report from the ABA CEO Roundtable
CPG’s Consulting Associate Joseph Cady recently facilitated the CEO Roundtable discussion at ABA’s National Conference of Community Bankers, held in San Diego. Attendees included 80-plus CEOs from banks with assets greater than $500 million. While the issues from prior years centered around credit quality and capital, the issues for 2011 focused on three critical areas: regulation, earnings, and growth.
The top issue of concern among the CEOs was the increasing regulatory burden. While expressing their frustration, few CEOs offered solutions in dealing with the onslaught, other than adding compliance staff and bearing the costs.
In the area of earnings, the question of scale as a competitive requirement was explored. While many CEOs embraced the need to be a certain size in the future, a few other CEOs suggested that having an effective niche and the successful execution of their strategic plans would be more important in remaining viable over the long term.
The issue of growth was also examined. This has proven to be a particularly difficult challenge for many who are experiencing little in new loan demand coming out of the recession. Solutions included finding underserved niches, making shifts in lines of business offerings, and developing new core competencies.
Many CEOs find themselves at a survival crossroad, often without good choices in addressing many of their issues. Others operating from a position of strength are challenged by countless considerations in selecting which opportunities to pursue, and if/when to shift to a more offensive posture.
CPG offers assistance to aid financial institutions with their strategy and planning needs, including developing effective answers to the same issues reported from the roundtable.
If we can be of assistance, contact us at 202-337-7870 or info@capitalperform.com.
Saying Farewell to Reg Q
On July 21, Regulation Q, which currently prohibits banks from paying interest to most businesses on checking deposits, will be repealed. The change comes at a time when most banks are flush with deposits, able to keep the trickle of loan growth funded, paying next to nothing on interest-bearing deposits, and obsessed with the more immediately impactful Durbin Amendment. As a result, most institutions are calmly preparing for the Reg Q change.
In fact, many banks may not even alter their commercial checking products significantly. A number of institutions already offer hybrid analysis accounts to municipalities that payout unused earnings credits in the form of interest. These banks may simply begin offering these existing products to a broader audience. We also expect many banks to do the following:
1. Continue to offer standard analysis products and set the earnings credit rate above the rate paid on interest-earning deposits to motivate customers to use treasury management services and keep accounts active.
2. Enable balances held outside of the checking account to count towards the earnings credit.
3. Allow for earnings credits to rollover month to month. In Massachusetts, Middlesex Bank’s Business Plus account already allows customers to settle their earnings credit and fees on a quarterly basis.
4. Expand the suite of services that are covered by analysis products. Banks that do not do so today may look at including merchant services and even trust services under the analysis relationship.
5. Offer tiered earnings credit rates. Again, many banks, including Bank of America and Wells Fargo, do this today.
These and similar tactics will become increasingly important once rates begin to rise. Banks should be using the Reg Q repeal as a reason to develop compelling value propositions to business customers that entice customers to expand their relationships and remain with the bank for reasons other than price.
In a letter dated March 29, 2011, Ben Bernanke announced that the Federal Reserve will not meet the April 21st deadline to submit a final rule on debit interchange fees, however he reaffirmed that the Fed is committed to approving final rules by July 21, 2011.
On March 15, 2011, the Senate introduced the Debit Interchange Fee Study Act that would delay debit interchange rules for two years, with a mandatory year-long study of the impact of proposed changes to debit interchange fees. This Act has been attached to the Small Business Reauthorization Act to increase its chances of passing the Senate. As of press time, the legislation was still awaiting further action in the Senate Banking Committee. A companion bill has been introduced in the House, which delays interchange rules for one year. It is widely expected that if the Act passes the Senate there is plenty of support for it in the House of Representatives (whether it be for a one or two year delay), and the President would not veto it.
And so the debates will continue...
A two-factor loan risk rating framework (also commonly referred to as a dual risk rating framework) can help to both improve risk adjusted returns on capital as well as provide an objective basis for justifying pricing differentiated by risk. It includes risk ratings for both the borrower and the facility. By explicitly capturing both of these elements, it provides management with a better sense of the true risk in the loan portfolio. This can serve a basis for risk-based pricing and more accurate allocation of capital. The single-factor risk rating methodology employed by many institutions is not robust enough to serve as a true measure of credit risk.
The two-factor rating framework adopted should reflect the institution’s credit policies, credit culture, and risk management objectives. To be truly effective, the factors to be considered when assigning risk to the borrower must be explicit and objective. In addition to meeting regulatory expectations, this will help to reduce uncertainty between the lenders and credit personnel about what constitutes a specific risk grade. The factors to be considered will differ by type of lending. The facility rating should account for the type of collateral, the degree of control exercised over the collateral, and the loan-to-value ratio.
For lenders, the future industry environment will be characterized by higher capital and greater regulatory scrutiny. To ensure accurate allocation of capital and to pass regulatory muster, a two-factor loan rating framework can serve as a foundation upon which to build risk-based pricing strategies, improved accuracy in provisioning, and build more robust analysis and reporting capabilities.
Rick Jones, Executive Vice President
Provident Bank, New York
CPG Analytic Solutions Update
Dual Risk Raking: a practical approach for developing a two-factor loan risk rating framework (also commonly referred to as a dual risk rating framework). Easy-to-use Excel-based templates are provided so that lenders and credit personnel can assign the borrower and facility ratings. The templates are customized to reflect the objective factors determined by the bank. There are separate borrower matrices for each type of lending and a facility rating matrix for assigning grades based on quality of collateral.
Branch Performance/Market Opportunity Model - BankRank: proprietary, Excel-based tool that enables objective analysis of the potential of bank markets and the performance of bank offices. The BankRank model ranks the attractiveness of geographic market areas based on their future potential, ranks the performance of branch offices based on their past performance, and compares the rankings in a way that enables more informed resource allocation, goal setting, and planning.
Sanddollar OREO/Loss Share Management Solution: designed to manage the events related to the accounting of loss share agreements, special assets management and acquisition accounting related to impaired assets.
