HARLINGEN — The community banking industry has been thrown into turmoil by new policies being proposed in Congress and by the Biden administration’s nominee for Comptroller of the Currency.
One issue involves forcing banks to report any transaction above $600 — cash withdrawal, debit or credit card or check — to the IRS.
The second is the nomination of Saule Omarova as Comptroller of the Currency, a position which oversees all domestic and foreign banks operating in the United States, with hearings on the nomination currently being held in the Senate Banking Committee.
What’s causing the fuss over her?
In a 69-page article published this month in the Vanderbilt Law Review, Omarova argues that all bank deposit accounts should be transferred to the Federal Reserve and placed in FedAccounts, eliminating the source of funds used by local banks to make loans to businesses and private individuals.
In addition, she proposes to allow the Fed in “extreme and rare circumstances, when the Fed is unable to control inflation by raising interest rates,” to confiscate deposits from these FedAccounts to firm up monetary policy.
Also, she proposes eliminating the Federal Deposit Insurance Corp. that insures bank deposits.
Some say it would in effect nationalize banks in the United States, and the end result could mean the closing of thousands of local banks and limiting the availability of credit and banking services to tens of millions of Americans.
Steve Scurlock is director of governmental relations for the Independent Bankers Association of Texas, a trade group which represents community banks.
He admitted his agency and the banks it represents are baffled by the nomination of Omarova, a professor at Cornell Law School and a native of Kazakhstan. She graduated from Moscow State University in the Soviet Union in 1989.
“ This is an unusual nomination, to say the least,” Scurlock said. “I guess you could probably gather we are not terribly enamored with some of the things we’ve seen.
“ We represent community banks and I think the business model for a community bank is pretty simple,” he added. “You take deposits in from your local area, your community, you lend that money back out to your community, and it benefits not only the growth of the community but it’s also a good thing for the bank and the shareholders and investors in the bank.”
But under Omarova’s proposal, those deposits would no longer be available to re-invest because they would be sitting in a Federal Reserve account, in effect a national bank, not a local bank.
No deposits means no loans and, eventually, no local bank, he said.
Ricky Leal is a senior vice president at First Community Bank, which has a number of branches in the Rio Grande Valley.
He says federalizing the banking business and eliminating local deposit funds just “doesn’t work.”
“ The entire theory in banking, especially local community banking, is based on gathering up deposits from the local community and loaning back out into the local community so that those dollars are cycled through and stay local,” Leal said.
“ The people that work at these community banks live here, they work here, they have home-grown insight for what’s working in the economy, what doesn’t work,” he added. “You’d lose all that. … A world without the local deposit, it would change banking as we know it.”
PPP and banks
Both Leal and Scurlock point to the distribution of several tranches of federal funds for small businesses as part of the Paycheck Protection Program as evidence of the effectiveness of local banks.
Scurlock said looking at the banking industry in its entirety, community banks control only about 14 percent of all financial assets banks own. But these smaller banks distributed more than 42 percent of all PPP funds aimed at keeping small businesses alive and functioning during the COVID-19-related economic swoon.
“ When our nation hit a boiling point when we knew we had a huge emergency happening with the pandemic, Congress got together and asked, ‘Are we going to use the SBA (Small Business Administration) to pass out this relief to small businesses which are hurting, who are facing closure? Or are we going to use the nation’s banking system?’” Leal said. “And they elected to use the banking system. We did that.”
The $600 transaction reporting threshold revealed Thursday as part of the Build Back Better Act now percolating in Congress is aimed at what Treasury Secretary Janet Yellen said were billionaires shirking on their tax liabilities, saying “there’s a lot of tax fraud and cheating that’s going on.”
Under the Bank Secrecy Act, financial institutions already are required to report suspicious transactions and any cash transaction of $10,000 or more to the IRS.
So why the concern over a $600 threshold for reporting individual transactions?
“There are some significant privacy issues, and we’ve already seen some issues with the IRS with some retribution on political opponents over the years, and we’ve seen data breaches and all the rest,” Scurlock said. “We think it’s a really bad idea that will create additional burdens on our banks.”
Leal agrees that the policy would cost his bank more to comply, but he also raises a point about the attitude some people in the Rio Grande Valley have about banks themselves, saying building trust with the “unbanked” is a constant challenge.
“As long as I’ve been in banking, and I’ve been in now for 15 years, you always hear about the banking system reaching out to the unbanked, people who don’t trust the banking system, people that choose to not participate in the system,” Leal said.
“ So we put together these products, and we put together these services, and we do outreach and try to teach people the benefits of operating in the banking system, and the government comes along and says, ‘We’re going to ask the banks to report all of your transactions to the IRS.’ All that does is alienate that group of people,” he added.
As more information about the transaction reporting legislation comes out, the more pushback congressional leaders are receiving.
On Wednesday, Valley U.S. Reps. Henry Cuellar and Vicente Gonzalez joined19 other Democrats in sending a letter to House Speaker Nancy Pelosi urging her to drop the IRS reporting legislation from the Build Back Better bill, citing privacy issues and constituent opposition.
The Democrats said hundreds of thousands of their constituents have contacted them and have voiced concerns about privacy in allowing the IRS to collect so much of their financial data.
The letter to Pelosi said even increasing the threshold to $10,000 per transaction, as has been floated, leaves a significant number of these voters opposed.
“ Most of these taxpayers are not the wealthy tax evaders who are the stated targets of this proposal,” the letter reads.
Scurlock, a former McAllen resident and bank examiner who served as deputy banking commissioner at the Texas Department of Banking, says the voters are right to oppose it.
“ I’m not a conspiracy, black-helicopter guy at all, but a foot under this tent or a nose under this tent, even if it’s $10,000 in inflows and outflows, I don’t necessarily trust whoever it is running the government that they’re going to just say, ‘OK, this is fine,’” he said. “It’s a step, and in my assessment, I think it’s a frightening step.”