Banks are notorious for sitting on their can doing little to promote the economic engine, even as they have a wealth of money creating power through the fractional reserve built into the system. They prefer to downgrade your credit worthiness while creating new ways to profit on Wall Street. The national government of the U.S. wants to look as though they are really doing something about regulatory reform. Today, the Federal Reserve has issued today’s “iron edict” for banking, which excludes credit card banks and special purpose banks. They pretend to foster financial literacy. With new powers firmly in place, the Fed intends to correct the banking system through “host state loan-to-deposit ratios.” (Applause) All banking institutions will be measured through revised figures based on compliance with section 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. They evaluate these ratios yearly.
The act “prohibits a bank from establishing or acquiring a branch or branches outside of its home state primarily for the purpose of deposit production.” It “also prohibits branches of banks controlled by out-of-state bank holding companies from operating primarily for the purpose of deposit production.” Would you say that this has worked in the past to keep banks straight in their pursuit of profit? Hardly. That won’t stop the Fed from pretending to get bankers to follow law. It will only work if the Fed uses the law aggressively, especially where loaning money is concerned. Since the Fed shares a similar corporate structure and philosophy to banks, enforcing ratios is unlikely to have much traction.
The act also provides orders to test compliance with the statutory requirements.
“The first step in the process involves a loan-to-deposit ratio screen that compares a bank’s statewide loan-to-deposit ratio to the host state loan-to-deposit ratio for banks in a particular state.
A second step is conducted if a bank’s statewide loan-to-deposit ratio is less than one-half of the published ratio for that state or if data are not available at the bank to conduct the first step. The second step requires the appropriate banking agency to determine whether the bank is reasonably helping to meet the credit needs of the communities served by the bank’s interstate branches.”
With recent publicity, you can see where the Fed announces they are going. “A bank that fails both steps is in violation of section 109 and is subject to sanctions (italics mine) by the appropriate banking agency”: the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, or the Office of the Comptroller of the Currency. Don’t you feel all better now?