May 18, 2011
Bernanke states that there is “good reason” for interchange concerns
Federal Reserve Chairman Ben Bernanke recently reiterated that he is not sure that the small institution exemption in pending interchange fee cap regulations would work as planned, adding that there "is good reason to be concerned" about its effectiveness.
Appearing before a Senate Banking Committee hearing on the implementation of the Dodd-Frank Wall Street Reform Act, the Fed Chairman, in response to questions from Senator Jon Tester (D-Mont.), added that the pending interchange cap would affect revenues of smaller issuers and "could result in some smaller [financial institutions] being less profitable or even failing" if the proposed exemption for institutions with under $10 billion in assets does not work. Tester is the author of Credit Union National Association (CUNA)-backed legislation to delay the proposed interchange rules for two years to allow further study.
Federal Deposit Insurance Corp. Chairman Sheila Bair later told legislators that the interchange changes would likely result in higher fees for financial services customers, and said that the income cuts for small issuers would cause significant stress for those institutions.
Interchange income pays for card security
In the aftermath of Michaels stores’ recent consumer data breach, the Credit Union National Association (CUNA) again reminded legislators that it is interchange fees that allow credit unions to cover the costs of dealing with these sorts of mercantile mistakes. A letter sent to Senators Jon Tester (D-Mont.) and Bob Corker (R-Tenn.), the two original cosponsors of Senate legislation that would delay interchange fee cap implementation by two years. The Fed interchange fee cap regulations would become law on July 21, absent a delay. While a final version of the interchange cap regulations has not yet been issued, it is expected to be released before July 21.
Michaels, a nationwide big-box craft store, recently notified customers of data breaches that occurred in 20 states. CUNA noted that while customers will likely have their debit cards reissued, at no cost, as a result, credit unions and other financial institutions, and not the retailer, will pay for the new cards. This breach was announced shortly after Sony Corporation admitted that hackers stole the account information of 77 million PlayStation users.
"What makes it possible for card issuers to cover this cost – as well as the cost of any fraudulent transactions which may occur as a result of the breach – is the interchange revenue merchants pay card issuers as their fair share of the cost of the payments system," CUNA said. The CUNA letter said that the proposed delay will give legislators and regulators the time needed to study the impact of the interchange fee cap on consumers, debit card issuers and merchants, and for Congress to address potential changes to the law as a result of this study.
The Conference of State Bank Supervisors (CSBS) and the National Association of State Credit Union Supervisors (NASCUS) also spoke up in support of this delay in their own letter to Congress. The regulators said that the potential economic impact of the cap, along with safety and soundness concerns, were reasons to delay implementation.
2010 NCUSIF audit ‘clean,’ Operating Fund has ‘deficiencies’
The National Credit Union Administration (NCUA) announced that its 2010 audited financial reports for its four permanent funds, including the National Credit Union Share Insurance Fund (NCUSIF), received unqualified or "clean" audit opinions. Noting the NCUSIF's unqualified opinion for its financial condition specifically, NCUA Board Chairman Debbie Matz said, "The fact that independent, outside auditors issued an unqualified opinion with no reportable conditions is a testament to NCUA's diligent oversight and protection of the share insurance fund for credit unions nationwide."
In addition to the NCUSIF, auditors also certified the financial accuracy of three other NCUA funds: the Operating Fund, the Community Development Revolving Loan Fund, and the Central Liquidity Facility. KPMG LLP completed the audits of all four funds. Expected this summer, the NCUA announcement said, KPMG also will provide its opinion of the financial statements for the Temporary Corporate Credit Union Stabilization Fund.
Matz said the agency made the independent reviews of the permanent funds immediately available to the public to "facilitate transparency in our operations."
Also in the report, the auditor found a "significant deficiency" regarding the NCUA Operating Fund. The auditor's concerns are classified as "deficiency," "significant deficiency" or "material deficiency." A significant deficiency is a concern that is less severe than a material weakness but "important enough to merit attention by those charged with governance."
Among other things, the auditor found:
- The Operating Fund needs improvement in reporting certain activities. For example, the report cited the inability of management to readily provide documentation related to property, plant and equipment.
- Also, for the first three quarters of last year, journal entries were not reviewed and approved by anyone other than the preparer.
As part of the auditor's report, the NCUA included a response in which it said it would take steps to provide timely documentation and to ensure manual entries are accurate and entered with appropriate safeguards.