Reform reading: Banks prepare for stress tests, possible rise in ATM fees

Introduction

Remember the 19 big banks that underwent “stress tests” two years ago? The Fed says those same banks must again demonstrate how well their balance sheets could withstand another potential downturn in the economy before they can boost dividends to shareholders. Also included in the stress-testing: how the Dodd-Frank law affects a bank’s risk profile and business strategy. Big banks must submit the new capital plans to the Fed by Jan. 7 as part of this round of stress-testing, whether they plan to raise dividends or not.

JPMorgan, Wells Fargo & Co., U.S. Bancorp, and PNC Financial Services Group Inc. are among the big banks that may raise dividends, reports Bloomberg’s Michael J. Moore and Dakin Campbell. As part of the new capital plans, banks must also eventually triple their holdings of so-called Tier 1 — or highest-quality capital — from the current 2 percent requirement. Some are already well above the new requirement: Bank of America Corp. had a Tier 1 common equity ratio of 8.45 percent on Sept. 30, JPMorgan had 9.5 percent, Wells Fargo 8 percent, and Citigroup Inc. 10.3 percent, Bloomberg said.

Higher ATM fees on horizon

Banks are bracing for a reduction in interchange fees – the fees paid by store merchants to swipe a consumer’s credit or debit card – and looking for ways to offset the loss of revenue. And that could mean higher ATM fees, reports The Street’s Joe Mont. “A lot of the things have been free, because that is how banks were able to get customers through the door. A lot of that is going to be rolled back. You have a massive revamp of products and pricing that is going on,” Gwenn Bezard, a research director with Boston-based Aite Group, told Mont.

During the Dodd-Frank bill debate, banking lobbyists killed a proposal by Democratic Sen. Tom Harkin of Iowa to cap ATM fees at 50 cents per transaction. The senator argued that the national average ATM fee was $2.50, even though actual processing costs were 50 cents or less.

Banks face $5 billion cost of reforms

The financial services industry will spend an estimated $3 billion to $5 billion over the coming three years to fully adopt all the requirements of the Dodd-Frank reform law, according to a new report by consulting firm Accenture. The biggest banks will spend up to $200 million each, the firm says, adding that those same banks “could also see profits fall between 20 percent and 30 percent.”

But there may be some upside to requirements triggered by the law. For example, if a bank must build a new database to meet the Consumer Financial Protection Bureau’s mandate to track fees and transactions, the bank could use the same customer activity data in-house to help develop new product ideas, Accenture says.