What’s the Fiscal Cliff?
The so-called fiscal cliff. For months, you’ve heard the media’s various shorthand descriptions and characterizations, most likely as cryptic as they have been hyperbolic. Extraordinary budgetary bungling and procrastination. A ticking fiscal doomsday bomb. Political and public policy brinksmanship, and an accountability dodge and deflection. A flirt with a self-inflicted economic recession, if not outright financial suicide. Or perhaps an altogether overblown year-end pretense, much like Y2K turned out to be.

Certainly some, if not most, of these descriptions to some degree fit the perplexing fiscal policy predicament looming over Capitol Hill. But they don’t together sufficiently explain what the impending fiscal cliff is and what it means for everyday Americans and community bankers on Main Street far outside the Washington Beltway. The 112th Congress reconvenes today to begin its brief post-election lame duck session to attempt, once again, to fix the problem.

So today, ICBA begins a short four-part series on the fiscal cliff—to cover what it is, what harm it could cause, what Congress might do to avoid it and what community bankers should consider doing in response.

First up—what is this fiscal cliff?

It’s the simultaneous and cumulative effect of expiring tax and spending laws and automatic government spending cuts starting on Jan. 2, 2013. The resulting rise in federal tax revenue and fall in government spending would be correspondingly applied to reduce federal budget total debt and annual deficit, now at $16 trillion and $1.2 trillion, respectively. Many of the sun-setting federal tax cuts and exemptions were initiated by the bundle of Bush-era tax measures, and the mostly across-the-board government spending cuts are dictated by the Budget Control Act of 2011, the stopgap measure that ended a congressional and White House impasse over the raising the national debt limit and reducing the government budget deficit.

Should Congress fail to act by New Year’s Day, the fiscal cliff is projected to generate more than $2 trillion worth of converging federal tax increases and government spending cuts and savings—again, producing the corresponding decrease in federal budget debt and deficits—that will gradually take effect over the next decade, according to the Congressional Budget Office.

About two-thirds of the fiscal cliff involves tax increases, and one-third contains government spending cuts. In 2013, Americans will pay about $400 billion in additional personal and business federal income taxes, and more than $200 billion in budget cuts and new program revenues savings will reduce projected federal government spending, allowing the current federal deficit to be reduced by about half.

On the tax front, without congressional action, the expiring Bush-era tax rates would generate the largest tax revenue under the fiscal cliff, including about $220 billion in 2013. Another $95 billion in tax revenue increase will come from ending a temporary 2 percent payroll tax relief provided in 2010. About $65 billion from various other tax reductions or exemptions, and $18 billion in tax revenue are estimated to come from Affordable Care Act health care taxes on high-income earners.

The major tax measures that will affected by the fiscal cliff starting in January include:
  • Personal income tax rates will return to pre-Bush ere rates, increasing from 10 percent to 15 percent for the lowest rates and from 35 percent to 39.6 percent for the highest rates.
  • Payroll tax rates will revert back to 6.2 percent from 4.2 percent on a person’s first $110,100 wages.
  • Alternative minimum tax measures that avoid inflation adjustments that have been routine in the past will cause more than 30 million individuals and households to pay more taxes. Many individuals and households making $33,750 and $45,000 respectively will fail to escape the tax if routine inflation adjustments made to the AMT.
  • Capital gains tax rates will increase from 5 percent to 15 percent depending on a person’s income, to 10 percent and 20 percent.
  • Dividend tax rate will increase for most taxpayers from 15 percent to 39.6 percent.
  • Affordable Care Act taxes are set to take effect for many high-income earners, aimed at individuals making $200,000 or more a year and households earning $250,000 or more annually.
  • Marriage penalty relief tax will expire, causing many dual-income couples to pay more in taxes.
  • Estate tax rates will increase 55 percent from 35 percent, with the current $5 million tax exemption falling to $1 million.
  • Child tax credit will decrease from $1,000 per child, to $500 per child. A refundable portion of the credit is also reduced.
On the government-spending front, the Budget Control Act imposes across-the-board cuts (the sequestration cuts) on defense and certain non-defense programs as well as caps on government spending rate increases through 2021, according to the CBO.

The spending growth caps, targeting “new discretionary budget authority,” are projected to limit the budget increases to 1.8 percent per year on average. The act also accounts toward budget deficit reduction another $100 billion in 2013 and subsequent years from various new government program revenues primarily from anticipated economic growth.

However, about 70 percent of the federal budget is shielded completely from automatic cuts under the Budget Control Act, including Social Security and Medicaid programs and federal pensions and veterans’ benefits. The Medicare benefits will be limited to a 2 percent spending reduction.

Nevertheless, budget experts estimate that more than 1,000 government programs will be affected by the Budget Control Act cuts. Other spending reductions in 2013 with potential political implications include federal unemployment payments allowed for up to 99 weeks, from 26 weeks, that will expire—a $26 billion budget line item potentially affecting more than 2 million people. A so-called Medicare Doc Fix expires, which curb payments for physician services by 27 percent, will cut budget spending another $11 billion.

There are various perspectives on what effects of these fiscal cliff budget spending cuts and tax increases will impose, most of them negative. So tomorrow in ICBA’s fiscal cliff series: What might happen if Congress fails to act? Read the CBO Report

Senate Banking Announces Hearing on Impact of Basel
The Senate Banking Committee has scheduled a hearing on the “Oversight of Basel III:  Impact of Proposed Capital Rules” for Wednesday at 2:30 p.m.

The witnesses will be Michael S. Gibson, director of the Federal Reserve’s division of banking supervision and regulation, John Lyons, Office of the Comptroller of the Currency’s chief national bank examiner, and George French, the FDIC’s deputy director of policy for the division of risk management supervision. Additional witnesses may be added at a later date.

Agencies Declare Delay in Basel III Implementation
In light of the volume of comments received and the wide range of views expressed during the Basel capital requirements rule comment period, the agencies (FDIC, OCC and Federal Reserve) announced that the proposed rules are unlikely to become effective on Jan. 1 as planned.

As members of the Basel Committee on Banking Supervision, however, the agencies said they take seriously their internationally agreed timing commitments regarding the implementation of Basel III and will continue to work to complete the rulemaking process. The agencies said they will take operational and other considerations into account when determining appropriate implementation dates and associated transition periods.

ICBA has continued to call on regulators to exempt community banks from proposed Basel III capital rules and to allow community banks to continue operating under Basel I capital regulations. For more information and resources on Basel, visit the Basel resource center.

Fed’s Duke: Community Banks Important to Mortgage Market
Along with announcing the delay of Basel III capital rules implementation, Federal Reserve Governor Elizabeth Duke expressed deep concern with a one-size-fits-all approach to mortgage lending during last week’s annual Community Bankers Symposium sponsored jointly by the Federal Reserve Bank of Chicago, the Office of the Comptroller of the Currency and the FDIC.

“I am convinced that the best course for policymakers would be to abandon efforts for a one-size-fits-all approach to mortgage lending,” Duke said. “Balancing the cost of regulation that is prescriptive with respect to underwriting, loan structure and operating procedures against the lack of evidence that balance sheet lending by community banks created significant problems, I think an argument can be made that it is appropriate to establish a separate, simpler regulatory structure to cover such lending.” Read more.

FDIC Releases Pre-Exam Tool at Community Banking Meeting
At last week’s meeting of the FDIC Advisory Committee on Community Banking, the FDIC announced a new online pre-exam software called “ePREP” designed to enable the agency to streamline its pre-exam document requests from banks. The agency says its new online approach, which is still being developed, will use exam “filters” to ensure that only necessary documents are requested.  The FDIC plans to roll out ePREP sometime in the first quarter of next year.

The Advisory Committee, which includes ICBA members Rebeca Rainey (chairman and CEO, Centinel Bank of Taos, N.M.), Jack Hopkins (president and CEO, CorTrust Bank, N.A., Sioux Falls, S.D.), Joe Pierce (president and CEO, Farmers State Bank, Lagrange, Ind.) and Betsy Flynn (president and CEO, Community Financial Services Bank, Benton, Ky.), was also briefed on the FDIC’s Community Bank Initiative and the feedback from the FDIC’s six regional community bank roundtables.  FDIC staff said that community banks raised a number of concerns at the roundtables including problems with raising capital, margin compression and lowers earnings, technology concerns, and the possible expiration of deposit insurance for noninterest bearing deposit accounts.  The agency plans to release the final results of its Community Bank Initiative in December.

OCC’s Curry on the Importance of Effective Risk Management
During last week’s Community Bankers Symposium in Chicago, Comptroller of the Currency Thomas Curry spoke on the importance of effective risk management for community banks, including enterprise and operational risk management. “A strong risk culture is proactive, and it drives the way your bank sets strategy and makes decisions,” Curry said. “It also translates into how your management team and employees anticipate and respond to risk throughout the bank.”

Curry also added that the OCC is not requiring community banks to have the types of sophisticated models and processes expected from larger institutions. “What we really want to see is community banks considering some form of stress testing or sensitivity analysis of your key loan portfolios on at least an annual basis,” he said. Read more.


ICBA Renews FDIC Money Smart Agreement
The ICBA announced last week that the association has renewed its agreement with the Federal Deposit Insurance Corp.’s updated Money Smart financial education program, which helps banks promote financial literacy within their community. As part of the agreement, ICBA will continue to make its members aware of this free program—furthering ICBA’s commitment to financial literacy amongst community bank customers.

FDIC’s Money Smart program is a complimentary educational program designed to bring more consumers into traditional banking relationships. The modernized curriculum has tracks for adults, young adults and small businesses. Because of its design, Money Smart has specific training modules, in nine languages, which can be used to fill in the gaps from other financial education programs. ICBA has been using Money Smart and involved with FDIC’s program since November 2002. Read the release.

Wholesale Inventories Up 2 Percent
Wholesale inventories rose 2 percent in September and were up 4.4 percent from a year ago, according to the Commerce Department. Sales of durable goods were up 1.2 percent in September and were up 2.8 percent from last year.

Take This Week’s Quick Poll
Take this week’s Quick Poll on the Go Local holidays campaign, and view results from the previous poll on the new format of ICBA NewsWatch Today. View the Archive. View the Archive.

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