Straight Talk

STRAIGHT TALK by Ballard Cassady KBA President & CEO bcassady@kybanks.com

STAY THE COURSE

The KBA’s goal is the same as this committee’s, the safety and soundness of Kentucky’s banking industry.

Reprinted from the KBA’s presentation to the Banking and Insurance committee last month concerning the IRS proposal and the ensuing crypto bills being filed in KY.

As always, we appreciate the opportunity to present information to the Banking and Insurance Committees. Today, we were asked to update you on the IRS reporting requirement for banks that has been one of the most hotly contested legislative proposals of any presidential administration in my 70-year history.

This proposal was made part of a budget reconciliation bill, as a funding vehicle for a massive welfare expansion, costing between $2T to almost $5T, depending on who’s doing the math. privacy is woven into the very fabric of every community’s business relationship. This IRS reporting –– at any dollar threshold ––would blight all of those relationships with consequences we can barely imagine……… because this proposal is without precedent. Then too, customer data provided to the IRS would be subjected to much greater security risk, as evidenced by the 1.4 billion cyberattacks and breaches the IRS currently reports. It's also ironic that the government has imposed a ton of costly bank regulations in recent decades aimed at attracting people who don’t use banks, the so-called unbanked. Often, these are people who don’t trust institutions of any kind, and this IRS proposal will send them fleeing –– and plenty of current bank customers with them.

The bill initially proposed that banks be required to report to the IRS all inflows and outflows of cash exceeding $600 for every bank customer account—whether for minors, businesses, non-profits etc. After massive public backlash, House Democrats moved that reporting threshold to hit “only” bank customers whose accounts receive $10,000 in non-wages deposits annually, completely missing the point that the issue was privacy, not the dollar amounts. Ultimately, the version of the bill that passed the House on November 19 did not include the provision requiring banks to report on their customers to the IRS. Good, right? Wrong! The bill contains $80B to hire more IRS agents, perhaps as many as 87,000 new agents. Less than $2B of that $80B is allocated to “taxpayer services”. The rest goes to operations support and enforcement— meaning audits, investigations, asset monitoring, and legal actions. That has many observers fearing a plan to slip the bank reporting requirement back into the bill in the Senate. While many senators have expressed staunch opposition to it, it’s hard to predict how Senate negotiations could end up. And even if it isn’t included, unelected and unaccountable regulators have developed a nasty habit of making laws disguised as regulations. You may recall that Dodd/Frank was only supposed to apply to banks over $10B until the regulators decided if it’s good for one, it’s good for all. In addition to all that, the Wharton School of Business looked at how this new IRS funding impacts the IRS’s efficiency. Currently, the IRS claims it spends just over $1 for every $300 it collects. Based on the Congressional Budget Office (CBO) scoring of a prior version of the bill, the IRS will be spending additional funding of $80B to collect an additional $120B. So,

For community banks in that means its efficiency will plummet, Kentucky, the cost of doing while the misery it can inflict on millions of Americans through audits and collecthe IRS’s job for them would tions soars. mean adding bank staff that For community banks in Kentucky, the our smaller banks absolutely cost of doing the IRS’s job for them would mean adding bank staff that our cannot afford. smaller banks absolutely cannot afford. And when such banks get regulated to that breaking point, they have no choice but to sell or merge. Those current transitions are undertaken with care for the communities involved, but change is hard, so hard that it should never be forced by misguided government regulation. Whether or not our industry falls under the IRS yoke in the final version of the reconciliation bill, we surprisingly share the concern of some progressive media voices about who is truly being targeted by a massive expansion of tax collectors. When the leaked documents on tax evasion by the world’s rich and powerful, known as the ‘Pandora Papers,’ made headlines a few weeks ago, Forbes pointed out that relatively few Americans were in the report…, probably because the U.S. tax code provides plenty of legal tax sheltering opportunities without going offshore.

So, our industry, along with thousands of our customers, continue to watch for this threat to re-emerge, and we’re joined by many other groups. The advocacy groups for every national or state financial institution, as well as business and consumer groups, have been deeply united in their intense opposition to this proposal. It attacks the very nature of the relationship between financial institutions and their customers, a relationship that has been developed and preserved by decades of statutory and case law. For a bank customer, privacy is the essence of that relationship, and trust in that So, if the current version should pass, who will those new agents go after to collect the money needed to finance all this new welfare? It won’t be the likes of Warren Buffet, Elon Musk or Jeff Bezos—they have legal means to avoid taxes. That new tax revenue is more likely to be coming from you and me. The most honest of folks can make simple mistakes or misunderstand the massive tax code. And the vast majority of us can’t afford a team of tax professionals. That makes us the low-hanging fruit for all those new agents.

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Let that sink in: we’re going to spend $80B to collect $120B from the very people already struggling to supply that $80B.

How much will all these new audits produce? I say, NOT ENOUGH to pay the tab for this new welfare spending. NOT ENOUGH to justify the anguish of those who will have to defend themselves in these audits without a team of CPA’s and lawyers.

And NOT ENOUGH to justify blighting the entire banking industry by subjecting all their customers to an invasion of privacy that previous generations could not have even have imagined.

So, the KBA and the over 5000 KY citizens who wrote letters to Congress on this issue are following the work of the Senate on this reconciliation bill with great concern, not just for our industry but also –– frankly –– for everyone we know and love.

But… this isn’t the only emerging industry issue that needs to be on the Committee’s radar. Right around the corner is crypto-currency issues. You can’t listen to business news for more than three minutes without some mention of it. The sheer volume of the media chatter has stoked a sense of false urgency.

Bills have been filed in a handful of state legislatures as Americans wrestle with all this. Some may prove to be on the ‘leading edge’ while others… will find themselves on the ‘bleeding edge.’

Who it will be, is yet to be seen. The approach of Kentucky's General Assembly to financial service innovations has always been one of judicious caution, of taking the time to learn from others’ mistakes. The exceptional soundness of Kentucky’s banks gives evidence to the wisdom of that approach.

With the regulation of crypto-currencies, we see no advantages –– only risks –– for our Commonwealth to start regulating in this area before the federal agencies have finished work that is still at least a year out. The Federal Reserve, the OCC and the FDIC issued a joint statement just last week, that they will be working together in 2022 to issue guidance on the risks and opportunities of crypto-currency operations and guidance on how certain crypto-related activities should be conducted by banks.

The KBA’s goal is the same as this committee’s—the safety and soundness of Kentucky’s banking industry. To every Kentucky citizen, the word “BANK”, is synonymous with insurance, oversight regulation, community reinvestment and safety. In the almost four decades I’ve worked with this committee, I’ve seen its members respect and uphold the integrity of Kentucky’s financial services industry with cautious, thoughtful oversight. The committee has been successful as shown in FDIC state banking industry rankings, and by our consumer’s trust. The banking industry of Kentucky just asks that you stay that course.

CHAIRMAN: Paddling in 2022 continued from page 7

We must remember that every checking account matters. Every deposit dollar means something because it matters to our customers.

The community bank experience is still all about people. We will continue to have face-to-face interactions in branches, but we may not need as many. We owe it to our customers and our stakeholders to communicate in a way that is accessible and easy – no matter the platform or venue.

There are not a lot of community banks left. We must remember that every checking account matters. Every deposit dollar means something because it matters to our customers.

I’m excited by the vitality of the community bank. Our core relationship-based service model is alive and well. As we enter 2022, we adapt and evolve to care for our customers and ensure we stay afloat together. The legacy of community banks in Kentucky is strong as we continue to be trusted, dedicated and resilient.