NEW YORK (
)-- U.S. policymakers appear to be having second thoughts about the Durbin amendment, one of the more onerous rules to come out of the financial reform legislation.
If the rule gets substantially watered down, or possibly even eliminated, it could signal an end to "basically two and a half years of bank bashing and blaming the banks for everything," argues Tom Brown, head financial services-focused investment firm Second Curve Capital.
Such sentiment has caused bank stocks to trail the broader market for much of the past 12 months, after they led the rally off the bottom in the prior 12 month period starting in March 2009.
"If you did have a change here I would interpret it as a signal that the pendulum has stopped swinging against the banks," Brown says.
The Durbin amendment would sharply curtail fees banks and card companies like
get from merchants for debit card transactions, costing the banking industry $12 billion to $14 billion in profits, according to a recent presentation
Bank of America
made to investors.
Bank of America consumer small business and card banking President Joe Price says that while the bank has been "generally supportive" of regulatory reforms, "we do have some concerns specifically related to the Durbin amendment."
are taking compensatory measures such as getting rid of debit rewards.
"There are going to be series of other things, we call them metering fees, that we're going to be thinking through, charging you for things that you get today for free and so we've got lots of opportunities to charge people," JPMorgan retail banking chief Charlie Scharf told investors last month in a presentation that devoted considerable time to attacking the rule.
"We just want to be very clear and make sure everyone understands what we think, which is we continue to believe that this is a terrible mistake and it's not a terrible mistake for us, but it's a terrible mistake," he said.
Scharf argues the rule will cause 5% of JPMorgan's customers "to wind up exiting the banking system entirely and wind up at places like check cashers and other companies which charge them ultimately much more than they wind up paying here."
The sponsor of the rule, Dick Durbin (D.,-Il.) dismissed such comments in a recent speech on the Senate floor. Durbin argued that "threatening higher consumer fees is a great strategy to scare away any efforts at reform," but, he contended, "banks and credit card companies have constantly tried to raise fees both on consumers and merchants as high as the market would allow them to go."
Still, the fact that the big banks are joined in their opposition by small banks and credit unions may be having an effect. The
, charged with implementing the rule by April 21,
. The regulator received more than 11,000 comments on the rule, with merchants typically supporting it and financial companies voicing opposition.
Bipartisan legislation to delay the rule for further study has been introduced in both houses of Congress, but a banking industry lobbyist says legislators are hesitant to challenge Durbin, one of the most powerful Democrats in the Senate, not to mention angering all the retailers who do business in their districts.
Of the Senate version of the legislation, sponsored by Jon Tester (D., Mont.) Keefe, Bruyette and Woods Washington analyst Brian Gardner wrote "we think the Senate Democratic leadership would prefer to avoid considering the bill unless it absolutely has to."
Gardner interprets the delay to mean that "a moderating of the original Fed proposal (which we have expected) is more likely now."
Indeed, shares of Visa and MasterCard rallied on heavy volumes after the delay became public, as did shares of
TCF Financial Corp.
, a bank widely known to rely heavily on fees from debit card transactions.
TCF has filed a lawsuit arguing the Durbin amendment is unconstitutional, attracting support from several banking organizations representing everything from banking industry giants to tiny credit unions. Analysts, investors and industry executives are all eagerly anticipating an April 4 hearing in the case.
"The debate surrounding this issue is escalating into a lobbying frenzy," argued a March 14 report from Stifel Nicolaus, which correctly predicted to Fed would miss its April 21 deadline. Stifel analysts also believe the Fed will miss a second deadline of July 21 when the rule must be implemented.
"Moreover, the political mood seems to be shifting in favor of banks and away from retailers," Stifel analysts wrote.
Fed President Bernanke stated in the letter announcing the blown April 21 deadline that he is committed to the one in July.
Further delays are likely to lead to further rallies in financial stocks, predicts Second Curve's Brown, in addition to TCF, he says another bank that should see an outsized benefit if the rule loses momentum is
City Holding Co.
. Brown doesn't own shares of either bank, though he expects his whole portfolio would benefit from a delay or softening of the rule.
Anton Schutz, CIO of Mendon Capital, an investment advisor focused on financial services companies, sees some reason for hope in the fact that--at least as in his view--it has nothing to do with addressing the causes of the banking crisis.
"It's about politicians getting their name in print. You're essentially transferring wealth from the banking industry to the merchants. What does that accomplish?"
A short time ago, few legislators in Washington dared ask such a question. That time may be passing.
Written by Dan Freed in New York
Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.