A year and a half after the country came perilously close to economic collapse, average Americans are sitting up and taking notice of the debate in Washington over financial reform. No one wants another financial crisis, and one thing that consumers, the White House, Congress, regulators and bankers of all stripes agree on is that financial reform is needed.
There is also broad agreement on the primary issues that reform effort must focus on, including ending the concept that any one institution is too big to fail and closing regulatory gaps that allowed securities firms and other non-banks to create huge problems for the economy. The legislation pending in Congress takes some positive steps toward addressing these matters. But it also stops short in several areas and goes overboard in others.
Traditional banks didn’t bring about the financial crisis. Their mission is, as it has always been, to serve their local community and make credit available to consumers and small businesses. The bill before the Senate unfortunately contains provisions that would hinder their ability to do this effectively and to provide the credit the local economy so badly needs to get back on track.
Consider, for example, the proposal to create a new Consumer Financial Protection Bureau. It sounds great in theory, and bankers strongly support improving consumer protections, especially for those consumers who patronize non-regulated shadow-banking businesses.
Consumers of traditional bank products and services already are among the most protected consumers there are. Congress and regulators already write, change and enforce needed new protections for those consumers. But not so for the shadow-banking customers.
Traditional banks and their employers must comply with more than 1,700 pages of consumer regulations every day. That’s about 37 pages per employee of the median-sized Georgia bank. The new bill would tack on 27 more provisions to that already heavy regulatory burden that will have a disproportionate impact on our smaller, community banks.
Creating a whole new bureaucracy will produce more problems than it will solve by putting the government in the business of deciding what products are right for bank customers.
It’s not a stretch to imagine that community banks could reasonably conclude that it is not worth offering some checking accounts, savings programs, home equity loans or other products that are specifically designed for their local markets because they don’t have the bureau’s stamp of approval.
This kind of invasive oversight undermines the essence and strength of community banks — namely, the relationships they have with their customers. How can they adhere to their mission if they can’t tailor products to meet the specific needs of their customers? What works in Massachusetts or Connecticut may not work in Georgia.
Then there is the issue of uneven enforcement of the rules. The new consumer rules would apply to both banks and non-banks, but enforcement against these non-banks, many of whom contributed greatly to the economic crisis, would be weak or nonexistent in many cases. In fact, Wall Street products, services and activities regulated by the Securities and Exchange Commission are specifically exempted from the new legislation.
How does that protect consumers from mortgage brokers or other financial entities outside of the traditional banking industry that made a disproportionate share of toxic loans and engaged in ultra-risky trading practices? It doesn’t.
There are other concerns. Yes, ending too-big-to-fail is critical, yet the Senate bill even falls short in this regard. The bill also contains provisions that will make credit less available for consumers and small businesses, and it doesn’t provide adequate oversight of accounting rules that greatly worsened the crisis.
Bankers support financial reform, but it needs to be done right — and it especially needs to be done with an eye toward the impact on communities. These issues are important, and vigorous, bi-partisan debate should be encouraged. The consequences of getting reform wrong are too great to be treated lightly.
Joe Brannen is president and CEO of the Georgia Bankers Association.