Felix Salmon and Simon Johnson are wondering why community banks are lobbying against the Consumer Financial Protection Agency, or CFPA. Both of them agree that community banks should support the CFPA, and find the opposition a kind of mystery that needs to be solved.
It’s actually not that mysterious at all. Community bankers are concerned that a new tranche of regulatory costs is being added to their overhead without much forethought about the unintended consequences.
Felix Salmon comes closest to the truth when he says community banks opposition is rooted in a “combination of fear of the unknown, on the one hand, and fear of the big banks.” But he doesn’t understand that this is more than a vague concern. It’s a very particular concern about the dynamics of regulation.
First, nearly all financial regulatory move made since the Great Depression has favoured larger banks over smaller ones. This includes both new regulations put in place and old ones removed. From the Community Reinvestment Act to the repeal of Glass-Steagall, we’ve helped bigger banks and hurt smaller ones. This isn’t just “regulatory capture,” which implies there was a period in which the regulations weren’t captured. In fact, regulations operated right from the start to enable to more powerful.
Very specifically, the CFPA will impose not only some very specific national rules on banks across the country, it will create an open-ended national rule making authority that will certainly be used in ways that no one today can anticipate. Let’s take just the notion of the CFPA mandating a basic offering of “plain vanilla” mortgages, and increasing the cost to banks of offering more complicated mortgages. Obviously, one of the advantages of community banks is that they can more easily adapt to local circumstances and lending demands. The imposition of a national mortgage standard, however, greatly undermines this ability.
Second, the bankers are no doubt wary about the CFPA because it is once again based on the ideology of regulators. That is, much of the act assumes that rational, uninterested regulators can correct for irrational, self-dealing market actors. But there’s no basis for this double standard. Regulators are just as prone to error as capitalists. Except regualtory error, especially when imposed on the national level, is harder to detect, harder to correct and brooks no dissent. Bankers who disagree with each other get to adopt different banking strategies. Bankers who disagree with regulators get to go to jail.
Third, the community banks justifiably fear getting caught between the pinchers of conflicting regulations. On the one hand, they will face the safety and soundness regulations from the Fed and FDIC. On the other, they will have the CRA and other fair lending enforcement from the CFPA. This is touted by advocates of the CFPA as eliminating conflicts of interest among regulators. But it could very well put the community banks in the unenviable position of answering to too many masters.
Fourth, the creation of a new set of rules with new goals and a new enforcement agency makes regulation more complex. This creates additional room for regulatory abuse and error because it effectively shields regulators from public scrutiny. The complexity creates ignorance which leaves room for state autonomy, undermining the checks on abuse that democratic political control can impose on government agencies.
Finally, the history of financial regulation suggests that there will be huge, unintended and unanticipated costs to this new set of regulations. Let’s quickly review: populist fears of bankers political influence led to state laws prohibiting banks from having multiple branches; one-branch banks were the majority of bank failures in the early days of the Great Depression, necessitating FDIC insurance; insured bank accounts created moral hazard risks that led to capital requirements for banks; capital requirements for banks led to the entrenchment of the Big Three ratings agencies, a huge run-up in securitization, and the loading up of MBS on bank balance sheets; this regulatory situation created our current mess. Why hasn’t more time been spent thinking about the likelihood of the next crisis in the making with the CFPA?
The mystery isn’t why community bankers oppose the CFPA. It’s why sensible advocates of safer banking like Salmon and Johnson are so eager to support it.
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