Let’s avoid collateral damage from financial regulatory reform

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Print this page by Bruce Whitehurst

The current debate in the U.S. Senate on the financial regulatory reform bill has significant long term consequences for our economy and our nation. Because the banking industry is objecting to elements of the bill that would do more harm than good, we are being portrayed by some as opposed to any type of financial regulatory reform.

Let me be very clear: banks of all sizes — community banks and large banks alike — are strongly in favor of financial reform that addresses the key problems that brought about the financial crisis of 2008-2009. 

The reality of the Dodd bill pending in the Senate is that it does not do enough in some areas and goes too far in others. If this bill were to pass Congress in its current form, the collateral damage on our banks — and therefore on their clients and on the economy at large — would be a regrettable, yet avoidable, consequence.

An overheated housing market, a secondary market with an insatiable appetite for subprime loans, underwriting standards that were too loose and extraordinary risk-taking on Wall Street were fundamental causes of our recent financial crisis.

So how does the Dodd bill measure up in terms of addressing these critical issues? First, the bill addresses systemic risk and seeks to end the idea of “Too Big to Fail” — areas where there is broad consensus that something must be done. Intelligent and informed people disagree on whether the bill as drafted accomplishes its intended objective, but there is positive bipartisan discussion under way. Better regulation of derivatives, hedge funds and a review of Wall Street’s proprietary trading practices are part of this discussion.

Second, the bill requires lenders to retain a small percentage of each mortgage loan they make if it is outside certain parameters. This may sound like a good idea, but would be very difficult to implement and may well reduce mortgage availability beyond reason.

What the bill does not address at all — in a major omission — is what to do with Fannie Mae and Freddie Mac, which are now essentially arms of the federal government. Reflecting on what could have made a difference in the past decade, it is clear that consistent underwriting standards are needed for a viable secondary market to continue. The bill should ensure Fannie and Freddie are financially strong and appropriately focused on underwriting standards that maintain a vibrant and low cost 30-year mortgage market.

Third, the bill would create a Consumer Financial Protection Bureau with broad independent rule writing authority.  It sounds great in theory, and bankers strongly support improving consumer protections.  But in practice, creating another new federal bureaucracy will produce more problems than it will solve by putting the government in charge of deciding what products are right for bank customers.

Unlike most countries that have just a handful of very large banks, the United States is well served to have thousands of community banks as well as larger institutions, so that banks of different sizes can serve clients in different ways. In fact, banks often tailor their products and services to best meet the needs of their local communities. However, if this new bureau were to mandate what products banks can and cannot offer, a “one size fits all” plan would take away a bank’s ability to best serve its local markets.

What’s more, the focus of this bureau would be placed much more squarely on traditional banks — which originated just 6 percent of subprime mortgages — and much less on the nonbank mortgage lenders and brokers, where 94 percent of subprime loans were made.

A bipartisan regulatory reform bill in the Senate is critical to all Americans, not just to the traditional banking industry. If we don’t get financial regulatory reform right, and the costs and burdens of new regulations outweigh any possible benefits, we will hamper our country’s best shot at a more robust economic future.

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