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Charlie Bantis: Guest opinion

Charlie Bantis
Special to The Aspen Times
Aspen, CO Colorado

One year ago the United States inaugurated a new president during one of the most troubling economic meltdowns in the past century. That meltdown was precipitated in part by the failure of several large financial institutions, including Lehman Brothers, Bear Stearns and AIG. The fallout spurred an effort in 2009 to reform America’s financial regulatory system, bringing the possibility of real changes in how consumers and small businesses receive financial services.

In early 2008, the Bush administration proposed a U.S. banking overhaul that would formalize the role of the Federal Reserve Bank, enhance federal regulation of lending and consolidate regulators. Then, in 2009, as President Obama began his term, Congress welcomed a slate of new legislators.

The new administration immediately set out financial regulatory reform as one of its three priorities. In mid-December, the U.S. House passed a final reform bill that tightens oversight of credit rating agencies, derivatives, executive pay, hedge funds, and consumer and investor protections.



Other factors being considered in the proposed reforms include:

• Instituting a single, independent regulator, the Financial Services Oversight Council, “with responsibility over systemically important firms and critical payment and settlement systems,” along with higher standards on capital and risk management for those firms. This includes supervision and oversight of financial markets and efforts to avoid or mitigate future financial crises.



• Restructuring the Federal Reserve Bank to provide better oversight and prevent economic disaster.

• Creating a Consumer Financial Protection Agency (CFPA) to oversee mortgages, credit cards and other consumer debts, and to design and mandate financial product offerings.

• Designating a new National Bank Supervisor to oversee all federally chartered banks.

• Establishing the first federal government office to monitor the insurance industry.

The U.S. Senate has not yet taken on financial regulatory reform, and the feud between the two bodies of Congress means the exact shape of reform is still nebulous, but it is clear that banking reform will have far-reaching consequences. We do know that some aspects of reform will hit consumers and businesses in the pocketbook. Already, changing regulations have required some financial institutions to revise or recall their product offerings, sometimes to the frustration of clients. Some possible outcomes include:

1. Eliminating “pre-emption” could hike costs.

The historic law of pre-emption, or allowing uniform national laws to pre-empt state laws, has provided a level playing field. Eliminating it, ostensibly so states can override regulations if their rules are tougher, will subject multistate banks to a patchwork of confusing and often conflicting state laws. Complying with an array of rules could make banking more expensive as banks’ expenses – and their fees – rise. Such rules also could fuel the rise of non-regulated lenders, whose practices could be far more abusive than those of regulated banks. And higher costs could fuel the trend of industry consolidation, eliminating smaller banks that have proven valuable during the most recent economic crisis.

2. The CFPA could have dangerous repercussions.

One-stop regulation, if implemented in the currently proposed fashion, could require Herculean efforts to monitor every product offered to consumers and small businesses – and that process could bring costs to match. Most seriously, it will not guarantee consumers’ safety. As President Obama pointed out earlier this year, 94 percent of subprime mortgage loans were originated outside the traditional banking industry.

After much debate, the House passed legislation that retains the CFPA, but that exempts 97.5 percent of U.S. banks – 8,000 of about 8,200 banks – from CFPA regulation. This exemption means costs will increase for consumers and businesses – without a concomitant increase in financial safety – and product and service offerings will decline.

3. Stringent regulations on big banks could raise the cost of credit.

In early December, lawmakers were responding to consumer complaints by writing bills that take a very strict approach against the biggest banks, those that fall into the “too big to fail” category. These efforts go beyond those suggested by the White House originally. They have the intent of providing a financial cushion in case of the future failure of a huge financial institution.

But the Obama administration has expressed concern that, if enacted, one plan could raise the cost of credit. While it’s important to have adequate capital, increasing capital requirements too much will require banks to increase loan rates, reduce interest on deposits, or both, just to maintain their profitability. Unfortunately, these changes make banking more costly for consumers and businesses. One consistent set of capital and risk guidelines that apply to all banks would go a long way toward building both a stronger banking system and better product and service offerings for customers.

4. Protective rules could eliminate choices.

Some rules that sound good on paper – such as eliminating abusive overdraft practices – could cause serious headaches for bank clients. With new overdraft regulations, banks would have to opt in or opt out to the lockdown on overdraft fees. Banks that participate would be limited in the types of accounts they can provide to customers, and many customers might find their account type eliminated, creating hassles for customers and the banks striving to serve them.

It is unfortunate that attempted reforms could limit the choices banks can offer. All along, responsible lenders have worked to keep their customers safe. The good news is that companies (and consumers) with cash flow, solid financials and owners with good personal credit still will be able to obtain financing, so long as they are not overleveraged. The lesson to take is that it is more important than ever to protect your future lending power by paying on time and safeguarding your financial health – but nevertheless, the upshot of reforms is that in the future, borrowing might cost more and be more difficult.


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