Experts Criticize Obama For Lack Of Focus On Regulation And Community Banks

07/13/2009 05:12 am ET | Updated May 25, 2011

Despite signs of improvement in the U.S. economy, some economic experts, and even officials associated with the recovery effort, have begun to worry aloud that the administration's approach is too broadly national, ignoring state and local concerns.

There are two main areas of concern about the White House's approach: Its effort to resuscitate the nation's banks and its vision for a regulatory system to prevent a similar economic crisis from occurring again.

With regard to the Troubled Asset Relief Program, the Treasury Department has poured billions of dollars into local and community banks to date. But officials continue to insist that the plan falls short, overshadowed and marginalized by efforts to prop up the larger financial institutions.

Richard Neiman, a member of the TARP Congressional Oversight Panel, told the Huffington Post that the Treasury should focus more on the role of community banks. "The first thing to note is that the community banks for the most part steered clear of the toxic assets and creative products that gave rise to the sub prime crisis that create problems for the national banks. They continue, to a great extent, to stick to the originate-and-hold model as opposed to the originate and distribute, meaning that many of the assets that they generate remain on those banks' books and the relationship they have with the borrowers is an important relationship that lasts beyond the origination of that loan."

Christopher Whalen, co-founder of Institutional Risk Analytics -- a risk ratings publication -- went a bit further during a discussion on Wednesday, suggesting the current structure of the TARP was inherently unfair.

"In our country we have made a very conscious but implicit choice," he said. "There's been no vote on the Hill. There's been no discussion with the American people. We have chosen the government-sponsored entity as the winner. So in other words, if you're not sponsored by Washington... you're really out of luck as a small institution. Not only are they going to treat you badly compared to the zombies but they may even put you out of business by confiscating your earnings and your capital over the next couple of years to help pay for what the zombie banks are still doing."

According to analysis from the Independent Community Bankers of America, the Treasury's Capital Purchase Program has to date paid out $12.6 billion to 541 banks, which have under $10 billion in assets. Contrast that to the $156 billion paid to 50 banks with over $10 billion in assets. Treasury Secretary Timothy Geithner has pledged to give small banks some of the money returned by the major TARP recipients. To this point, there is limited evidence of that happening.

The money discrepancy has raised concerns among some economists. Though Karen Thomas, an executive vice president with ICBA, says her real worry is the design of the government's bank-rescue programs.

"When community banks look at the overall situation, they see the largest institutions have caused the problem and they have had to pay a lot of the price in terms of the fallout of the economy," she said. "They are now facing serious challenges in their market places and so forth. Most of the programs created are designed and used by the larger institutions."

Of greater concern for Thomas, however, is the type of regulatory structure that the Obama White House may institute in order to prevent the next economic collapse.

"We see a lot of danger to a single prudent regulator that would have enormous power of the banking system," she said, reflecting the general interest of other community banks. "What we think regulatory reform needs to focus on is getting a handle on the unregulated institutions and fill those gaps and to focus on the systemic risk institutions and take measures to reduce that systemic risk."

Currently, the administration is crafting a new set of reforms to the regulatory system, likely to be announced in the weeks ahead. On Tuesday Secretary Geithner outlined an approach that included "systemic risk regulations" bolstering "consumer and investor protections," and streamlining "out-of-date regulatory structures."

As for the details, they remain vague. But local officials and even some national figures have begun to push more forcefully for a system that is less centralized and more focused on state and community actors. Dismissing concerns that such a system would create a bureaucratic mess -- an alphabet soup of regulation -- in which certain states with lax rules become home bases for banking activity, these officials touted local regulatory institutions as strong watchdogs on the world of finance.

"Having multiple regulators does not mean you are replicating what the other one does," said Neiman, "but that you are leveraging, either through alternate exams or concurrent exams where you divide up responsibilities, in my opinion produces a better result than a singular result."

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