Obama's Smart Move On Big Banks
The Obama administration's proposal to fund a consumer financial protection agency with fees charged to big banks is smart on two counts: Economically, it helps temper the advantages enjoyed by financial institutions considered too big to fail, thereby discouraging their growth to dangerous levels; and politically, it goes a long way toward securing the support of smaller banks that have staunchly opposed a consumer agency on the grounds that it would further disadvantage them.
The idea is also supremely fair, despite protests to the contrary from the Financial Services Roundtable, which represents large firms. First of all, big banks tend to hold more complicated assets and are thus more expensive to supervise. In addition, numerous academic studies have found that big banks are riskier, more prone to failure, and more expensive for consumers than their smaller counterparts. Their disproportionate contribution to risk should be reflected in the fee structure.
As reported by the Washington Post, the Obama plan would require any bank with more than $10 billion in assets to pay higher fees to its current regulator as well as the new consumer agency. The focus on assets versus deposits is important, because big banks are more likely to hold derivatives and other non-depository assets than smaller banks. The plan would also force non-bank mortgage lenders and other previously unregulated consumer financial firms to pay into the regulatory structure and abide by it. This addresses another source of resentment for small bankers, who have viewed these non-regulated competitors as unfairly advantaged.
The Independent Community Bankers Association, which represents some 8,000 small and mid-sized banks across the country and has a strong lobbying presence, holds a unique, straddling position on financial reform. On one hand, its members favor greater restrictions on big banks and have decried the bailouts, which they view as rewarding risky behavior. At the same time, the group has been courted by big banks to help defeat the proposed financial consumer agency, which both groups have opposed for different reasons.
The Obama funding proposal strikes at the heart of that uneasy alliance, and appears to have been successful. In a statement today, the ICBA hailed the funding plan and asked the administration to strike an even tougher pose toward big banks: "to either downsize these mega-institutions or require them to divest sufficient assets so they no longer pose risks to the entire financial system." While not specifically addressing the issue of consumer protection, the statement sounded far more conciliatory than in the past, saying: "The ICBA looks forward to working with the Obama administration and Congress on behalf of America's community banks and the communities they proudly serve to ensure that regulatory reforms make our nation's financial system even stronger than before the current economic crisis began."
At a June 10 forum on community banks at the Economic Policy Institute, it became clear that the ICBA shares some positions with progressive reformers and could be an occasional ally with groups such as the broad-based coalition Americans for Financial Reform - but for its intransigence on consumer protection. A break in the old alignments could be good news all around.
From an economic standpoint, the plan is equally deserving of praise. This is the first time the administration has proposed a two-tiered fee structure with a higher penalty on big banks, an approach that could discourage banks from taking advantage of their size or growing very large to begin with. It is too soon to know whether the fees in this package, which have not been announced, are sufficiently large to have such an impact -- but they are at least a move in the right direction.
Economists have long worried that banks considered "Too Big To Fail" enjoy an implicit guarantee from the government and are emboldened to take ever greater risks. The problem, known as moral hazard, was described succinctly by economists John H. Boyd and Ravi Jacannathan in the July issue of The Economists Voice: "Knowing they will be protected by government if things go badly, large banks are willing to take more risk than they otherwise would have done. To make matters worse, the special protection afforded by TBTF status is highly valuable. Recent research suggests that banking firms will pay huge acquisition premium just to get into the TBTF size range." Boyd and Jacannathan recommend breaking up mega-banks, or at the very least, regulating them much more stringently. The latest Obama proposal would not only do that, it was also ask the big banks to pay for service.
Robert L. Borosage: Wall Street Rules: The Bernanke Reappointment
Ben Bernanke has performed valiantly in an unprecedented crisis. But save the laurels for later; the Senate should grill him, not deify him.
Loading comments…
Want to reply to a comment? Hint: Click "Reply" at the bottom of the comment; after being approved your comment will appear directly underneath the comment you replied to
Well, what do you know? Obama and his team are actually trying to regulate the giants and look out for the little guy. I'm happy to be proved wrong at least a bit about my cynicism that they are in bed with the big banks - at least we have a foot out of the bed!
great, we lent the bankster who caused the crash 25T$, I bet they can find some pocket change for regulation...not.
Time for the Fed to hit the reset button!
Colonial bank is a good example.
a new spin by wall street agent.
No Wall Street agent would admit there are studies showing the biggest banks are the riskiest because those are part of the Wall Street finance complex.
They are the riskiest because they deal the most with derivatives, financial instruments that increase systemic risks, yet philosophically sold otherwise with citations to Ayn Rand novels or whatever.
Finance opposes any regulation, why not? Most derivatives should be banned. The world did better without them. Traders themselves call them "toxic."
But Obama has made it clear that they will continue with "innovation", more of the same.
The way I read it, there are all the committees and regulators already extant to enforce and enact regulations. The new commission, I thought, was merely a way, fashionable in Illinois politics, to sidestep bureacracies and make new ones where to stash cronies as overseers. I will think about it more.
Anyways, if middle sized banks had the guts, they would lobby for derivative legislation/rules now and publicly complain about unequal treatment.
While in principle this sounds good, the point made by one blogger that this is similar to the FDA is a good one - rating agencies, which were supposed to perform a similar function of protecting investors is another. The bottom line is that these type of agencies are loath to bite the hand that feeds them and eventually succumb to the pressure applied by those hands.
You make a good point but even those agencies not directly funded by fees from the entities they oversee are no less susceptible to the pressure you speak of. One has only to look at the Bernie Madoff debacle to realize that enforcement is key. Will a new agency like the CFPA have the enforcement power necessary to be successful albeit not perfect but reasonably successful given its mandate. I don't know, but doing nothing isn't acceptable.
The fees will simply be passed on and as someone already said and it is worth repeating, the banks should have little to no influence on regulation dealing with public standards of ethics, regulation, and, let's not forget ENFORCEMENT, without which the rest is a charade.
Obama is again setting up the banks to be effectively steer public policy towards their interests, be so-called self-regulation, and impose very weak enforcement of standards and regulations. I am sure the author knows this, so this is a lobbyist's piece for banks, antagonistic to public interests and welfare... and what has become a typical Obama solutions to problems, a masquerade of words covering special interests policies hostile to public interests, societal fairness, the purpose of government, and the future of the vast majority of the American people; and, without doubt, shows Obama hypocrisy, disingenuous rhetoric, and frankly, weak and poor character. Reality is what is is, not what I had hoped it would be...
If the banks pay for it then it will end up like the FDA. Pharma pay for the FDA to review drugs, actually they pay for fast tracking them. I'm sure an economist dreamed that up too as a "good idea".
But as policy this has turned out to be a mistake. Since the drug companies can now fast track drugs to market they are pushing more drugs to market even if there is no need for the knew drug and even if its not cost effective. The old system required the drug makers to plan carefully for which drugs were the most important.
I can imagine something similar happening in the bank scheme. We could have banks paying for their regulation paying to fast track regulations or financial instruments that are useless.
Do you really think that the banks will pay for this? The taxpayer will pay for this through bank charges, etc.
This article is ridiculous and ignores reality. Wake up.
So you think the taxpayers should just pay for the regulation? You oppose two-tier fee structure? What is your position on paying for regulators to watch the banks?
I truly don't understand why there is such opposition to a CFPA. An agency designed to protect consumers from deceptive industry practices and to oversee and hopefully enforce new stronger protective regulations. It is exactly this fierce opposition that underscores the need for such an agency in the first place. I am in favor and I think the general public is in favor of any intervention including stiff fees imposed upon these so called "Goliath financial institutions" to absorb the cost of the CFPA. As to concerns over any trickle down fees to consumers, the article aptly points out there are over 8,000 small to mid-size banks that will gladly court middle class consumer business with reasonable fees. I mean that's free market capitalism, right?
There must be painful consequences for the flagrantly prodigal behavior by these bailed out institutions, or I will continue to feel like I am watching a B movie in bizarro world where the villains get champagne kisses and caviar dreams and honest hardworking middle America caters the affair and cleans up afterward.
I'll tell you why...it is because every time we get in Repugs (remember they have held the executive branch since 1952 for 36 years of the last 56 years) and as soon as they get in they cut the regulators to the bone or cut them off at the knees....
So what is the point of generating another agency when we have agencies that could do the work if they were motivated or incentivized or required by the managers....ASK SPITZER, he can get the job done without a new agency...
We need to LEGISLATIVELY reinstate all the regulations, including another version of Glass-Steagall, that were done away with by Rubin, Gramm, Clinton, Bush, et al, in the late 90s-early 2000s.
I am at the bottom the the banker food. We are the community banks and our customers are not getting help or money. I want the government to lend directly to those customers, and get capital flowing again.
Treat the small business guy as well as you treat the corporate giants. WE DESERVE SOME HELP
we the people will start non-profit credit union and
put you bankers, big or small, out of your misery SOON.
I like Ellen Brown's ideas for establishing state banks not beholden to the FED, as they have in North Dakota, which is one of the few states not in financial hell right now.
This is something the administration should push through, with or without Repub support. It would go a long way toward easing concerns of taxpayers who fought against the bailout.
I agree with the theory and the proposal, but those costs would just be passed on to the customers in the form of higher fees for any and every service. You wanna deposit that check with a human teller? That'll be 20 bucks. Bank of America is a perfect example: right after they got billions in tarp money and announced thousands of layoffs, they raised their monthly service charge on our business checking account from $17 to $30. We closed the account. That's why anyone with a lick of sense will put their money in a credit union, I do. Have never regretted it. My credit union has done more for me than any bank could ever do.
Then support your smaller, local banks, or do the smart thing and enroll in your local credit union.
So, yes, you're right. We shouldn't support these behemoths with our money. My credit union has lower fees on everything, I have a personal relationship with my banker (they know my name and how they've helped me in the past), and I've never had a problem getting a line of credit.
I'll see it when I believe it.
- doubter
You must be logged in to comment. Log in or connect with
