Many financial sector executives are not fans of bank regulators -- to put it mildly. But I have a different perspective: I love my bank regulator. Here's why -- and why you should, too.
This week marks four years since the passage of Dodd-Frank, the major financial reform legislation that emerged in the aftermath of the financial crisis. The law remains a contested work in progress; roughly half of its 400 parts still have not been implemented, and armies of lobbyists are trying to undo the parts that have been put in place.
The only upside of the financial crisis is that it should have forced us all -- elected officials included -- to recognize that under-regulated, risky behavior on Wall Street puts us all at risk. Estimates vary, but the deepest recession since the Great Depression could have cost the U.S. economy $25 trillion or more. It should also have taught us that a robust regulatory system is a necessary line of defense to protect our economy from financial calamity. Six years after the greatest financial crisis since the Great Depression, it's important that elected officials understand they can't just pay lip service to these principles while enabling powerful interests to lead us toward another crash -- and requiring taxpayers to foot the bill.
To understand where we are now and what remains to be done, it helps to review what happened in the years leading up to the financial crisis. Elected officials -- influenced by lobbyists -- chipped away at the regulatory framework that had helped us avoid economic calamities for decades. Regulatory budgets, which provide the manpower to enforce financial regulations, also became insufficient for the task of overseeing an industry that ballooned over the last few decades.
The result: A weak regulatory system that allowed banks to engage in too much risky activity and brought the global economy to the brink of destruction. Now, less than a decade later, have we learned our lesson about the dangers of deregulation and regulatory inaction? Yes and no.
Dodd-Frank contains the most significant financial reform measures since the Great Depression's aftermath. But every step of the way so far, from drafting to implementation, special interests have attempted to weaken, delay and dilute them as much as possible.
As a bank president, I get a significant opportunity to talk with regulators who visit our institution to check on our progress. They diligently examine the loans we make; they look at the investments on our balance sheet; they review our processes and procedures to make sure that we are running a safe and sound institution that is not putting our depositors' savings at risk or engaging in risky activity that could result in a bank failure. The examination process helps ensure that we run a better business, that we generate real earnings, and that we have good management in place. And -- believe it or not -- the bank regulators want to make sure that the banks they oversee are profitable. In my interactions with examiners, it's very clear that they believe they have a mission to protect the banking system for the purpose of helping make our economy function better. For this effort, they are vilified rather than celebrated by the anti-regulatory crowd in industry and on Capitol Hill.
As a business leader, would I prefer to have more of a free hand? Possibly. But, make no mistake about it, without strong regulation, the lure of higher returns would cause too many bankers to pursue riskier investments or make riskier loans. That happened in the run up to the 2008 crash and we need to make sure it does not happen again.
As we look to how future crises might unfold -- or be prevented in the first place -- authorities are at last working to hold those responsible for the last crisis accountable. The Justice Department has or is negotiating big settlements with banks like Citigroup and Bank of America around allegedly fraudulent mortgage-related activity that, in part, precipitated the financial crisis. Those ex post facto penalties are critical, but more important is having a strong regulatory regime in place to make sure those abuses are never again tolerated.
To protect our economy, our job market and our communities going forward, we need to ensure we've learned our lesson from the 2008 crisis. One key lesson is that we -- including those of us in the finance industry -- need to learn to love our regulators. That means giving them the tools they need -- effective laws, manpower and other resources--to do their jobs and safeguard our financial system. We've seen what happens when we don't.