Right paths to financial reforms

By Roger Claypool

A year and a half after the country came perilously close to economic collapse, average Americans are sitting up and taking notice of the debate in Washington over financial reform. One thing that consumers, the White House, Congress, regulators and bankers of all stripes agree on is that reform is needed.

There is also broad agreement on the primary issues that reform effort must focus on, including end of the concept that any one institution is too big to fail and closing regulatory gaps that allowed securities firms and other non-banks to create huge problems for the economy. The legislation pending in Congress takes some positive steps. But it also stops short in several areas and goes overboard in others.

Traditional banks like mine didn't bring about the financial crisis. Our mission is to serve our local community and make credit available to consumers and small businesses. The bill before the Senate would hinder our ability to do this.

Consider, for example, the proposal to create a new Consumer Financial Protection Bureau. It sounds great in theory, and bankers strongly support improving consumer protections. But in practice, creating another new bureaucracy will produce more problems than it will solve by putting the government in the business of deciding what products are right for bank customers. Community banks could reasonably conclude that it is not worth offering checking accounts, savings programs, home equity loans or other products that are specifically designed for their local markets because they don't have the bureau's approval. This kind of invasive oversight undermines the essence and strength of community banks – namely, the relationships we have with our customers.

Then there is the issue of uneven enforcement of the rules. The new consumer rules would apply to both banks and non-banks, but enforcement against these non-banks, many of whom contributed greatly to the economic crisis, would be weak or nonexistent in many cases. Unlike the banking industry, a strong infrastructure for examination and enforcement does not exist for non-banks. How does that protect consumers from mortgage brokers or other financial entities outside of the traditional banking industry that made a disproportionate share of toxic loans?

The bill also would make credit less available for consumers and small businesses, and it doesn't provide adequate oversight of accounting rules that worsened the crisis.

Bankers support financial reform, but it must be done well. The consequences of getting it wrong are too great to be treated lightly.

Roger E. Claypool of Sioux City is chairman of the Iowa Bankers Association.