Yesterday’s New York Times had a staff editorial (“Quietly Killing a Consumer Watchdog”) complaining that “Republicans are using backdoor methods to destroy” the Consumer Financial Protection Bureau because it has done such a good job of protecting consumers. According to the editors, Republicans want to “prevent the bureau from regulating their financial supporters.” Andrew Rosenthal echoed a similar tune last week, arguing that Republicans “want to shrink [the CFPB] down to the size where they can drown it in the bathtub.”
This theory, which I wrote about on Friday, argues that complying with the Constitution by bringing the CFPB under meaningful government oversight does the bidding of big banks. Apparently, proper oversight results in fewer effective regulations (a dubious proposition to begin with), which helps the banks’ bottom line. This misguided notion — that reducing regulations always helps big banks — is worth deconstructing, as it is one of the biggest hurdles to sensible regulatory reforms.
It is well known in the financial industry that the biggest players in the industry have made peace with the Obama administration regarding Dodd-Frank. While small banks have difficulties complying with onerous regulatory requirements, large banks rely upon lawyers, lobbyists, and in-house regulatory-compliance divisions to bear their regulatory burden. This means that Dodd-Frank will probably actually increase the market share of large banks, even if their costs technically go up.
J. P. Morgan’s behavior exemplifies this phenomenon. Their chief, Jamie Dimon, believes that Dodd-Frank is going to make it tougher for community banks to exist, while ultimately helping his firm (already the biggest in the U.S.) increase their market share (h/t Tim Carney):
In Dimon’s eyes, higher capital rules, Volcker, and [over the counter] derivative reforms longer-term make it more expensive and tend to make it tougher for smaller players to enter the market, effectively widening JPM’s “moat.” While there will be some drags on profitability – as prices and margins narrow, efficient scale players like JPM should eventually be able to gain market share.
Admittedly, properly designed OTC-derivative rules and capital requirements could be sensible, but regulatory costs help large banks regardless of the policies from which they result.
So who really has an incentive to alleviate Dodd-Frank’s costs? Community banks, whose relationship banking model protects underserved constituencies, such as farmers and small businesses. According to a story published last week by the Hill:
“To alleviate the burden of excessive regulation on the nation’s community banks, ICBA is calling on policymakers to carve out community banks from new regulations while continuing to pursue tiered regulation that distinguishes between community banks and larger and riskier institutions,” said ICBA head Camden Fine. “Community banks have little in common with Wall Street firms, megabanks or shadow banking institutions and did not cause the financial crisis or perpetrate abusive consumer practices.”
If you don’t want to take a trade group’s word for it, how about former governor of Montana, Democrat Brian Schweitzer, who probably knows a thing or two about the importance of community banks to rural economies:
Banks that actually did their job like in Montana — where we didn’t have banks go upside down, because they made you bring your financials in and they’d only loan you money if they understood your business plan — now, they are the ones that are being penalized. They now have more regulation on them, and it’s more difficult for them to make the loans. The very banks that were doing their job are having a tougher time because of the banks that are too big to fail.
Or Charlie Maddy, the CEO of Summit Financial Group, which “serves communities located in the south-central and eastern panhandle regions of West Virginia as well as in the Shenandoah Valley and northern regions of Virginia”:
The Dodd-Frank Act was intended to stop the problem of too-big-to-fail, yet now we have even bigger institutions; ironically, the result may be that some banks will be too-small-to-survive the onslaught of the Dodd-Frank rules.
The Obama administration’s bias against community banks is so pervasive that former special inspector general for TARP, Neil Barofsky, argued that, during the financial crisis, Treasury secretary Timothy Geithner “made the preservation of the largest banks, no matter the consequences, a top priority of the US government.” (emphasis mine).
Fortunately, any political observer can see that pointing out this bias toward big banks could pay out great political dividends. Hopefully more politicians and policy-makers will recognize this, and start aligning our regulatory structure with both the Constitution and good policy.