Since the financial collapse of 2007-2008, the cry for greater regulation of the financial industry has been almost deafening. One major piece of legislation, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, was the "camel" that was produced.
This mish-mash of a bill is the most comprehensive financial regulatory package that was ever put together. And, like most financial reform and regulatory legislation it was designed to fight the past war, not the war or wars of the future. The bill was signed into law on July 21st of 2010 by President Barack Obama.
My feeling about the bill at that time? I believed that the Dodd-Frank Act was out-of-date at the time it was signed into law. My argument was that many banks, especially the bigger banks were already moving beyond the efforts of the legislators.
When I was in the Federal Reserve System (in the late 1960s), the feeling was that the Fed was about six months behind the banking system. That is, if the Fed put a new regulation on the banking system…say concerning Eurodollar deposits…the banks would move to somehow get around the regulations.
It would take at least six months for the Federal Reserve to catch up with what the banks were doing so that it could try another of regulation to get the impact on the banks and the banking system it wanted.
Of course, it was the bigger banks that were making the moves and keeping ahead of the Federal Reserve and other regulators. The Federal Reserve, and other regulators, were always behind playing catch-up!
And, that was before the revolution in information technology.
Right now, I would say that the big commercial banks are still substantially in advance of the Federal Reserve and the regulators, but I would not want to put a time period on the lead.
All, I know is that I was in a financial institution the other day and they told me that they had to be agile enough in the information technology field that they had to have a new generation of what they were doing out into the market place in nine to twelve months to keep up with or stay ahead of the competition.
Note that this effort was to stay ahead of the competition not the Federal Reserve or the regulators.
Second note. These bankers were not from small- or medium-sized commercial banks. The vast majority of small- and medium-sized commercial banks do not have this kind of talent.
It is my feeling that the Federal Reserve and the regulators lag significantly behind this time pacing.
These private sector bankers are young, savvy and sophisticated. They are on the cutting edge. Their whole business is based on their knowledge of and sophistication in the information technology space.
What the Fed does is not based on the cutting edge. What the Fed does, and other regulators do, is attempt to grade what a bank has done. Not what it is doing or, what it is going to do. Consequently, the Fed, and the other regulators, will always be behind time.
An instance of this has just been reported in the New York Times. It seems as if "Major banks have quickly become behind-the-scenes allies of Internet-based payday lenders that offer short-term loans with interest rates sometimes exceeding 500 percent." This quote is from the New York Times.
With 15 states banning payday loans, a growing number of the lenders have set up online operations in more hospitable states or far-flung locales like Belize, Malta, and the West Indies to more easily evade statewide caps on interest rates.
While the banks, which include giants like JPMorgan Chase, Bank of American and Well Fargo, do not make the loans, they are a critical link for the lenders, enabling the lenders to withdraw payments automatically from borrowers' bank accounts even in states where the loans are banned entirely.
The banking industry says it is simply serving customers who have authorized the lenders to withdraw money from the accounts." How, then, do the banks make money?
For the banks, it can be a lucrative partnership." But, many of the customers are on shaky financial footing. The withdrawals often set off a cascade of fees from problems like overdrafts. Roughly 27 percent of payday loan borrowers say that the loans caused them to overdraw their accounts…That fee income is coveted, given that financial regulations limiting fees on debit and credit cards have cost banks billions of dollars. But, there are also many other fees and charges that can be assessed for different aspects of the bank loan relationship.
A study by the Pew Charitable Trusts showed that by 2016 Internet loans will make up roughly 60 percent of the total payday loans, up from about 30 percent in 2011. More and more, it appears that these payday loans will be going offshore. As Dustin McDaniel, the attorney general of Arkansas, states, "The Internet knows no borders. There are layer upon layer of cyber-entities and some are difficult to trace."
I am not going to get engaged in a discussion about the desirability of this type of bank activity. All I want to present at this time is the evidence that the changing nature of technology has changed the environment. It is far easier to skirt and evade rules and regulations today than it ever was. Furthermore, it is going to be far easier in the future to get around regulations.
Can banks and non-banks be regulated? My answer is…not really in the way it is being done today.
Banks and non-banks will only be regulated in areas where the banks and non-banks allow it to happen. These will be in areas where the cost of regulation is not too high and the restrictions of the regulations do not keep the banks from lucrative customers.
In this respect, the banks tend to accept rules and regulations that apply to process and not to specific outcomes.
The effort to control payday lenders is an effort to shield people from predatory loans. That is a specific outcome. The rules and regulations applying to this specific outcome results in businesses moving to new venues and new technologies. Payday lenders are not just on the street corner of a impoverished neighbor of an urban environment.
Rules and regulations relating to process pertain to what is being done and how it is being done and not to the specific outcomes related to what is being done. The New York Times article ends with this: "Now the Online Lenders Alliance, a trade group, is backing legislation that would grant a federal charter for payday lenders." The lenders themselves are saying that regulation is not bad, in and of itself, but it needs to be the right kind of regulation.
Today it is easier for institutions to get around rules and regulations than ever before. They can also evade the rules and regulations faster than ever before. This evasion will only get easier and faster. Maybe our politicians and regulators should begin to realize this.