Simon Johnson, today, wonders why America’s small community banks are lobbying against the Consumer Financial Protection Agency, or CFPA. He gives some very big-picture reasons why they shouldn’t — basically, what’s good for consumers is good for their bankers. But on a much narrower level, the opposition still doesn’t make much sense. Here are some reasons why:
- Small community banks are good at boring, simple banking — think the Bailey Building & Loan. That kind of activity should pass a CFPA audit without breaking a sweat. Conversely, a CFPA audit is akin to a tax on size and complexity — the more opaque a bank and its products, the harder it will be to persuade the CFPA that what it’s doing is good for consumers.
- Small community banks compete with predatory lenders, and in extremis are forced into the gutter with them. The CFPA, by severely curtailing predatory activity, moves the battleground back onto the community lenders’ own turf. More generally, the CFPA will turn formerly-unregulated lenders into regulated financial institutions, which will help level the competitive playing field.
- The CFPA is rightly prejudiced against yield spread premiums and other hidden ways of gouging consumers, such as putting prime customers into subprime loans. Small community banks don’t engage in such shenanigans. Meanwhile, community banks are really good at old-fashioned know-your-customer underwriting, which the big financial institutions find more or less impossible.
So why the opposition? I think it’s a combination of fear of the unknown, on the one hand, and fear of the big banks, on the other. Since every regulator to date has been successfully captured by Wall Street, it’s reasonable to assume that the CFPA might end up being captured by Wall Street too. In which case the burdens of the CFPA might end up being borne disproportionately by smaller community banks.
There may be great opportunities to profit by deceiving consumers, and large scale advertising and other marketing can be very effective at that. Big companies are much more capable of doing this than small ones because of the great economies of scale involved. With regulation, you can take away these opportunities to deceive people into taking bad deals with large scale marketing, and this hurts the big companies’ competitiveness much more than the small ones’.
This may be an important issue. With things more plain vanilla and clear, a lot of customers may have a natural preference to go with the local community bank. If the big and/or internet banks can’t falsely make it seem like they have a substantially better deal through confusion, a lot of people may like to just go to their local bank, by their home, and sit down with someone.
The question is, how do we persuade the community bankers themselves of this? How can we turn their fear into greed? Because they could make the difference between the CFPA coming into existence and it dying a death in committee somewhere.