By James Kwak
To be clear, I favor the Consumer Financial Protection Agency. I favor it because I think it will be good for consumers. I also like to think that it will be good for small banks relative to big banks. My main argument for this is that should not harm the main competitive advantages of smaller banks, which should be customer service and local underwriting. But I’m still in favor of the CFPA even if it doesn’t help small banks.
John Pottow (hat tip Mike Konczal) agrees on the small bank point. His main argument is that the CFPA should lower fixed regulatory costs by making it easier to get approval for basic products. He also adds this point:
The current credit market, with its indecipherable multi-page contracts, is not competitive. Actually, that’s not true: It’s perniciously competitive — the competition focuses on better hiding fees in small print. Burying terms in legal documents is an activity where larger banks again hold the advantage. By contrast, a true plain vanilla market would remove the obfuscation and refocus the competition on price. Once more, smaller lenders would benefit from this increased transparency and leveled playing field.
Now, Stephen Ranzini, an executive at a small bank, did write in with this comment on Pottow’s article:
Since the penalty for offering any product that isn’t ‘plain vanilla’ will be severe if that product is ‘after the fact’ found to be not to the liking of these new CFPA bureaucrats, only plain vanilla products will be offered. Since large banks can leverage economies of scale and a lower compliance burden per dollar of assets to outprice smaller banks and we won’t be able to compete anymore by crafting niche products to serve niche needs, we will be screwed (as will our customers). Gov’t needs to better regulate the non-banks. Michigan has only 15 bank examiners for all the mortgage firms in the state. These non-banks created 95% of the toxic exotic mortgages because they aren’t effectively regulated.
Now, there’s a fair amount of hysteria and blame-the-other-guy in here. First, he throws in the insult of calling CFPA regulators “bureaucrats,” while later in the comment he says there should be more regulators – to regulate non-banks, not him. Note that he doesn’t call those other regulators “bureaucrats;” he calls them “bank examiners.” I agree that non-banks need more regulation, but I don’t agree with the implicit assumption that this can be done by traditional prudential regulators; we’ve already seen where that got us. Also, blaming subprime lending on “non-banks,” is disingenuous, although they did play a major role. Not only did the top 25 subprime lenders include banks such as Citi, Wells, Wachovia, Chase, HSBC, IndyMac, and National City, but most of the others were supported by large banks that provided financing by buying up their mortgages.
Still, though, if the commenter is right that the small bank strategy is “niche products to serve niche needs,” then he may have a point. I’m still skeptical, because his entire argument rests on the premise that regulation will be so severe that it will be chilling to the market – and when have we seen that in the last thirty years? – but there could be something there.
