University of Michigan Law Professor John Pattow, who specializes in Bankruptcy and Commercial Law, talks about the effects of a Consumer Financial Protection Agency (CFPA) on small banks:
Leaving aside the irony of the ABA’s new-found populism, the real objection to this argument is that it’s absurd. Simple economics suggests the CFPA would actually help small banks, for at least two reasons.
First, regulatory compliance costs are largely fixed. Big issuers do indeed have an advantage with fixed costs, as they can spread the costs over more borrowers. But the plain vanilla rule would lower fixed regulatory costs by providing one-time, simple-template approval for products underwritten by the CFPA. Smaller issuers should rejoice in this reduction of fixed costs as it chips away at the current advantages the regulatory structure accords large lenders.
Second, and more important, plain vanilla products will achieve a transparency long overdue in the financial products market. Markets depend on consumer choice, and consumer choice is missing when consumers cannot understand or compare the terms and conditions of financial products.
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.
To be sure, there may be some industry segmentation. Smaller institutions will likely gravitate toward the plain vanilla products, and the mega-banks might specialize in the exotica. But this likely mirrors current practice: Small banks are inclined toward simple products that can be explained readily to small bank customers, just as the bigger banks are likely to pursue the complex products tailored ones for larger customers. By reducing the costs of plain vanilla products, we would be helping, not hurting, the little guy.
I wrote about the issue, and my worries and hopes about it, for The Atlantic’s Business Channel. This does make me less worried that a CFPA would be just another hurdle that would hurt small banks, and would give them an actual competitive edge instead.
The small banks see the government approaching and know two things:
(a) the rules will be written for the benefit of the big banks;
(b) the small banks are have plenty of skeletons that have conveniently been overlooked by regulators who are more focused on the big guys.
I suspect their objections have little to do with any substance of a CFPA and far more to do with their opposition to any increase in government intrusion. Right now, Wall Street looks set to block all regulation, full stop. Since that is the only outcome that allows the little guys to continue to pull the creative accounting stunts that have defined their business models (look at the recovery rates on FDIC seizures – these guys hold some amazingly nonperforming assets that they simply refuse to write down), why break the unified stance?
The small banks fear the government far more than they fear the big banks.
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