There is perhaps no other area of the federal government where personnel have a greater influence on policy than bank regulation. By picking the right regulators, the president can have a meaningful impact on the banking sector and the economy at large.
Banking has long been a bastion of static thinking on the regulatory front, and it needs a shot of dynamism. With recent confirmations at the Federal Reserve and the Office of the Comptroller of the Currency, and the nomination of a new chair of the Federal Deposit Insurance Corp., the administration is on the cusp of an overhaul of regulators that will have potentially far-reaching consequences. A new director—and new thinking—at the Consumer Financial Protection Bureau would also have a positive impact on the regulatory culture under which banks are operating.
The president’s new team of regulators can make an impact without any changes in the law or regulation in three key areas.
First, these regulators can approve new banks. Only six new banks have been chartered since 2010, and more than 2,000 have gone away. The attendant lack of dynamism and entrepreneurial disruption is palpable. Community banks are losing critical funding and payment market share to large banks and fintech companies. Traditional banks are crowding around discrete areas of the American wallet: middle-market commercial loans, owner-occupied commercial real estate and small business lending. Mortgage and consumer lending are increasingly offered by big companies that can afford to comply with costly rules. Customer contact and loan pricing is increasingly automated and regulated. New bank founders need the flexibility to build diversified portfolios, certainty around the capital required to implement a given business plan and certainty around the timeliness of the approval process. Greater transparency in these areas would contribute far more to stimulating new charter development than revising handbooks and holding conferences. Agency leaders can give that clarity right now, and they should.
Second, the burden of onsite bank exams is a continual concern. Most of these complaints are from banks so small that if any 200 of them were to fail tomorrow, it would hardly make a dent in the FDIC’s reserves. Banks divulge massive amounts of information to regulators on a quarterly basis. Couldn’t regulators perform remote exams of these small banks, with onsite spot checks as needed? Further, the rigid application of compliance regulations are eliminating small dollar lending programs at many community banks—to the detriment of the very customers these rules are supposed to be protecting. Wouldn’t community banks be better off if they could diversify their loan portfolios by offering products needed by their communities? Wouldn’t the industry be better served if examiners’ efforts were focused on large banks, where the customer experience needs improvement, and the consequences of failure are more severe?
A final element of dynamism relates to the ability to exit. Banking is one of the few industries where the government approves the sale of the company—and takes months, if not years, to do so. Even the smallest transactions are subject to geographic competition tests normally seen when titans merge and make no sense in this age of digital banking. The list of incentives for regulators to say “no” is long and getting longer. Third-party protest groups have no direct skin in the game, yet have great influence over the process. Meanwhile, stakeholders, customers, employees and communities are all in limbo. Regulators could address these concerns by setting deadlines, actively brokering conversations between all parties and holding public hearings in a matter of days, not months. Restoring a timely process could make a big difference in resolving these issues.
None of these efforts require changing a law or a regulation. All of them would improve the transparency and timeliness of regulation. Unfortunately, few of the beltway types that frequently occupy regulatory chairs have a business executive’s skill and experience in gathering information and making timely decisions. These skills are badly needed now in the regulatory arena. As the new administration gets its team in place, the president should know he can make a significant difference in banking just by choosing the right people to occupy the regulatory chairs—and then letting them do their work.