Banks should defend the CFPB out of self-interest

Al Drago/Bloomberg

The Trump administration is no fan of the Consumer Financial Protection Bureau and has done everything in its power to gut the agency. The D.C. District Court has repeatedly stymied those efforts, citing the principle of separation of powers. The administration's attacks seem to have little legal merit — after all, the agency was created by Congress, and only Congress can end it. Still, one can expect the administration to continue in its assault against the CFBP. Banks and credit unions must vigorously oppose these deregulatory moves, not only to promote the public's interest, but also out of cold self-interest.

According to research by the Edelman Trust, banks beat out other financial institutions such as fintech and crypto firms in consumer trust. However, that trust is eroding with younger generations. For instance, a report by FINRA found that 55% of members of Gen Z prefer to invest their money in cryptocurrency products over traditional banking options.

Cryptocurrency and similar nonbank alternatives are highly volatile and have decimated investor savings at rates normally seen during recessions. For instance, the Bank for International Settlements found that 75% of bitcoin investors have lost money, despite that asset's precipitous rise since its inception. While crypto and other nonbank options may be appropriate for certain risk-seeking investors, the vast majority of savers, investors, depositors and borrowers are better off relying on traditional banks and credit unions. The largely illiquid and highly volatile nonbank markets are rife with abuse. Even well-established and highly capitalized crypto players like Coinbase have faced penalties from state and federal regulators. So-called stablecoins have not been immune from allegations of fraud either, as is evident from the whopping $60 billion wipeout of the Luna crypto network. One might expect such abuses to motivate investors and deposits to return to traditional banks and credit unions, but that has not happened. Market forces alone have not soured consumers on nonbank options. That should be a worrying indicator for the legitimate banking sector.

While banks and credit unions are governed by strict regulations, fintech and crypto firms are free to offer analogous products while steering clear of such rules. And the new administration's hands-off policy forebodes continued laxity when it comes to nonbank regulation. This regulatory disparity allows nonbank actors to entice consumers with the lure of anticompetitive rates and returns that traditional players simply cannot afford. Moreover, banks cannot overcome their competitive disadvantage by simply joining the crypto game. Such incursions into the fray would still remain subject to prudential regulations, the Volcker Rule, Basel capital requirements and the like.

How can banks and credit unions compete against the seemingly inexorable hype surrounding the latest nonbank offerings? Perhaps ironically, the CFPB may be the answer. The traditional banking sector has been no fan of the CFPB, but it is high time that the industry reconsider that position.

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While the  Commodity Futures Trading Commission and SEC have wrangled over the authority to serve as primary regulator of crypto, the CFPB has been no shrinking violet in the space. The CFPB plays a vital role in protecting consumers from deceptive practices across financial asset classes including NFTs, video game currencies, cryptocurrencies and other darlings du jour. The agency has helped mediate thousands of complaints from consumers about crypto scams, and has issued advisories and guidance to steer consumers away from crypto-related fraud. The CFPB has also been particularly effective in its fight against more traditional predatory lending practices. Overall, the agency has helped to resolve over 3 million customer complaints in all industries. While other agencies make splashy headlines with big-figure settlements, the CFPB does much of its good work at the individual level, mediating consumer complaints on a case-by-case basis and without any fanfare.

Through these efforts, the CFPB has gained a well-earned reputation for being highly effective in helping to root out the fraud and corruption that beleaguer consumer markets. The banking industry needs a robust CFPB to continue that work. Robust consumer protections protect not just consumers but traditional banks as well.

There is ample precedent for the idea that robust consumer protections promote a stable financial climate that benefits mainstream financial institutions like traditional banks. Indeed, the world has already witnessed the damage that can be wrought by regulatory failure. As the Financial Crisis Inquiry Commission found in its postmortem of the 2008 Great Recession, greater fortitude by regulators might have helped avert much of the damage from that crisis.

By policing the excesses of the nonbank Wild West, a robust CFPB decreases the likelihood that consumers will dissipate their capital on high-risk nonbank options. Where would that capital flow instead? The natural consequence of a robust consumer protection regime is that consumers will increasingly rely on the stability and reliability of traditional banks. Simply put, the CFPB's work pushes capital away from volatile and speculative markets into stable ones.

To be sure, the CFPB's regulations have added some compliance burden to banks that play by the rules. But those costs are well justified by the systemic benefits that would inure to the benefit of both consumers and banks if the CFPB were allowed to pursue its critical work without political interference. Banks and their lobbyists must put appropriate pressure on the Trump administration to avoid any further gutting of the CFPB — for their own sake.