In the current environment, deregulation is in the wind, and the regulatory framework is being reassessed. But given the credit cycle’s natural ups and downs, this period of deregulation won’t last long.
As with every cyclical swing, some deregulatory changes will be sensible and durable, and some will not. So much of regulation unfortunately remains an art not a science. In practice, this means that there are some regulations that are needlessly burdensome and not particularly effective. On the other hand, without considerable care there is a danger that the wrong deregulation will expose institutions, their customers, and/or the financial system to outsize risks.
There are some deregulatory steps that can achieve the balance of increasing efficiency and lowering costs on the one hand, while, on the other hand, maintaining, if not increasing, safety and soundness. Banks and their trade associations should focus on one or more of these reforms, which I detail below, that fit this standard or fall in the simple category of good government — and before the winds shift and the door shuts on the current deregulatory period.
Elimination of regulatory duplication. Banks need one set of supervisors and rules to follow, not several covering the same issues. Having one agency accountable for each institution would improve outcomes. For example, one agency should be in charge of examination and supervision at each bank, not multiple. One agency should be in charge of ratings and enforcement at each institution, perhaps considering a collective multiagency view.
Streamlining regulatory duplication would eliminate billions of dollars of cost without harming safety and soundness or customer well-being. The agencies understand the importance of clear lines of accountability as a bedrock of good risk management. It’s incumbent upon them to work out their differences so that duplication is avoided and to achieve clear lines of accountability.
Requiring fair rights of appeal. Bankers and their advocates are concerned that our current appeals mechanisms don’t work, that there will be some form of retribution if they even question an agency judgment. In some cases, administrative law judges may lack proper objectivity or expertise to adjudicate a case fairly.
With the growing power of agencies in our daily lives, not just in banking, it should be a fundamental tenant of good government, indeed a fundamental human right, to provide everyone with a fair, unbiased right to appeal without fear of retribution. There are a variety of ways to do this.
One way is to enhance the current ombudsman programs at the federal agencies. An ombudsman program was created in 1993 during my tenure at the Office of the Comptroller of the Currency to settle disputes before they become contentious, and Congress subsequently made ombudsmen mandatory for the other banking agencies. But over time, the ombudsmen role has been weakened considerably. In some cases, ombudsman now can’t deal with enforcement matters, and in all cases, bankers have a real concern that there will be retribution. Though this is not the only appeals mechanism that should be considered, it worked at the OCC when I was comptroller, and it can and should be fixed.
Promoting innovation. Regulators should themselves innovate and encourage banks to innovate in ways that increase the effectiveness and efficiency of compliance with law and regulation without expensive manual solutions. There are dozens of bank and regulatory systems that would benefit from the utilization of new, innovative technologies
For example, to combat financial crime, institutions are working with intelligent robotic automation to help their analysts conduct know-your-customer due diligence through collecting and analyzing both structured and unstructured data. Such technological advances can also be used to more efficiently identify risky customer behavior from the high volumes of unproductive alerts current systems generate. Regulators and institutions working together to achieve this type of innovation would ensure far better compliance and a safer system for everyone.
Improving regulatory effectiveness. Now is the time for agencies and the private sector to work with academic institutions to establish a permanent, highly rigorous center for the study of effectiveness and efficiency in regulation. While banking agencies and bankers have many impressive experts in regulation, there are few academic centers around the globe that have strong or large enough departments with the requisite skills and experience to evaluate rules, particularly from an effectiveness and efficiency perspective.
A sustained effort in this area would pay big dividends for the private and public sectors as well as consumers. Everyone benefits by increasing the quality of regulation. It may never be a science, but by increasing rigor, through better utilization of data, experience and testing, we can distinguish what works from regulations that have become make-work.
Modernizing finance for low-income groups. This is a good time to implement creative as well as traditional products more effectively for low- and middle-income Americans. The fact is that too many Americans are struggling even in today’s growth economy. Thoughtful finance that allows for small- business development, the genuine advancement of financial literacy and the application of effective, community-focused banking standards — as opposed to fly-by-night piratical standards — for low- and middle-income customers can make an enormous difference for people and their communities.
There are two promising avenues of potential progress: using technology to lower the outsize costs of small-dollar loans and improving underwriting, again with advanced and technologically driven standards, so that one can better differentiate between sound and unsound loans. With such differentiation, the costs of borrowing for many low- and moderate-income Americans can materially decrease.
In sum, now is the time when sensible deregulatory efforts and steps toward innovation can lead to a better, safer financial system for consumers, bankers and regulators. The window of opportunity to be thoughtful and innovative while regulators are not pressed fighting fires is a narrow one. Carpe diem: We must seize the day.
