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Opinions and views from expert CFOZone members.

Apr 01

Financial reform going nowhere fast

Posted by Ron F in Senate Banking CommitteeRiskRegulationPaul VolckerFederal ReserveConsumer Financial Protection AgencyCongressoinal Oversight PanelCongresscomplianceChris Doddbanking reformBankingbank failuresbailouts

Ron F

I see that the slow boat to financial reform continues to drift sideways, as Senate Banking Committee member Bob Corker followed Paul Volcker's call for action yesterday with a sorry-no-can-do.

Unlike health-care reform, Democrats will need the support of a Republican like Corker to get a bill containing resolution authority for big banks, derivatives regulation, and consumer protection enacted this year. Only one piece of legislation can be passed through the budget reconciliation process in any one year, and now that the process was used for health-care reform, everything else will require a filibuster-proof majority that the Democrats no longer have.

As we've noted before, consumer protection seems to be the big sticking point for GOP support of financial regulatory reform. But it's hard to understand the Republican position here without calling the industry out for rank hypocrisy, as the Congressional overseer of the bank bailouts, Elizabeth Warren, did in an editorial posted yesterday n Politico.

Warren notes that in 2006, the bank lobby that is helping to spur GOP opposition to consumer protection (and no doubt some Democratic hesitation as well) argued that oversight of that issue should be separate from bank oversight, whereas now the lobby is take the exact opposite position.

What's changed? Nothing that I can detect, except the fear that a regulator with clear responsibility for consumer protection will take that seriously as a result of the financial crisis. Why that is a problem remains puzzling, however.

Wrote Warren about the lobbyists: "They were just as willing to argue against the integration of safety and soundness and consumer protection functions in 2006 as they are willing to argue for the integration of safety and soundness and consumer protection functions today - so long as it derailed any meaningful consumer protection."

What gets lost in what passes for "debate" here is that consumer protection is not just for consumers. Sure, the idea is to keep banks from profiting on products that do little but hide risk. But that is hardly inconsistent with banks' safety and soundness unless you believe that they cannot make sufficient profits on an honest basis.

Sure, you can argue that regulators concerned with the safety and soundness of banks can protect consumers simply by making banks make good loans based on borrowers' ability to pay. But regulators failed miserably to do that in the years leading up to the crisis, as former Federal Reserve economist Richard Alford points out in a post at Naked Capitalism today.

"The Fed adopted a macro-economic framework for policy analysis that systematically underestimated (i.e., ignored) the importance of financial markets and institutions to policy and economic performance," Alford wrote. "Not surprisingly, it ignored its supervisory regulatory responsibilities."

 Yet even though the bill recently passed out of the Senate Banking Committee would house a consumer protection agency in the Fed, after Committee Chairman Chris Dodd backed down from creating a free-standing agency, the bank lobby remains opposed to any agency housed anywhere if it has such a mission.

As a result, so-called moderates like Corker want regulatory reform to move closer to what he calls the "middle of the road." But it sounds to me as if what they really want is to drive the rules into the same ditch where regulators put them before the crisis so banks can once again careen at full speed toward a meltdown. Makes perfect sense, no?

Sorry, but I'd say that contrary to what the Times reported today, Volcker still has his hands full.

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