Financial regulatory headaches and head fakes

The Wall Street Journal’s article from earlier this week exploring the growing ranks of what the banking industry calls the “underbanked” (or “unbanked”) quickly became fodder for cable TV wonks, with sundry personalities sallying forth to defend or attack the notion that banks should do more to arrest the trend carrying folks away from traditional banks.

It’s a curious topic to become fixated upon, for while the trend is interesting in the abstract, it doesn’t really figure into the country’s still unresolved issues concerning “too big to fail” institutions and the score of regulatory fixes ushered into existence by the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that were meant to shore up the management of so-called systemic risk.

How much work still needs to be done by the federal agencies tasked with implementing Dodd-Frank? According to the law firm Davis Polk & Wardwell LLP, over 60% of the Dodd-Frank rulemaking deadlines have been missed with fully one-third of the required rules not even being proposed as yet. To restate, more than two years have passed since the passage of Dodd-Frank into law, and more than half of the enabling regulations are still under discussion. Given the regulators’ track record, some might be tempted to applaud their inaction; however, the agencies’ failure to implement the law also means that the proximate causes of the last meltdown are still out there, and implementing the law certainly wouldn’t increase the chances of another crisis.

So you will have to excuse me if I seem to have little interest in the relatively small movement of working class people away from the traditional banking system. Again, it’s an interesting subject for discussion in the abstract, but when you consider the mountain of rules needed in order to implement a two-year-old law, I can’t imagine that our regulators’ time is being well spent on the topic of the underbanked. Of course, that hasn’t stopped the Federal Deposit Insurance Corporation (FDIC) from issuing reports addressing the issue, expending precious bureaucratic bandwidth while major financial regulations that bear directly on systemic risk move along at a snail’s pace.

It’s not that I don’t believe consumer protection is important, but how many agencies does it take to monitor such things? FDIC maintains a consumer protection presence with a library of reports and rules on its website, even though the Dodd-Frank Act created a brand new agency – the Consumer Financial Protection Bureau (CFPB) – to handle all things related to consumer protection. FDIC is still very much involved with consumer protection, even though it is also tasked with weightier issues, such as being the chief liquidator of failed financial institutions, the details of which are still very much up in the air thanks to Dodd-Frank’s new Orderly Liquidation Authority. Given FDIC’s mixed-up miscellany of a portfolio, it is easy to imagine that the agency doesn’t have the focus or bandwidth to accomplish much of anything, despite the better efforts of Sheila Bair, the agency’s former chairman.

It’s becoming clear that we have reached a point of diminishing returns with financial regulation. We don’t so much replace bad regulations with better, new ones; we simply pile one set on top of the old ones until we are put in the shadow of a massive tumbling mountain of red tape that doesn’t quite solve anything. Perhaps what is needed is more clarity from the President and Congress. Or perhaps we need to refocus our efforts on a fewer number of issues, rather than the sprawling ambition of Dodd-Frank to regulate everything. After all, if Dodd-Frank is viewed as a legislative response to a very specific crisis, it fails on so many different levels (can you say conflict minerals?)

In any event, the institutions most hurt by our bureaucratic failures are the smaller community banks, for they are the ones that lack the wherewithal to handle the escalating costs of compliance.

Ironically, they are also the ones best positioned to address the needs of the underbanked.