By Kathleen M. Murphy
President and CEO, Maryland Bankers Association

A year and a half after the country came perilously close to economic collapse, average Americans are sitting up and taking notice of the debate in Washington over financial reform.  No one wants another financial crisis, and one thing that consumers, the White House, Congress, regulators and bankers of all stripes agree on is that financial reform is needed.

There is also broad agreement on the primary issues that reform effort must focus on, including ending the concept that any one institution is too big to fail and closing regulatory gaps that allowed securities firms and other non-banks to create huge problems for the economy. The legislation pending in Congress takes some positive steps toward addressing these matters.  But it also stops short in several areas and goes overboard in others.

Traditional, FDIC-insured banks didn’t bring about the financial crisis.  Their mission is, as it has always been, to serve their local community and make credit available to consumers and small businesses.  The bill before the Senate unfortunately contains provisions that would hinder their ability to do this effectively and to provide the credit the local economy so badly needs to get back on track.

Consider, for example, the proposal to create a new Consumer Financial Protection Bureau.  It sounds great in theory, and bankers strongly support improving consumer protections.  But in practice, creating another new bureaucracy will produce more problems than it will solve by putting the government in the business of deciding what products are right for bank customers. Community banks could reasonably conclude that it is not worth offering checking accounts, savings programs, home equity loans or other products that are specifically designed for their local markets because they don’t have the bureau’s stamp of approval.  This kind of invasive oversight undermines the essence and strength of community banks – namely, the relationships we have with our customers.  How can we adhere to our mission if we can’t tailor products to meet the specific needs of our customers?

This new agency would require community banks to "geocode" deposits to track where they come from; collect and submit additional data to the government about loan applicants and meet a whole host of regulations designed to protect consumers from risky Wall Street investments that most community banks don't make in the first place.  That means more paperwork, more expenses and greater burden on already scarce resources, hindering community banks’ lending and community leadership.

Then there is the issue of uneven enforcement of the rules.  The new consumer rules would apply to both banks and non-banks, but enforcement against these non-banks, many of which contributed greatly to the economic crisis, would be weak or nonexistent in many cases.  Unlike the banking industry, a strong infrastructure for examination and enforcement of federal rules does not exist for non-banks.  How does that protect consumers from non-bank mortgage originators or other financial entities outside of the traditional banking industry that made a disproportionate share of toxic loans?

There are other concerns.  Ending too-big-to-fail is critical, yet the Senate bill falls short in this regard. The bill also contains provisions that will make credit less available for consumers and small businesses, and it doesn’t provide adequate oversight of accounting rules that greatly worsened the crisis.

Bankers support financial reform, but it needs to be done well—and it especially needs to be done with an eye toward the impact on communities like ours. These issues are important, and careful, vigorous debate should be encouraged. The consequences of getting reform wrong are too great to be treated lightly.

April 23, 2010