The very regulations designed to reel in bad behavior by large banks is ironically helping them. How can that be so? There were many abuses within the banking and financial services industry leading up to the Great Recession. Large banks and mortgage brokers made loans to people who wouldn’t normally qualify or have the capacity to repay a loan, investment banks repackaged these mortgages into complex investment contraptions without due diligence and risk analysis, rating agencies cavalierly gave their blessings to these high risk securities and many borrowed to purchase these fractured investments. The bubble burst, people lost jobs, homes and retirement savings. Folks in the Bay Area and around the country were justifiably outraged at the reckless behavior of large commercial banks, investment banks, mortgage bankers and shadow banks, those financial services companies that provide many of the same services as banks but are not banks. Riding the wave of public anger, congress authored the Dodd Frank legislation (http://www.sec.gov/about/laws/wallstreetreform-cpa.pdf) to prevent this kind of behavior from happening again, hopefully forestalling another economic meltdown that might strong-arm our economy, and the world’s economy, into a catastrophic depression. Good idea, right? Well, not exactly. The country’s largest banks, JPMorgan Chase, www.jpmorganchase.com, Bank of America, www.bankofamerica.com, Citibank, www.citibank.com, Wells Fargo, www.wellsfargo.com, and Goldman Sachs, www.goldmansachs.com, all have a presence in the Bay Area. These banks are enormous corporations with legions of lawyers, compliance personnel and war chests of cash. As challenging as the existing and new regulations are, ( see Dodd Frank, Basel III, Consumer Financial Protection Bureau), these large banks have unlimited resources and can make the deliberate choice to comply, litigate, delay or simply carry on with business as usual and pay fines for noncompliance. In effect, they are bulletproof. Community banks, credit unions and savings banks don’t have unlimited resources, massive compliance departments or designated piles of cash to pay fines when they break the rules or get caught. What these customer centric financial institutions have is integrity and a passionate commitment to customer service. They are part of the business and social fabric of their local communities. They do what’s right, because it’s the right thing to do. In doing so, they provide viable competition to big banks and provide customers with choices. Eventually, the unrelenting weight of existing and new compliance regulations may likely force smaller financial service companies out of business. So who benefits when these small institutions disappear? The same big banks these regulations where meant to reign in. When there is less competition the consumer has fewer choices and that is not healthy. Community based financial services companies didn’t create the conditions that led to the Great Recession. Why should they be made to pay for sins they did not commit?
October 23, 2013