Should The U.S. Banking Industry Be Regulated? Thoughts On Financial Reform

by Todd Smith on 2010-06-115

Some thoughts and opinions on the financial reform bill and U.S. banking regulations by an insider in the financial industry.

I’ve been joking that banker jokes have probably replaced lawyer jokes. Would you agree? And, despite the fact that the financial industry is a vast place, in some situations, I often hesitate to let people know that I work in it. I think that the term “Wall Street” is really painted with far too broad a stroke. For instance, there are plenty of financial planners dedicated to empowering people and are really not part of so-called Wall Street. But, too many people think that financial professionals are all one and the same and paint us all with the same brush. Just check out some of the things that have brought attention to this besieged industry:

So, I was surprised and confused when I read a recent poll.

financial reform bill, U.S. banking regulations
Image from CBS News.

Should The U.S. Banking Industry Be Regulated?

Interestingly, Bloomberg recently conducted a national poll of 1,002 adults that confirmed that Americans despise Wall Street and corporate bosses. It’s a small consolation that Wall Street wasn’t the only group singled here, with two-thirds of those polled saying that they have an unfavorable opinion of business executives as well. I can understand the perception of misguided dealings and corporate greed that fuels this general consensus. And, in my opinion, there is a lot broken that needs to be fixed and fixed fast. But what REALLY gets me is that the same group in the poll who seemingly abhorred Wall Street and corporate executives, were against the financial reform package that is a top priority in President Obama’s agenda.

How can this be? Could it be because Americans despise Congress just as much as business, with 67 percent disapproving of Congress? So it seems that lawmakers and executives are basically despised by two thirds of the U.S. population (if that sample size represents general U.S. sentiment). Based on that, I guess that it should not be a surprise that people are not enthused about giving Congress more authority to regulate the business world.

Thoughts On Financial Reform

Take note that fifty-six percent of those polled said they would support government action to limit compensation for those who helped cause the financial crisis, or to bar those people from working in the banking industry. Yet nearly 70 percent said they support the current bank regulations for consumer protection and oppose a new agency for consumer protection. Does anyone see a contradiction here? And, what does this do for the average investor trying to secure a retirement? For instance, it’s been over a year since the Madoff scandal rocked Wall Street and beyond, but no real reform has occurred. Personally, I was waiting for legislation on fiduciary standards, but that seems to be going nowhere.

Recently though, the Senate Banking Committee approved a consumer-protection bill that would set up a bureau at the Federal Reserve with the authority to write and enforce rules. The conclusions I draw from this is that despite the economic meltdown and all that’s been said about it, people are still generally satisfied with consumer protection and really don’t care about redoing the financial regulatory structure. Wow! But, on the other hand, banks are still viewed negatively by 54 percent of the respondents while insurance companies are viewed negatively by 60 percent. I guess what the masses are saying is that though they hate bankers and the corporate greed so many executives seem to harbor, more regulation is not the answer.

Perhaps this is a win for letting an open-market, capitalist system run its course? Personally, as an industry professional (shh don’t tell anyone) I would say that smarter regulation is in order, but not more regulation and government intervention per se. I would love to see capitalism continue unhindered, but isn’t that again another paradox? Doesn’t capitalism by its very nature tend to breed greed in some shape or form where profits rise above all else? Surely, there must be some middle ground. Otherwise, we seem to be saying that we don’t like you (professionals in the financial industry) and we worry how you may hurt us again, but we don’t want to do anything about it. Or, perhaps people do want to do something, but they don’t know whom to trust to do it? You can see my confusion here. The fact is that greed will always be present, especially in a capitalist society. We just need to figure out what to do about it.

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{ 5 comments… read them below or add one }

Ron June 12, 2010 at 1:01 pm

For the uninformed, banking IS regulated … heavily.

Regulation never has been the answer and more often than not, results in negative (though usually unintended) consequences.

Andy June 12, 2010 at 3:40 pm

It seems to me that the regulation pendulum swings from one extreme to the other every 10 or 15 years. At this stage it looks like we are going too far towards regulation to avert another financial crisis. US banks and fin institutions compete in a global market place where money moves around electronically and easily. If the US loses it competitive position we are just giving our most profitable business to countries in Asia and Europe. Our politicians should have a 10-15 year view rather than trying to win the next election. June 13, 2010 at 4:37 am

When things are going good, people overlook regulation. When things go bad, then it is time to regulate. The banking industry has certainly gotten a black eye the last several years. However, I think there is a lot more tied to the problem than just the banking industry. I tend to agree with Andy, politicians seem to be short sided, and it seems to be another situation where we are training to just put a bandaid on the problem.

Rob Bennett June 13, 2010 at 10:09 am

I don’t think that either regulation or a lack of regulation is the problem.

I think that the problem is the economists. They “believe” (not too many really believe anymore but lots pretend that they do) in the Rational Man theory and that theory has been discredited for a long time. Many people think theory doesn’t matter. But all of the tests that bankers use to assess risk are rooted in this discredited theory. The regulations require use of the discredited theory. The bankers made horrible mistakes not because they disregarded the regulations but because they followed them.

The regulators cannot do their jobs until we acknowledge that it makes no sense to root regulations in theories that do not describe reality. And the bankers cannot do their jobs until we acknowledge that it makes no sense to root risk assessments in theories that do not describe reality.

We need to get Step 1 right before we can get step 101 right. Getting the theory right is the very first step. That’s the one we keep putting off.


ConsumerMiser June 13, 2010 at 2:38 pm

I am for more regulation and oversight. Otherwise, it’s like having the foxes watch the hen house.

I think the American people don’t trust our elected officials in general (crosses all party lines) and don’t trust them to get the financial regulations right or to make things any better.

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