Felix Salmon

Why a prudential regulator can’t house the CFPA

By Felix Salmon
March 3, 2010

Listening to Robert Johnson, a Roosevelt Institute fellow, talk at his institute’s conference this morning helped drive home to me exactly why it doesn’t make sense to house a Consumer Financial Protection Agency inside the Fed, or other bank regulators. And the reason is that those regulators are consumer financial protection agencies already: the banks are the customers of the Fed and of the other regulators, and it’s the regulators’ job to protect the finances of their customers the banks.

Elizabeth Warren was at the conference too, and did a great job of explaining what she called “the bank industry’s complexity machine”. Regulators and regulation always evolve in the direction of complexity and away from the simplicity that real consumers — individuals with mortgages and credit cards — need. “The banks want to make reform very complicated, so that only the experts can understand it,” said Warren — and it’s inevitable that a CFPA housed at the Fed or at any existing institution would gravitate towards the kind of regulatory complexity which is a ubiquitous symptom of regulatory capture.

In 1980, noted Warren, Bank of America’s credit card agreement was one page and 700 words long; today it’s 30 pages of dense legalese. Banks will never willingly return to a world of 700-word credit card agreements, not when their profits from consumer finance are almost entirely a function of forcing consumers into paying hidden fees they don’t understand at the outset.

Essentially, the CFPA, by its nature, is going to have to have an adversarial relationship with the banking industry, at least at the outset. The prudential regulators, meanwhile, exist to make those banks healthier: they like anything which generates income and profits, and have historically not cared in the slightest if such products are only profitable because they rip off consumers with moderate financial literacy. If they end up housing the CFPA, the CFPA will never be allowed to force the banks into the world of simplicity and honesty that we financial consumers so desperately need.

6 comments so far | RSS Comments RSS

Sorry. I am a Bank examiner and I disagree. I would never consider the bankers our “customers.” Our job is not to protect a firm from losses, or to make decisions that “protect their finances.” Depending upon which agency, and consequently which mandate, you work for, your primary interest is either in maintaining the stability of the financial system so that it can perform its appropriate role of intermediating deposits and allocating credit well, and/or insuring that the bank does not take risks with insured depositors money that jeopardizes the DIF (the regulation as mitigating the moral hazzard of deposit insurance argument).

Posted by Carter | Report as abusive

I could not disagree more. The recent final rules concerning Regulation Z’s open-end lending totaled more than 1,150 pages. The requirements within Reg Z are byzantine. I have not heard from one banker, thrifter or credit unioner who thinks the complexity of the rule is a welcome addition. Warren’s comments almost imply that all of these changes were born within the financial industry. Not so. The complexity of disclosures often is a direct response to the complexity of financial regulation. Creating a new regulator will not solve this problem. It will only worsen it.

Posted by Ademanaonge | Report as abusive

I am thinking what the bank examiner just described is exactly what Warren described. the current regulators don’t care about the consumer, they care about the stability of the system, or the bank. the consumer has no place in either of those. and the complexity of the rules usually has been driven by the financial institutions innovative creation of new ways to get money from their customers. and when the moon is right and the stars align just right, some body decides maybe that particular innovation wasn’t good for the consumer (usually because the consumer (aka voter) bends the ears of their representative enough times that eventually they push the regulators to do some thing about the fleecing the consumers had been getting

Posted by willid3 | Report as abusive

For a concrete example of Felix’s point, take a look at OCC Interpretive Letter 916, which authorized a bank to adopt largest-to-smallest check posting. http://www.occ.treas.gov/interp/oct01/in t916.pdf Banks began adopting that practice in order to maximize overdraft fee revenue. (For example, if a customer with a $500 balance wrote checks for $600, $250, and $50 on the same day, by posting largest-to-smallest the bank could charge for three overdrafts, even though the customer had money to cover the two smaller checks.)

The OCC, like Carter the bank examiner pointed out in the comment above, is mostly interested in “safe and sound banking practices.” In practice, this means “bank profits.” So if you look at Letter 916, the fact that largest-to-smallest check posting will generate more revenue for the bank is deemed to be a positive factor. The fact that this revenue is coming at the expenses of consumers is assigned no weight by OCC.

The Fed or any of the other bank-captured regulators will look at consumer protection the same way, as a dangerous impediment to bank profits and the regulator’s larger mission.

Posted by RogerNegotiator | Report as abusive

Responding to wiilid3,

I am what’s called a “safety-and-soundness examiner” – I was only making the point that the banks are not our clients. The consumer compliance examiners are in a different area, and they are very devoted (and principally motivated) to enforce the consumer laws.

Posted by Carter | Report as abusive


It’s axiomatic that government agencies wind up serving their largest constituencies, and your comments reflect that. Margaret Thatcher once described the UK Foreign Office as ‘looking after foreigners’…

What Warren and everyone else is saying is that there needs to be an agency who’s constituency is the consumer, the man/woman on the street, rather than the ‘system’ or the commercial institutions.

And, just as an aside, your statements about safeguarding the system are, quite frankly, disturbing. As a government official, your first duty should be to country (aka, “We, the people”), not to the banking system. Your view neatly encapsulates why we wound up in the mess we are in.

Posted by ChrisMaresca | Report as abusive

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/