Be careful what you wish for. That’s my modest advice to some bankers and their government regulators who want to ease up on bank oversight.
An article in the Wall Street Journal last week reported that several banks around the country are dropping the Federal Reserve as a regulator. The actions so far seem innocent enough, and perfectly reasonable in the examples mentioned, but they did conjure up some bad memories of how the housing bust – and subsequent global financial crisis – got started.
Here’s the story.
According to the Journal, Little Rock-based Bank of the Ozarks in June opted to ditch its holding-company structure, which means it is no longer regulated by the Fed. Now, as a bank only, and not a BHC, it will be regulated solely by the Federal Deposit Insurance Corp.
Saving money from having two layers of regulation was the main motivator for the bank. George Gleason, the bank’s CEO, said, “We didn’t really need to be regulated by both.”
The bank, which has about $21 billion in assets, is the largest bank to make such a move, but it’s not the only one.
“We’re spending time, money and effort with the Fed that we really don’t have to,” Bancorp South Bank CEO Dan Rollins told the Journal.
Even some regulators don’t have a problem with it. “Banks should be able to structure themselves in whatever way they want,” Keith Noreika, acting head of the Office of the Comptroller of the Currency, told the paper.
Indeed, reducing unnecessary expenses seems to be the principal motivator behind the moves. Small banks, the Journal said, are “looking to save money at a time when loan growth has often been hard to come by and super-low interest rates are squeezing profits.”
That sounds reasonable enough, but the Journal raised some caution flags. “Some skeptics of the move worry about banks shedding a layer of oversight, potentially enabling them to engage in more risky lending or other activities,” it said, although the banks interviewed noted that they remain regulated by the FDIC. “It is also a way for banks to sidestep things such as Fed-administered stress tests.”
Those tests “are costly in terms of both time and staffing,” the Journal noted. But they also are a way to ensure, as their name implies, that a bank can withstand a financial crisis.
I haven’t lost sight of the fact that not all banks can get rid of their holding companies and must remain under Fed oversight. Big money center banks like JPMorgan Chase, Citigroup and the like that underwrite securities and engage in other risky activities – and supposedly too big to fail – must have a holding company to keep those units separate from their deposit-taking units.
So maybe there’s nothing to be concerned about. And I’m not trying to insinuate that the banks looking to leave Fed supervision are up to no good and trying to get away with something. Indeed, these actions by the banks may be perfectly benign, and we should take them at their word that they are being done for the express purpose of saving money. No reason to be alarmed about that.
It’s just that it sounds a little too close for comfort to what happened as a prelude to the financial crisis.
If you’re old enough to remember, something similar happened just before the housing market crash. Countrywide, then the biggest independent mortgage banking company in the country and others sought to become thrifts under the old – and now discredited – Office of Thrift Supervision, which had a relatively relaxed regulatory regime. Angelo Mozilo, the former head of Countrywide – and the poster child, for many, of the housing bust – opted for OTS oversight, as opposed to the stricter supervision of the Fed and the OCC because “the savings-bank charter better aligns the regulatory supervision of the company with our strategic objectives,” he said back then.
We know what happened after that. Countrywide nearly went bust before it sold itself to Bank of America, which itself nearly went bust, as a result, dragged down by billions of dollars of bad loans Countrywide made and billions more in lawsuit awards and penalties. The failing OTS was later merged into the OCC under Dodd-Frank.
Things are radically different today than they were back then, no question. For one thing, we don’t have government-sanctioned reckless mortgage lending like we did back in the late 1990s and early 2000s. That’s precisely because we have much stricter financial regulation than we had back then.
But now the momentum is moving in the other direction. Loosening some of the restrictions on bank lending makes sense, for the good of the overall economy, if not bank profits. But reducing or avoiding regulatory oversight doesn’t. Let’s not condemn ourselves to reliving past mistakes.
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INO.com Contributor - Fed & Interest Rates
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
3 thoughts on “Let's Not Relive The Past The Hard Way”
I don’t see how zero down mortgages could be a problem! When buyers have nothing to lose history will repeat itself again. At least seven foreclosures in my little town right now. Banks are trying to get full value on trashed houses selling occupied because they refuse to leave. These are not the bargains in the past now but will be if you are patient. Banks are sliding these out a little at a time and expecting buyers to foot all past tax and closing expenses. Once again our government will be at fault they seem to care more about us constantly having debt instead of having a savings. Borrowers will be slaves to the lenders. This ponzi scheme works as long as homes continue to rise. The bond frenzy is the root of the problem.
"Reckless mortgage lending" sanctioned by the government? How about also reckless mortgage lending required by the government?
That is how far the stupidity went. Social engineering at its worst.
Excellent point. People forget that Fannie, Freddie and Dodd and Frank - how's that for irony - pressured mortgage lenders to make subprime and high LTV loans and not charge any risk premiums.
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