Business Perspectives

Effective reforms needed for banking

With so much negative commentary about the banking industry, it's easy to miss the fact that over 325 traditional, FDIC-insured banks and their more than 14,000 employees are serving towns and cities across the state, committed to helping their communities thrive.

Lending typically declines in recessions. Yes, there are individuals and businesses that have not been able to obtain a loan. That may be because their cash flow or collateral positions have changed. Or because bank examiners are looking more closely at every loan — especially ones involving real estate — which is what happens in every economic downturn. Bankers are accustomed to close scrutiny. They expect examiners to analyze their operations based on standard banking principles, the most basic of which boils down to one question: "If I lend you this money, will you pay it back?"

Traditional bankers get paid when people repay their loans. But there was a different standard in play in the run-up to the housing collapse and subsequent economic meltdown. The vast majority of subprime, no-documentation loans were made by entities outside of the traditional banking industry. These loans were originated by individuals with no stake in the transaction who were compensated on the basis of the number of deals done, not whether they were repaid.

The Kansas Bankers Association and the country's state bankers associations believe Congress should enact regulatory reforms, including the elimination of "too big to fail," determining a process for resolving institutions that pose the greatest risk to the economic system, and strengthening cross-agency oversight of financial institutions and markets so signs of risk can be identified and addressed at the earliest possible point. But it must be reform that is effective and does not impose crushing new and overreaching regulations at a time when traditional banks are helping their communities deal with a still-fragile economy.

The proposal for a new Consumer Financial Protection Agency — one more huge, expensive government operation — looms as the worst of both worlds, harming traditional banks while exempting from oversight many of the entities that were responsible for the toxic loans and need to be reined in. If reform punishes the good lenders — the ones at the heart of the nation's economic recovery — and lets the bad ones go untouched, the nation's communities will pay the price.

In addition, the CFPA would hurt consumers, according to a study by David Evans of the University of Chicago Law School and Joshua Wright of George Mason University Law School.

According to their study, "under plausible yet conservative assumptions" the CFPA would increase the interest rates consumers pay by at least 160 basis points, reduce consumer borrowing by at least 2.1 percent and reduce the net new jobs created in the economy by 4.3 percent.

The focus on the small number of bad actors has caused many to lose sight of the good that the banking industry, its 8,300 banks and millions of employees across the country are doing every day. We worry that the leadership many of these banks provide in towns and cities across the country through loans, volunteer service and financial investments is in jeopardy if financial reform is not done well. We also worry about bank customers if the federal government decides to help them balance their checkbook. That's the kind of "consumer protection" that this country can't afford.