What’s Right and What’s Wrong with Obama’s Regulatory Reform Plan

How can our economy remain competitive and thrive if its businesses, including financial institutions, don’t bear the brunt of their poor actions and decisions? It can’t. But that’s exactly what is happening now as our government props up the Wall Street institutions that created economic calamity. We need not only a return to traditional financial standards and free market discipline but to downsize the Wall Street megabanks to eliminate the threat any one institution can pose to our nation’s entire financial system.

Common sense tells us that no financial institution should ever become so large and powerful that it becomes too big to manage, too big to regulate and too big to face judgment in the marketplace. Nevertheless, for years policymakers have sanctioned and approved too-big-to-fail financial corporations. Now they’re using hardworking Americans’ tax dollars to keep those institutions afloat.

As guardians of Main Street, community bankers nationwide have long urged an end to too-big-to-fail. For years, our pleas to put taxpayers and our nation's financial well-being above the interests of individual entities fell on deaf ears. It was only in the wake of the financial-markets crisis that policymakers could no longer ignore what seemed so obvious to the rest of us. Now the Obama administration and Congress are beginning to address the serious problem of too-big-to-fail institutions through the administration’s financial regulatory reform plan. While parts of the plan provide a good starting point, there is still more that can be done to ensure we don’t repeat this crisis.

Community banks support provisions in the administration’s plan that create a consolidated systemic-risk regulator, impose higher capital and liquidity requirements on too-big-to-fail institutions so they can better absorb losses when they stumble and give the FDIC special resolution authority to unwind and resolve systemic risk firms that fail. However, to protect taxpayers and our economy, we need regulations to downsize the megabanks, require firms that pose systemic risks to pay into a separate systemic-risk reserve fund that can be used to unwind mega-institutions when they fail and impose a special FDIC systemic-risk premium for the extra burden the largest banks place on the Deposit Insurance Fund.

Another part of the plan threatens to undermine the way community banks successfully serve their customers and all of Main Street America. The proposed Consumer Financial Protection Agency would have far-reaching powers over bank products and services provided to customers. Unfortunately, the agency as currently proposed would hurt, not help consumers.

Community bankers agree that we need to close existing regulatory gaps and safeguard consumers from abusive and improper practices. After all, we have always put the best interests of our customers first. In doing so, we pride ourselves in offering our customers the safest and most sound products and services in the marketplace. The proposed agency, by separating consumer policy from safety and soundness supervision conducted by bank regulators, would create more regulatory confusion without improving consumer protections. Those increased regulatory costs would be borne by all consumers, making many financial products and services more expensive for all Americans and perhaps not affordable to some.

Community bankers work with our customers to ensure that they’re well informed about the products and services they choose and that they are capable of managing them. So why should community banks and their customers be punished for the deceptive practices of others?

Instead, a more targeted approach to fixing the real problems of our financial system lies in focusing on too-big-to-fail institutions. By implementing measures to regulate giant financial firms and reduce the risks they pose to our economy, Congress can begin restoring citizens’ faith—and essential free-market discipline—in our nation’s financial system. We must ensure that any new regulatory regime addresses too-big-to-fail institutions while implementing meaningful consumer protections that will not disproportionately affect the community banks that did not contribute to the current economic crisis. We must get it right for the long term—future generations of Americans are counting on us.