How Consumer Regs Can Work against Consumers

Article excerpt

Early last year my firm was engaged to conduct research on compliance burdens. Our charge was twofold:

(1) To quantify the costs of bank compliance with consumer protection laws; and

(2) To recommend ways to reduce these costs without undermining the goals of the laws.

We decided to look at the issues from the perspective of overall public policy. The outcome of this work might surprise many policymakers. We concluded that the regulations, as currently constituted, not only impose unnecessarily high costs on the industry, but also create direct adverse impacts on the public.

First, the regulations raise the costs of consumer financial services and potentially undermine the banking system's strength. Second, they produce direct, counterproductive effects.

But the study also concluded that there is potential to find common ground between banks and advocates of strong regulation, and to change the regulations to everyone's satisfaction.

The study, Common Ground: Increasing Consumer Benefits and Reducing Regulatory Costs in Banking, has just been released. We studied the issues in cooperation with Dr. Anjan Thakor of Indiana University on behalf of our client, the Herbert V. Prochnow Educational Foundation of the Graduate School of Banking at the University of Wisconsin. Highlights follow. Costs of compliance. Like other studies, our research demonstrates that the costs of compliance are high.

We looked at only a small subset of the regulations governing banks-- specifically, those aimed mainly at protecting consumers and promoting community lending, plus the Bank Secrecy Act. Accordingly, our cost findings cover only a small share of what has been measured in other, broader studies, such as ABA's.

Nevertheless, the results are consistent. Dr. Thakor's research found:

(1) Compliance with consumer protection regulations cost banks about 19% of net income in 1992.

That came to $86,730 for the typical bank in our survey. Three regulations the Real Estate Settlement Procedures Act, the Bank Secrecy Act, and most costly, the Community Reinvestment Act--accounted for almost 60% of the total.

(2) Compliance costs are disproportionately high for small banks versus large banks, and for independent banks versus holding company affiliates.

Thus compliance burdens place independent community banks at a competitive disadvantage.

These findings support the industry's contention that compliance costs have reached a level that affects banking's very health and structure. Why regulate? Having quantified the costs of compliance, we turned to the benefits side. We set out by defining what these regulations--including the Bank Secrecy Act--are intended to accomplish:

(1) To help customers make good selections among competing financial services--the main goal of such disclosure laws as the Truth in Lending and Truth in Savings Acts.

(2) To promote fairness. Another goal of the disclosure rules, this is also a prime goal for the two laws prohibiting credit discrimination, as well as CRA and the Home Mortgage Disclosure Act.

(3) To promote widespread availability of financial services--the main goals of CRA, and, at least to some extent, the nondiscrimination laws.

(4) To promote affordability of financial services. This is, at least indirectly, a goal of CRA and the nondiscrimination statutes, through the law of supply and demand. The disclosure laws are also meant to promote affordability by strengthening the customer's shopping and bargaining power.

(5) To promote other social goals. Some regulations are not designed to protect customers from banks, but rather to use banks as vehicles through which to pursue goals that are only tangentially related to banking. Examples are the Bank Secrecy Act, the Flood Insurance Act, and, arguably, some aspects of CRA.

(6) To achieve these goals without producing negative distortions of the financial marketplace. …