COLUMN: Make CFPB Funding Cuts Top Priority

Article excerpt

Byline: Andrew Kahr

The rapid negotiation of a fiscal compromise between President Obama and Republican leaders indicates that the new Congress will feature horse trading rather than gridlock on many other issues also - including banking.

In order to enact legislation he seeks, Obama will have to modify some of the more radical initiatives prompted by the financial crisis and grope for a middle ground.

If our industry could speak with a unified voice, what should be our top legislative priority for 2011? An even less restrictive treatment of bank securities activities? A bank-friendly approach to housing finance? Or limitations on the scope and funding of the Consumer Financial Protection Bureau? This is the debate that we should now be undertaking.

The Volcker Rule and customized derivatives are of interest primarily to the few large banks whose share of total deposits has grown so dramatically in the past 20 years. No industrywide consensus will develop to go to bat for the permissive treatment of derivatives and proprietary trading.

The more crucial issue, however, is a much broader one: To what extent should securities activities be integrated with banking?

The Glass-Steagall Act cut off commercial banking from the securities industry for 50 years starting in the 1930s. The force of events during the 2007-9 period, including the collapse of three of the largest securities firms, caused an accelerated reintegration of the two industries.

Is it salutary for banks accepting insured deposits to do nearly everything that securities firms do? Banks failed because they took excessive risks. I think banking should focus on less risky assets and activities.

An even larger issue is the role of the government in subsidizing home finance, both through guarantees and by funding immense portfolios. The subsidies, particularly the underpricing of risk, marginally increase homeownership. By making mortgages cheaper, they also let consumers bid up home prices, even to levels that were unsustainably high.

Right now, banks hold record levels of deposits, and cannot find enough good loans to make. It seems perverse to argue that, in this environment, we need the current huge level of government subsidies in order to enable home purchases to be financed. Why not eliminate the subsidies in an orderly way, let rates on new mortgages rise to a market level and encourage banks to acquire and hold them? If total mortgage balances and hence home prices were restrained by the amount of capital available to support the mortgages, then future bubbles would be much less likely. …