Academic journal article ABA Banking Journal

Quid Pro Quo

Academic journal article ABA Banking Journal

Quid Pro Quo

Article excerpt

Quid pro quo

As you read this, the fate of financial reform legislation may already have been determined, or perhaps not. Several bits of information we've seen or heard over the past month, however, make us wonder how much freedom the industry would actually gain if a major reform bill were to become law this year or next. We would go so far as to say that banking is facing a serious challenge to its freedom to operate, a situation that could be made worse if new legislation further increases regulatory authority over banks. "We'll get tougher." Virtually every banker, we're sure, can come up with an example of greater regulatory involvement in the operation of his or her bank, whether it be in regard to loan classifications, compliance, or policies and procedures. Even without new legislation, the evidence suggests this trend will continue.

For example, in his testimony before the House Banking Committee about the Bank of New England failure, Comptroller Robert Clarke allowed that maybe his staff should have been more vigilant and forceful in insisting that BNE reduce its exposure to commercial real estate.

Having missed that boat, so to speak, Mr. Clarke said he is prepared not to miss it again, and signalled his intention to be tougher from now on.

A second example is the experience of some New England bankers frustrated by the heavy-handed approach of federal regulators. One told us recently, "the feds want us to have 8% capital set aside for every loan we make. That's $8,000 for every $100,000 loan." The result, he said, it that the recovery in his area is being badly slowed.

Banks cannot be run by a rule book, nor can they be run from Washington. Yet that's precisely what events are leading to. As the rules and restrictions multiply in number and complexity, the flexibility to respond to local and individual needs is being stifled. Four defenses. This worrisome swing of the pendulum didn't just materialize out of thin air. …

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