How Regulations Affect the Banking Industry and Its Customers
Lyons, Chris, Business Perspectives
Banking regulations are like medications. Some work fine to keep the system running. Others may do more harm than good. Yet others are used because a better cure hasn't been discovered.
Virtually every aspect of banking is regulated by federal and state agencies, and different types of banks are regulated by different types of agencies. For example, national banks are regulated by the Comptroller of the Currency, a part of the U.S. Treasury; bank holding companies are regulated by the Federal Reserve; state-chartered institutions are regulated by the State Banking Commissioner; and the infamous savings and loan banks are ruled by another set of regulators. The FDIC is the main federal regulator of state-chartered banks.
In regard to having state and federal regulatory agencies to answer to, Chief Executive Officer Benjamin Rawlins, Jr., of Union Planters Corporation said: "Having two opinions is not a bad thing for this country. I think the plurality is good."
TOO MUCH AND TOO LITTLE REGULATION
If regulations are like medications, then regulatory agencies are like physicians: the more you have the more chances that their dictates will overlap. For example, as many as three separate agencies may have a hand in bank examination procedures. According to the study "Vision 2000: The Transformation of Banking" by the Arthur Andersen Institute, the banking system as presently structured "allows state authorities to grant bank-product powers that can adversely affect the federal deposit-insurance fund. The thrift industry has been plagued by this type of conflict--and it is costing taxpayers billions of dollars as a result."
On the other hand, there are areas that are under-regulated. One of those involves disclosure activities. Says attorney Anita Lotz, whose practice with the law firm of McDonnell Boyd emphasizes banking regulations: "I think there's a feeling in Congress that people aren't getting all the information they need concerning savings account and credit card disclosures. Also, in the last few years, people have bought uninsured investments thinking they were fully insured bank products. Obviously, there's a problem there."
Another area that's underregulated concerns Community Reinvestment Act disclosures. Banks are required to report their community reinvestment activities to their regulators. Those activities are subject to regulatory review when a bank wants to engage in other types of new activities. "A lot of that information doesn't become public," said Lotz, "partly because the data is so voluminous that it's hard to make it meaningful to the public."
The community reinvestment issue becomes more significant as national banks become more of a reality. As banks and holding companies get bigger, legislators and regulators will be concerned about the issue of whether or not one community is being sacrificed to benefit another.
REGULATIONS AND THE LOAN PROCESS
When a would-be borrower goes to a bank and fills out a loan application form, the regulatory process begins. In this case, the Equal Credit Opportunity Act applies. This act prohibits banks from discriminating against loan applicants.
"Anyone who has taken out a home mortgage and looked at the stack of papers put in front of them...that's a very real example of how regulations affect borrowers," said Lotz. When a person applies for a home mortgage, there are certain pieces of information in that application that the bank is required to report to its regulators. This information provides regulators a statistical picture of the mix of people from whom and for whom the bank is receiving and approving applications.
If a loan is not approved, the applicant is entitled to know why, according to Lotz. "A lot of these regulations are inapplicable to commercial loan customers above a certain size. There is a feeling on the part of regulators and the Congress that these are sophisticated customers who can get this information on their own. …