Bank-regulator relations suffer from avoidance of communication even more than from friction. Here's a sampling of what I've heard from bankers and their advisors:
"We never ask them questions unless we already know the answers. We don't want these issues aired with them, even on a no-name basis"
"If we initiate communication with anyone other than our assigned examiner, there will be retribution."
"It's not in the regulation, but the examiner told us to do it this way, so we're doing it."
"We don't understand why they don't like this product, so we simply stopped selling it."
"We want to pay X [who formerly held elective office], because he has an 'in' with the regulator. He'll get the answers we want."
That's all Greek to me.
Once, when I had an idea for a new structure seemingly permitted under the Bank Holding Company Act, a bank lawyer told me "Yes, I can see that's legal, but they'll stop you anyway."
I called and made an appointment to see the then Deputy General Counsel of the Fed, who didn't know me from Adam. His response was brief: "Yes, the law allows that. But I can't tell you what the Board will do. All their decisions are political."
That was not only an honest and correct answer, it was also a very helpful answer. We proceeded with implementation. No lobbying—and no objection from the Fed or OCC. Subsequent legislation crystallized the new structure.
I always seek regulatory response before recommending action by a bank that goes beyond "me, too." I seek it from the most relevant policymaker in Washington—not from the examiner-in-charge or his immediate superior.
Maybe I'm just lucky, but I've never failed to get a prompt response, nor have I ever gotten a misleading or deceptive answer. I can't say that I've always concurred, or always done what the regulator would have preferred. But clarity of communication, civility and compliance are improved, conflict and wasted effort minimized.
A contrasting experience with Visa: When I explained an idea, the answer was: "Yes, Visa rules allow that now. But if you do it, we'll hold a telephone board meeting within a week and make a new rule to outlaw it." We went ahead anyway, which proved to be a sound decision. Visa was overplaying a weak hand.
Anyone who makes rules needs to understand that if they threaten a new rule or interpretation to block innovation permitted under the already-accumulated hundreds of pages of regulations and guidance, they're moving away from sound, forward-looking and principled administration towards what the courts call "arbitrary and capricious," aka a reign of terror. Is that what prepaid debit cards are now facing?
Then there's the hidden subtext. Neither Dodd-Frank nor any legislative enactment authorizes a regulator to prohibit or punish merely because an initiative is thought to be insufficiently or less than maximally "consumer-friendly." Regulatory decisions allegedly based primarily on "consumer-friendliness" won't wash.
Was it "consumer-friendly" when Arkansas limited credit card interest to 9.8%—dissuading Arkansas banks from providing cards to many creditworthy customers? Let consumers decide what's consumer-friendly.
Agencies can best promote a healthy industry and delivery of good value to bank customers by assuring maintenance of a consistent, logically evolving body of explicit written pronouncements that face forward and answer far more questions than they raise. The recent crisis occurred largely because of lack of foresight, including by regulators. Getting good results from regulation, as from anything else, requires foresight.
But no body of regulations and published guidance can foresee all contingencies, including those generated by human ingenuity. To get the right results, regulators must encourage providers of financial services to come forward with their concerns, their options for action and their new ideas.
This rarely happens now. Some regulators say: "We're in a listening mode"—but who hears that?
A great potential benefit from the creation of the CFPB is that in many domains of regulation, its advent more completely separates consumer protection policymaking from the examination fact-finding of the prudential regulators.
Given recent developments, including enforcement actions, banks are concerned about such decisions as design and marketing of optional protection products; implementation of ability-to-pay consistently with Regulation B; and application of the limitation on first-year credit card fees.
Regulators need to increase their effectiveness in encouraging institutions to step forward informally with proposed answers to concrete open questions—rather than freeze like deer in the headlights, as they now too often do.
Andrew Kahr is a principal in Credit Builders LLC, a financial product development company, and was the founding chief executive of First Deposit, later known as Providian.