Payday Loans: Are these short-term, small-dollar, high-APR products exploitative or simply expedient for the cash-strapped poor? This long running debate came to the fore on BankThink this week. First, former FDIC Chairman William Isaac wrote an op-ed proclaiming that payday loans are "an important lifeline" for millions of people. While he welcomed regulatory action against dodgy operators, Isaac wrote, "I'm deeply concerned about the unintended consequences this could have on much needed financial services for underbanked people who rely on legitimate short-term lenders." In a rebuttal, Mike Calhoun of the Center for Responsible Lending, an advocacy group highly critical of payday companies, quipped that he was unsurprised to see Isaac defend this kind of lending, since he is also the chairman of Fifth Third, one of the few banks still making "deposit advances," a payday-like product. Whether you call them payday loans or deposit advances, these products are a debt trap, Calhoun argued. "Payday loans quickly turn into long-term, high cost, loans that borrowers cannot escape." In a comment posted on Calhoun's piece, Isaac shot back: "I don't believe Mr. Calhoun or regulators are smarter or wiser than" the people who choose to take out payday loans. As for the criticism that borrowers get trapped in a cycle of debt, Isaac wrote: "Payday lending is not intended to be a permanent fix it is clearly a quick fix in an emergency situation until the borrower can find a better solution, which might involve arranging a longer term loan, taking a second job, buying a new car, or selling some asset." Two of BankThink's most engaged and articulate regular commenters, frankarauscher and gsutton, chimed in on either side of the debate to make one of the liveliest discussions we've had.
Do Let Your Babies Grow Up to Be Bankers: So wrote Noma Bruton, the chief human resources officer at Pacific Mercantile Bank in California, in her BankThink debut, "Banking Is Still a Great Career Choice." Community banking, to be exact. Aside from better-than-average wages and benefits, she wrote, working in the industry brings the satisfaction of making a positive contribution to the local economy and society. Unfortunately, she acknowledged, the financial crisis has sullied the industry's reputation to the point where few bright young graduates are interested in working as bankers. But a reader saw a different disincentive to join the profession: "Too much regulation, too much power to regulators.
All the work in the bank is now based on what examiners would do and most of them would have no clue how to actually get the job done as a bank employee."
Pandit's Unsung Idea: This week saw the debut of American Banker Editor at Large Barbara A. Rehm's blog (which should be bookmarked right away by all readers who care about financial services policy). One of her posts dealt with the subjective nature of measuring banks' risk-weighted assets, prompting two readers to support resuscitating an idea floated a few years ago by then-Citigroup CEO Vikram Pandit: The benchmark portfolio. "Require the regulators to prepare a hypothetical balance sheet for a large bank and require each large bank to run it through its internal models. Publish the results. That provides a way to compare one bank's analysis with the others, without spending a lot of effort determining what the 'truth' might be. Which banks are 'liberal' and which 'conservative' would become clear." By valuing an imaginary portfolio, banks would show the world how they think, and the results could be compared on an apples-to-apples basis. But as Barb noted, regulators were lukewarm on the idea when it came out. And we always wondered: How could anyone know that the banks weren't using more rigorous methods to value the fake portfolio than they were for the real ones?
Got an informed opinion on the business of banking? Submit to BankThink. Full submissions guidelines are available here.
