Is Regulation the Newest Banking Bubble?

In a financial bubble, assets are overpriced and credit overextended. Today, lawmakers and banking regulators are inflating another kind of bubble by overcompensating for past sins, says Richard J. Parsons.

In Broke: America's Banking System, recently published by the Risk Management Association, Parsons doles out plenty of criticism for the industry. He admonishes fellow bankers to "understand our duty to society" and calls for higher standards. That includes licensing and certification for certain banking jobs and boards composed of banking and financial market experts, rather than community leaders. Toward the end of the book, he turns his sights on regulators and lawmakers.

"A growing number of community and regional bankers now complain that the flood of new public policies and intensified regulatory scrutiny are bringing unintended consequences," writes Parsons, who worked at Bank of America (BAC) for three decades. "Rather than actually make the system safer, the current bubble of policies and regulatory oversight runs the risk of creating the newest external event risk."Following are five risks that Parsons warns could flare up due to what he calls the "regulatory bubble."

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"That's all I can stands, I can't stands no more," Popeye the cartoon sailor said. Many community bankers are similarly reaching their boiling points. Parsons cites a community bank that sold itself to a credit union last year after receiving "unreasonable supervisory demands" from its regulator. By making such requests, Parsons writes, bank examiners risk driving more institutions into the hands of credit union regulators, which he quips are "probably just as prepared to regulate banks as were the savings and loan regulators back in 1982, when S&Ls started acting like banks."

"Some banks, like college students, want to find the easiest grader," Parsons writes. And banks can still shop for regulators, despite Dodd-Frank's elimination of the most reputedly lenient agency of all, the Office of Thrift Supervision. In fact, as a result of that move, which left the Office of the Comptroller of the Currency in charge of thrifts, many are now looking to make a move to state bank examiners or the credit union system. While there may be legitimate reasons for a bank to want to switch, regulators need to ask themselves, "are you the examiners of choice because your oversight practices are perceived to be lax? How do you know?"

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