Charles O. Prince, the chairman and chief executive of Citigroup Inc., has decried the "patchwork" of regulations and "regulatory arbitrage" that he said has let subprime lenders avoid oversight.
"What we're living with now is a patchwork through which some participants in the financial system have tried to sneak through," Mr. Prince said in a speech to a Greenlining Institute conference in Los Angeles last week. "The arbitrage of regulatory responsibility has led to very aggressive, very exotic mortgages. We need to find a way to close down regulatory arbitrage."
Mr. Prince said "the balkanization of financial services" had let mortgage lenders slip through the cracks. "You have brokers making loans, and going straight to the securities markets," he said, adding that the capital markets moved so quickly to accept exotic mortgage products that regulators were unable to keep pace. "We have to upgrade our regulatory framework, and we need to encourage responsible lending," he said.
Banks have a "special responsibility" to the communities they operate in, he said. "It doesn't serve our interests to make loans that are risky and have the potential to backfire."
Also at the conference, John Dugan, the comptroller of the currency, told reporters that subprime lenders do not fall under his jurisdiction.
"We don't set the underwriting standards," he said. "The market does."
