The Treasury Department's blueprint to overhaul the financial regulatory system is aimed largely at macro-level concerns like investment bank oversight and market stability.
But what if the focus was on stimulating innovation around the profitable and responsible provision of financial services to consumers, especially those least connected to the system? How would we organize ourselves?
Three principles are critical to this discussion. First, the interests of consumers must be central to the mission of regulators. The nation's financial regulators have been vocal in recent years in encouraging banks and credit unions to serve the underbanked. Federal Deposit Insurance Corp. Chairman Sheila Bair in particular has been tireless in her advocacy and creative in her approach.
Regulators and the financial institutions they oversee are asked to balance multiple missions.
There is a perceived tension between ensuring institutional safety and soundness, which cautions against taking risks, and promoting opportunities in underserved communities, which are often thought to be risky merely because they are less well understood.
The perception of dueling missions presents a false choice. Numerous banks and other financial companies have demonstrated that, by taking the time to know and educate the customer, they can serve new markets in ways that actually pose less risk to their institutions.
If we want bankers to be more creative, then it is up to the regulators to embrace these dual missions and demonstrate how to make them consistent rather than mutually exclusive.
Second, banks should remain obligated to demonstrate their efforts to provide access to all consumers, and other financial firms should join their ranks in this regard.
It is time to recalibrate the Community Reinvestment Act, which was enacted in 1977 to ensure banks made loans in communities where they took deposits. Given the broad constellation of providers in today's financial universe, the CRA should be extended well beyond banks to include any provider of financial services for consumers.
Wouldn't it be a better use of talent if some of the same creative minds that came up with CDOs, SIVs, and other exotic products were to focus on creating products for the underbanked? Certainly since investment banks now have access to the Federal Reserve Board's discount window, they should take some responsibility for serving all sectors of the market.
The law should reflect the national character of today's financial services market by focusing at least as much on the people served as it currently does on the places served. The CRA should have a broader focus than credit access, including the full range of products and services a consumer needs to participate in the financial mainstream. And bringing new consumers into the mainstream should be at least as important as making loans to those already there.
Third, we need a system that levels the playing field for the increasingly diverse array of financial services providers.
Underbanked consumers operate simultaneously in the formal world of banks and the less formal one of retailers, check cashers, bill payment providers, money transfer companies, prepaid card marketers, and others. The current regulatory system treats those two worlds as separate and distinct. But the distinctions are increasingly blurred as banks and nonbanks seek to develop partnerships to manufacture and deliver specialized products to underbanked consumers in ways that borrow from the best of both worlds.
In designing a new regulatory framework, how can we mimic the agility of consumers as they navigate different providers? This is one of the thornier questions. The Treasury blueprint tilts toward more centralized federal regulation. Applying such thinking to state-licensed money-services businesses could address the lack of consistency across states and providers. But it could have negative consequences for overall competition.
Regulation is always a balancing act among competing interests. We need a financial system that is strong, competitive, and sound. We also need one that is inclusive and focused on the needs of the consumers it is meant to serve. We shouldn't have to choose.
