The results of the financial stress tests offer about as clear a picture of the stability of the nation's largest financial institutions as we are likely to get.
With the removal of at least some uncertainty about the future of individual financial institutions, a real opportunity arises to turn public attention toward the future of the regulatory landscape for the financial services sector as a whole. This future should offer increased transparency, stronger accountability to public financial services needs and a minimum safety standard for financial products.
To guide this process and make it more transparent, we need publicly accessible data on all financial products and services that affect our communities, similar to the disclosures currently mandated for banks under the Home Mortgage Disclosure Act. Mortgage data provided an early (if often ignored) warning of the problems in the mortgage market.
Expanding data disclosure to consumer loans and financial services would go a long way toward averting a future crisis. Our collective understanding of, and concerns about, future toxic products would also be well served by expanding data disclosure to other types of companies, such as mortgage lenders, insurers, consumer finance agencies and others.
Equipped with this heightened data disclosure regarding financial products and services, we must set new, higher standards of accountability by modernizing the Community Reinvestment Act. Since 1977, CRA has asserted that financial institutions have an affirmative obligation to meet the credit needs of the entire community in which they accept deposits, including the credit needs of low-wealth consumers. However, many financial products are now offered by financial institutions not covered by CRA.
In fact, less than 6% of problem mortgages were made to low-wealth borrowers under CRA. If we are to truly hold financial institutions accountable for meeting the credit needs of the communities they serve, we need to expand CRA to apply to 100% of the products and practices. This would include mortgage companies, insurance companies, consumer lenders and others.
But transparency and accountability only get us so far. We need a banking regulator whose sole purpose is to establish minimum safety standards for financial products. This is different from establishing a minimum safety standard for institutions — the task assigned to the four existing federal bank regulators.
These minimum safety standards would help identify and effectively regulate products, such as mortgages with ballooning payment amounts, before they negatively affect the wider economy. Sen. Dick Durbin, D-Ill., has introduced a bill to establish a Financial Products Safety Commission to establish just this type of regulator.
Now that widespread fear of the wholesale insolvency of the nation's largest banks has eased slightly, it is time to address the stability of the financial sector as a whole. Transparency in the marketplace, accountability to the community and minimum safety standards for financial products are the best prospects for ensuring economic stability and prosperity.