One of the post-financial-crisis success stories that has gone unheralded is the degree to which the American banking system has accommodated a historic amount of regulatory change, cleaned up its balance sheet, added significant amounts of capital and remained genuinely profitable. Many banks have not just survived this period of historic change but have done genuinely well.

What makes this success story even more impressive is that it has taken place during a period of historically low interest rates, an environment that is not conducive to decent bank profitability. If interest rates pop up just 50 to 100 basis points, what has thus far been an unheralded success story will be headline news.

Regulators too can take credit for helping to build a more resilient banking system, indeed the best in the world. Our banks have better capital levels, are more severely and reliably stressed to uncover problems, and are better regulated than any banking system on earth.

In sum, the state of the American banking system is something both bankers and regulators can take pride in.

With that said, now comes the hard part. How regulators continue to implement new rules, and how banks continue to deal with what may be a lower interest rate environment and a heavy regulatory burden, will determine whether this has been a historic turning point for finance in America or whether the recent success merely sets the stage for another painful set of events.

Now is the time where it is incumbent upon regulators and bankers to show courage and confidence in our futures. This is particularly the case as we face the reality of a new federal administration in the coming year.

Some thoughts on the direction of regulatory policy follow:

  • The regulatory community and, if need be, Congress must level the playing field among all financial players. Failing to regulate the shadow banking system appropriately will end badly. Of this I am certain. This should be as much of a priority as anything else in finance.
  • While nobody who cares about finance wants a lax regulatory environment, it is in the interest of regulators, consumers, business borrowers and the overall economy that we strive to make supervision not only effective, but efficient. For example, I, like my friend Paul Volcker, have advocated for streamlining the number of regulators involved in supervising individual financial institutions. Today, some institutions can count dozens of regulators in this country, let alone internationally, that they have to deal with on site in their institution. This kind of waste hurts us all.
  • We have to do more to support community development financial institutions and other community and regional banks. These banks can make a huge difference in the lives of middle- and lower-income Americans and small businesses. While efforts have been made to rectify the situation, right now we continue to overburden these institutions with needlessly complex and overly intrusive regulation.
  • Bankers must redouble their own efforts to treat every consumer well, to squash even the appearance of unintended discrimination and to enhance financial stability. I have a great deal of faith in the private sector and the great American market economy. I believe banks can and should exceed the rules in these areas. And by doing so, they can take better charge of their own destinies.
  • It is time we gave financial institutions discretion to set their own allowance for loan and lease losses consistent with prudential regulatory requirements, not accounting complications. It is bank regulators, not the accounting profession, who should be in charge of this important issue. Whatever banks do in this regard is and should be transparent. Accounting efforts to tinker with this important safety and soundness tool over the last 20 years have been dangerous to safety and soundness and have complicated matters unnecessarily. It is time to put an end to this.

We can make finance safer, more consumer-friendly and more productive for the economy of the United States. It is time now to refine what we have put in place.
Eugene Ludwig is the founder and chief executive of Promontory Financial Group. He was comptroller of the currency in the Clinton administration.