This is a particularly tough period for regulators and for bankers. We are still in a tenuous recovery from the 2008 financial shock and are living in the midst of a weak, indeed, anemic economy. Most banks have forgone profits for balance-sheet repair, as they should, with success: U.S. balance sheets are stronger today than before the financial crisis in 2008.
And yet, even with these stronger balance sheets and stronger risk and control systems, the regulatory and supervisory environment remains stormy and the seas are getting rougher.
Negative public sentiment — best exemplified by the Occupy Wall Street protests — exacerbated by continuing public criticisms of banks from official Washington has affected regulatory perspectives. The regulatory pendulum is, as it always does in cyclical downturns, swinging towards excessive conservatism when it comes to judgments about examination ratings, orders, applications, and the implementation of rules.
We can see this new regulatory conservatism expressed in applications that take months and months to address when they raise novel questions. Indeed, many new-business applications that would have been perceived as relatively straightforward in prior years are held in suspense for longer than would ordinarily be the case. We can see it in the continuing high level of public orders and the relative stickiness in lifting them on the upside.
To allow the regulatory pendulum to drift back towards equipoise and that golden middle of not too hot and not too cold will take courage on the part of policy makers and agency leaders. They are going to have to give the clear signal that application reviews should be drastically accelerated and should result in approval, unless there are clear legal or safety and soundness imperatives that argue otherwise.
New rules should be implemented in the simplest possible ways — the Volcker Rule proposal being an example of lots of cooks in the kitchen. There is so much complexity at this point that, irrespective of the substantive outcome, the complexity of the proposed rule will drive down economic activity. And, agency leaders should send the message to field examiners that reasoned, moderate supervision is preferable to reflexively conservative judgments that threaten to halt economic activity. A rededication of agency Ombudsman programs can help in this, too.
Economic recovery is best fostered by balanced and even-handed financial regulation with particular sensitivity shown to community and regional banks. These smaller institutions are being smothered by a heavier dose of compliance, new rules, and more intrusive examinations. Because every institution smaller than $50 billion in asset size is — by definition — not systemic and pays a premium for clearly not being too big to fail, their regulatory loads must be weighed commensurately.
Courage by policy makers, agency leaders, and others to speak out in favor of accelerating the application process, simplifying rules and regulations, and sending a signal to examiners that they do not have to be overly conservative in order to be supported is critical. Encouraging this behavior is the one stimulus measure that costs essentially nothing; it is budget neutral. Furthermore, without this kind of stimulus, all the other expensive policy measures will not work as effectively.
It is time to make sure that the pendulum swings back into balance. If we do not take these steps and move forward, we risk drifting back into the maelstrom.
Eugene A. Ludwig is a founder and the chief executive of Promontory Financial Group LLC. He was the comptroller of the currency in the Clinton administration.
