bank regs

[Dan Scanlan <dscanlan@xxxxxxx>]

The Buddy-to-buddy Regulatory System
by Ralph Nader

Banks and their regulators have always enjoyed a cozy relationship.
Regulators are notorious for going slow in clamping down hard on
practices that might be unsafe and unsound. Cease and desist orders,
a weapon available to all the regulators, are used sparingly and
usually only in the most egregious cases. The hundreds of billions of
dollars of deposit insurance and taxpayer money lost in the savings
and loan debacle of the 1980s stand as a monument to regulatory
laxness and delay.

One of the prime reasons for this buddy-to-buddy regulatory system is
the fact that both the financial institutions and the regulators find
it comfortable and mutually beneficial. Under the disjointed federal
financial regulatory system each niche of banking has its own
separate regulator, and when regulators appear before Congressional
Committees they are always protective of their own group of
institutions.

The Office of the Comptroller of the Currency (OCC) has a particular
concern about keeping its flock of national banks in a happy mood.
OCC derives all its operating funds from assessments on national
banks under its jurisdiction. When a large national bank decides to
switch to a state charter, it can leave a gaping hole in the budget
of the Comptroller. So it is not surprising to see the Comptroller
vigorously protect his flock of national banks through lawsuits
preempting the application of state and local consumer protection
laws to national banks. The unspoken and quite effective message is
clear?ìstick with the national charter and thumb your nose at state
consumer laws.

Now other federal financial regulators are finding some new ways to
stroke the institutions under their jurisdiction. This time, the
Community Reinvestment Act?so important in moving credit into low and
moderate income and minority neighborhoods?is endangered by a new
effort to mollify banks and thrift institutions.

The Office of Thrift Supervision (OTS) kicked off the new war on CRA
by proposing a regulation which would limit full examinations of CRA
performance to only those thrift institutions with assets of $1
billion or more. Institutions below that threshold would only be
subject to limited ìstreamlinedî and ìsimplified exams.

It is not surprising that OTS is anxious to keep its own constituency
happy. For several years, plans have been floated to eliminate the
agency and let its functions be absorbed by the Office of the
Comptroller of the Currency. In addition, some institutions have
abandoned their thrift charters to convert to bank charters. So, OTS
figures that easier CRA exams just might keep their wandering
institutions home.

OTSís new easy CRA exam rule takes effect on October 1. And surprise
of surprises, the other financial agencies are now eyeing the same
thought of easing the burdens for their member institutions. No one
wants to be left out when it is time to pass out new gifts to the
banks.

The Federal Deposit Insurance Corporation (FDIC), which examines
state banks, has issued a proposed rule similar to the handiwork of
OTS. The rule is now out for comment. The Comptroller of the
Currency, Jerry Hawke, already under fire for his scorched earth
attacks on consumer protections, is urging his fellow regulators to
adopt a uniform streamlined CRA exam rule, undoubtedly thinking that
he would have protection behind a solid regulatory front. But the
reports coming out of OCC suggest that on substance, OCC will be in
agreement on CRA-light exams for all institutions of less than $1
billion in assets. Earlier, the Federal Reserve was behind a move to
a $500 million threshold for full exams, but the Fed seems certain to
join the others at the billion dollar mark.

The adoption of weaker CRA exam rules will signal to the banking
industry a de-emphasis of efforts to push bank credit into low and
moderate income and minority communities. It will mean a sharp
reduction in data and analysis needed to judge how well financial
institutions are helping to meet the credit needs of all areas of
their communities.

Much of the effective enforcement of CRA as a prod to push banks to
serve all their communities comes to the fore when banks file merger
applications. Community activists have been effective in pointing to
data generated in CRA examinations to challenge the proposed mergers.
In many cases, the protests constructed from the data have led to
significant concessions that have assured critically needed credit
for many communities. Even when the regulatory agencies want to make
an informed decision on the community lending of the merging banks,
the cupboard will be bare under the CRA-light approach to
examinations.

The proposals for bare bones exams are on top of an already absurd
rating system applied for CRA performance by each institution. Almost
all the financial institutions - 98 percent - receive either a
ìsatisfactoryî or an ìoutstandingî rating for their performance as
community lenders. Nothing is so rare as a regulator applying a ìneed
to improveî or a ìsubstantial non-compliance rating to a bank. If
there were any validity to the ratings and credit was actually
flowing at a ìsatisfactoryî level to all neighborhoods, our inner
cities would, indeed, be shining cities on the hill. The conditions
donít match the glowing CRA ratings awarded by the regulators.M

Until OTS leaped out with its billion-dollar rule, the only banks
that were eligible for limited streamlined CRA examinations were
small institutions under $250 million. But, the billion dollar
threshhold lets the vast majority of the nationís commercial banks
off the hook.

There are 7,691 commercial banks nationwide ?only 428 with more than
$1 billion in assets. If the OTS-generated rule becomes standard,
this means that 7,263 banks will be on the regulatorsí CRA-light list.

CRA has been a valuable economic tool for people who have few tools
with which to build their communities. CRA has generated at least
$1.75 trillion in credit to inner city and depressed rural areas
since its adoption in 1977. It should not be weakened by regulators
shamelessly attempting to please their banker-constituency. People
need to speak to their members of Congress about this matter.
Ralph Nader is the author of: The Good Fight : Declare Your
Independence and Close the Democracy Gap (Harper Collins Books).
www.ralphnadersgoodfight.com