Reregulating Financial Services – An Approach
By
The time has finally come to get down to the business of getting the financial services sector under control. Everyone, except the large financial service companies themselves, agrees, to some extent, that the current business model is the problem. The difficulty is how to go forward without hamstringing the industry but yet eliminating the abuses that have created the current meltdown in the world economy.
Pressure is being applied from everywhere with recommendations from leaving everything alone (since the system is righting itself and the worst has been avoided) to going back to the rules and regulations of the 1930’s. The extremes, as usual, are both wrong but where are we to find the correct balance?
The first step, which may be the biggest one, is to agree on where things went wrong. One should not assume that the problem started with unregulated hedge funds, out of control mortgage lending and “me first” chief executives, no, those are symptoms of a much larger problem that needs to be addressed: the fundamental makeup of the financial services system and the redefining of the relationships that should exist among all parties.
If there are a couple of quick lessons we should take away
from the recession of 2008 - ??, it would be that the financial services sector
of the economy is too important to the overall health of the country to be left
to its own devices. There is a second
lesson that indicates that “systemic risk” (the ability of the banking system
in the
The structure of the banking system, as it now stands, is not sustainable. The map needs to be completely redrawn, which is exactly what the large financial services companies do not want to happen. They firmly believe that by treating the symptoms the disease can be controlled. Above all, the top 20 companies do not want to lose the “to big to fail” concept, since it is the only reason most of them are still in business.
Everyone seems to agree, or at least pays lip service to the idea, that the financial services system needs an overhaul. So let’s take a look at where we should start.
Part one would be the “System.” We need to establish tight, firm control over
the country’s financial system, i.e. the big picture. This should be the Federal Reserve’s job and
they should be provided with all the tools they ask for to regulate how the
overall system interacts in the financial marketplace. A bit of an Interstate Commerce Commission
where, when one financial transaction impacts another, the
Part two relates to consumers. The original concept of banking is one that defines a deposit by a customer as a loan of funds to the bank for which the bank is obligated to pay a fee to the depositor for use of those funds. The banks have developed “predatory” fee structures whereby the depositor now pays the bank for the privilege of lending the bank funds.
A separate regulatory agency should be established that sets the rules of the road for any financial transaction that impacts an individual as opposed to a corporation – and I do mean ANY financial transaction. It should not make any difference if the consumer based financial transaction is a deposit, loan, credit card, mortgage or securities transaction. It should not make any difference if the financial company is a bank, a mortgage company, a brokerage firm or a payday loan company. The focus of the regulation should be the effect of the activity on the consumer not the institution.
The success of the mobile telecommunications industry is one where someone finally figured out that the purpose of making a phone call is to contact a person and not a building. They focused their efforts on the object of the transaction. The same is true in the financial world, the focus of regulation should be on the object of the transaction.
Part three would be corporations. Corporations, for the most part, should be able to take care of themselves. They can hire attorneys to read and write contracts just the way the banks do. However, since they usually maintain deposits in excess of the FDIC insured limits and also deal with parts of the financial system that individuals do not, the health and honesty of financial services companies is critical for them. So here we need a regulatory agency that will set the standards for the various financial institutions that deal with everyone that is not defined as a consumer. Be it a charitable foundation, municipal government, pension fund or industrial corporation, ANY organization that accepts or transacts in ANY form of monetary instrument must meet the standards and be licensed by the regulatory agency.
I personally do not believe that the idea of one central financial regulator for the country is a good one. However, I believe that a financial services board should be established that would consist of the heads of the three proposed regularity agencies, the Secretary of the Treasury and chairpersons of the House and Senate banking and finance committees.
Hopefully, such an arrangement as suggested would be able to
avoid the surprises and abuses that have led to the current financial hardships
that have been left at the front doors of average citizens in the