Government must first do no harm while we increase access to banks

Government must first do no harm while we increase access to banks
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Why does the market leave out those 66 million unbanked or underbanked Americans with nearly $1 trillion in buying power? The answer involves the unintended effects of the regulatory actions and turf wars meant to assist these neglected consumers, who are more likely to be minorities and from areas of persistent poverty. During the last decade, some state regulators and attorneys general have fought to increase state oversight power, limit interstate banking, prevent more evolution in the federal banking system, and enact measures that protect the most vulnerable.

While that last objective is clearly laudable, their efforts impose licensing, paperwork, and system development rules. Those business costs are then passed onto customers in the form of higher fees and minimum balances, which underserved Americans often cite as barriers to financial access. In some cases, the banks simply stop offering certain products because the regulatory costs make certain products unaffordable.

Small changes in costs have the greatest effects on those on the margin. As a result, more consumers have less credit options, and the remaining options they do have would come from less regulated providers often on less friendly terms. Certain states have enacted more price controls and block the ability of banks to sell loans to investors for other states when those loans went above state interest rate limits, even when those loans conformed to the state laws when they were started.


So the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation have taken recent actions to preserve 200 years of jurisprudence to ensure markets could function in an orderly manner and maintain liquidity that lifts credit access. The Office of the Comptroller of the Currency has finalized a rule clarifying that a bank is the “true lender” of a loan and retains the consumer protection obligations related to that loan. It also guards against fears of predatory lending.

These federal actions also bolster the ability of lenders, including financial technology companies, to create responsible partnerships with banks that reach the customers who may otherwise go unserved. These partnerships allow banks to benefit from innovative technology and better approaches, including the broader use of data, to better assess the credit of millions of new consumers who were once invisible in the market.

Ironically, a similar array of actors working to limit interstate banking are also fighting efforts to allow innovative companies with special business models to become chartered banks. Several incumbent banks argue that chartering new firms that engage in some aspects of industry, including those with business models which focus on serving the unbanked, can create an unlevel playing field, but the opposite is true.

These companies with business models which qualify as national banks would have their activities supervised by the same manner which similar activities for incumbent banks are supervised, making the playing field more level. State regulators oppose additional federal charters because they depend on the licensing fees and argue that federal charters allow companies to evade some state consumer protection laws. They do not account for the fact that payday lenders, which draw ire from consumer groups for abuse, are licensed and regulated by states.

Building a moat around our banking system to prevent new and innovative companies from obtaining federal bank charters to operate might protect incumbents, but it cuts consumer and business choice and opportunity. It stifles technology and prevents the banking system from adapting to such evolving consumer and market preferences. Officials should consider the mountain of evidence about the adverse effects of the price controls and several regulatory actions to protect incumbent banks.


Yet many continue to think such actions make a difference since privilege bias is real. People with low rates and ample credit often cannot imagine why anyone might pay a rate higher than them. It amounts to a “let them eat cake” perspective toward those living in poverty and fails to consider that some people are just starting to build credit. They will not climb the ladder of opportunity without any rungs at the bottom.

Price controls and charter limits are not the only barriers on full and fair access to this banking system, but they are some of the most apparent and unfortunate. Officials must select between helping the underserved by lifting them up with more choice and opportunity or by harming them with misguided protectionist efforts. Legislators and other officials must take more care in understanding the unintended effects of the decisions which otherwise hurt those people they hope to assist.

Brian Brooks is the Acting Comptroller of the Currency. Charles Calomiris is the chief economist with the Office of the Comptroller of the Currency.