But don’t be quick to forget that the seeds of the current global financial crisis were sown by the near total breakdown of mortgage-lending standards and banking-industry oversight. Most of this can be laid squarely at the feet of arrogant economic and political theoreticians who viewed the borrowing public as little more than a bunch of statistics and a springboard for their next personal bonus or career move.
Now the Federal Reserve Board has a new religious vision in the form of eager, bright-eyed and perhaps the naivety of Governor Elizabeth Duke. In her speech to community bankers in Phoenix, Arizona, yesterday, she revealed her vision like a campaign pledge:
* I believe that the banking business plays a special role in the economy and carries with it special responsibilities. These responsibilities come from the role of the financial system as the circulatory system of our economy. And with respect to insured depository institutions, given the federal safety net provided by deposit insurance, access to the payment system, and the availability of discount window borrowings, bankers have a responsibility to operate in a safe and sound manner.
* I believe that rigorous supervision and enforcement are necessary companions to regulation. One of the lessons we have learned in the current crisis is that different levels of supervision and enforcement can cause problems, even when institutions are ostensibly following the same regulations. Nowhere was this more evident than in the mortgage origination market, in which banking organizations and firms outside the banking supervision system were all originating mortgages but were subject to very different levels of oversight.
* I believe in the separation of banking and commerce. The lending policies of banks should have as their purpose the efficient channeling of savers’ funds to their most productive uses. The allowance of banks to affiliate with commercial firms threatens the ability of banks to continue to serve as efficient and objective intermediaries of credit and has the potential to expose banks to the operational, financial, and reputational risks of commercial affiliates. It also has the potential to extend to commercial affiliates the federal safety net afforded to banks in recognition of their role in the economy.
* I believe that a bank holding company should act as a source of financial and managerial strength to its banking subsidiaries. That is, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity, and it should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. The reasoning behind these functions is that a bank holding company derives certain benefits at the corporate level that result, in part, from the ownership of an institution that has access to the federal safety net, including deposit insurance. This principle is, naturally, very familiar to almost all bankers, since it is embedded in Federal Reserve regulation, but it is worth repeating from time to time.
* Finally, I believe that strict adherence to consumer protection is necessary to protect consumers and the financial system as a whole. We have now witnessed the severe consequences of inadequate consumer understanding of financial products and of lending to consumers without regard to their ability to sustain the payments. Reasonable regulations, such as the Federal Reserve’s recent rule changes for mortgages and credit cards, can help protect consumers and encourage responsible lending.
Sure Ms. Duke is a banker-type. For a banker, her commitment in the face of the old cronies in the good old boys’ network of banking is a breath of fresh air, bordering on a religious outlook when we have a U.S. President that is similar in nature. Are the winds of change in the air? Is Ms. Duke the inspiration that ho-hum greedy bankers need? Will the Federal Reserve get the religion of financial literacy where people are concerned? Even more important, will they apply financial literacy to themselves? Are these the seeds of victory that we need or are we too late? Perhaps a little selfless vision never hurt anyone. Then again, do you believe it?
~ E. Manning