Goldilocks and the Three Regulators
At the annual State of the Union address, Republicans typically sit on one side of the aisle; Democrats on the other. This January, however, a few members from each party boldly went where none had gone before, choosing to sit side by side to hear the President’s speech. Noting this break from tradition, President Obama told the often polarized Congress, “What comes of this moment will be determined not by whether we can sit together tonight, but whether we can work together tomorrow.”
The same could be said of bankers and their regulators.
Regulation is a key ingredient of a safe banking system and a sound economy. It is also an instrument that requires precision handling so that it neither permits imprudent lending nor strangles credit. In Goldilocksian terms—not too hot, not too cold. Just right.
Ideally, the regulator and banker work collaboratively, each making their case, but trying to look at the world from the other’s perspective and listening to one another’s concerns. Because if the bankers and their regulators get it wrong, communities will suffer. Residents and businesses will not get the loans they deserve—or they will not be equipped to repay the loans they get. And in a political atmosphere, it’s easy to err either on the side of extreme caution or extreme generosity, whichever has most recently been out of favor.
Striking a balance in life feels intuitive, even if it’s not always attained. Most of us function better on eight hours of sleep a night than logging either three or 12. Subsisting on rice cakes to reach an anorexic state is as life-threatening as gorging one’s way to obesity on supersized muffins and extra-large buckets of country fried chicken.
But Americans and organizations often succumb to the charms of overdoing it. And overdoing it is what led to the economic collapse. Like in Murder on the Orient Express, a lot of people had a hand in the economy’s undoing, including consumers who believed that real estate would boom long enough for them to benefit, the lenders—including lightly regulated mortgage brokers—who financed those overheated dreams, the Congress that encouraged the notion of home ownership for all, the regulators who approved it, and the appraisers, realtors and assorted extras who facilitated it along the way.
The banking business necessarily involves risk-taking, and bankers don’t always get it right anymore than doctors or lawyers or schoolteachers or parents always get it right. Everyone thinks of themselves as creditworthy, just as everyone thinks they have a good sense of humor. But not everyone is, and that’s the judgment call bankers must make daily, based on the available evidence. Even solid citizens to whom you lend money don’t always pay you back when they lose their job or get hit with unexpected bills or turn out to be less solid than their credit rating and portfolio would suggest.
The core services that banks provide—insured deposits, small business loans, financing for state and local government public improvement projects—foster the community’s growth and prosperity. Without any risk-taking, a lot of creditworthy people and companies don’t get loans. So it’s in everyone’s interests for banks and their regulators to find the right balance; for regulators to help banks succeed. It’s the regulator’s job to push against the prevailing wind. In boom times, their role is to slow things down. When credit has dried up, their role is to help banks lend. Bad things can happen from keeping the rein too tight as well as keeping it too loose.
For all the caricatures and jokes, the bank is a symbol of hope and prosperity in a town; a vote of confidence in a town’s future. Take away the bank—or pound it into the ground through regulatory excesses—and it will be the community that will be the loser.