Bankruptcy

Consumer Protection & Bank Soundness

By Stephen Lubben

To date I've left the issue of the "Consumer Financial Products Safety Commission," or whatever name it ultimately ends up with, to my co-bloggers, who are much more versed in matters consumer. But then today I read that Senator Shelby had this to say at the American Bankers Association:

Safety and soundness trumps everything," Shelby said to loud applause. "It trumps the consumer finance whatever."

Although the bankers apparently ate this up, they should really run from this argument as if it were the swine flu.The argument only makes sense if the nation's banks are so horribly undercapitalized that they depend on the extra margin they get from confusing their customers and getting them to make poor choices regarding their finances. Under the Senator's argument, banks need to conduct "unfair, deceptive, or abusive" advertising and write their documents in "unplain" English in order to maintain their soundness.

Wow.

This has to be his argument, otherwise the argument makes no sense. In every other respect, the new consumer protection agency should help bankers and their ilk by improving their reputation among consumers and protecting them from class-action lawsuits whenever they foul up. Wouldn't the latter increase their soundness in direct proportion to their decreased insurance premiums? How does consumer protection threaten bank soundness? Did toaster companies go out of business when the Consumer Product Safety Commission stopped letting them sell exploding toasters? I guess the ones who couldn't make it selling legitimate toasters did -- but the Senator can't really be saying that America's banking industry is like a shoddy toaster company, can he?

If the Senator (or, more realistically, a member of his staff) would like to explain what he really meant, I'm available -- feel free to contact me offline.

Full post as published by Credit Slips on March 18, 2010 (boomark / email).