In today's podcast episode, we have the privilege of having Raj Date with us. Raj Date has held various significant roles at the Consumer Financial Protection Bureau, including serving as the acting head and the first-ever Deputy Director. He recently penned a thought-provoking article in the new online publication, Open Banker, titled "Banks Aren't Over-Regulated, They Are Over-Supervised." Alan Kaplinsky, Senior Counsel in Ballard Spahr's Consumer Financial Services Group, takes the lead in the discussion and is joined by Joseph Schuster, a partner in the group.

Background and Complaints

Bankers have consistently expressed to Raj Date that banks are over-regulated. In the aftermath of the financial crisis, this claim seemed rather peculiar. Banks enjoy a range of government privileges such as subsidized leverage through insured deposits, liquidity via the discount window and home loan banks, exclusive access to payment rails, and even the choice of law through federal preemption. Given these advantages, safeguards on various aspects like capital, liquidity, credit exposure, market and interest rate exposure, cybersecurity, and consumer protection seemed like a reasonable trade-off.

Over-Supervision: Points and Examples

Bank examination attempts to cover an extensive range of areas, sometimes causing it to lose sight of the bigger picture. For instance, it obsessively focuses on processes rather than the substance. This is evident in the supervisors' requirement for banks to document everything. It takes an incredibly long time for banks to receive examination reports after exams are completed, sometimes even years later, and these final reports often become outdated. Bank examinations also often stifle innovation as supervisors are critical of banks offering new products and services, leading bank management to be reluctant to innovate due to the fear of being downgraded. Moreover, the focus on process rather than risk itself has led to a brain drain in bank management.

Changing the Examination Process

Raj Date calls for immediate changes to the examination process even though the banking industry is currently thriving. He suggests the following approach. Regulatory agencies should be proud of their long histories of public service, but this pride can lead to conservative and resistant cultures. Unlike private sector firms, they do not have the pressure of profit imperatives to eliminate unproductive practices. The only solution is strong top-down leadership that sets ambitious goals. For example, in a pilot with a few mid-sized banks, they could structure a supervisory exam strategy that costs 75% less in combined bank and agency costs and is 75% faster from the first-day letter to the final report. They should embrace new technology tools in pursuit of these goals and then iterate on the initial (likely unsuccessful) results. This will be a challenging and even painful process, but it will be worth it.

Over-Regulation and Its Impact

While acknowledging the issues of over-supervision, Joseph directs significant attention to the problem of over-regulation. He argues that modern regulatory practices have become more complex, restrictive, and less clear, creating barriers to innovation and access to credit. Products like "Buy Now, Pay Later" (BNPL) face regulatory hurdles despite effectively addressing consumer needs. Joseph also discusses the potential negative impact of proposed changes to late fee regulations, warning that such measures could limit access to credit and push consumers towards higher-cost alternatives. He criticizes the heavy-handed approach of regulators, such as the CFPB's issuance of circulars, which adds further uncertainty and complexity for institutions trying to innovate in this space.