Bashing the Bank Piñata By Fisher Investments Editorial Staff, 10/22/2010
- Despite best efforts by regulators, banks found ways around the onerous rules saddled on them.
- No one can possibly anticipate the millions upon millions of ways customers interact with financial firms daily.
- Some may interpret banks out-maneuvering regulators as negative, but keep in mind banks are just trying to be profitable.
- Eventually Washington (and the media) will stop using Financials as piñatas and move on to something else.
Following the "most comprehensive and sweeping reforms ever adopted for credit card accounts" in 2008, the Federal Reserve announced plans to change the rules yet again this week. The latest round of changes aim to shore up "loopholes" in the cleverly titled Credit CARD Act (Credit Card Accountability Responsibility and Disclosure) of 2009. Despite best efforts by regulators, banks found ways around onerous rules—adapting fees and interest rates to legally make up for revenue lost to regulatory limits.
But of course they did! No regulator can possibly imagine the millions upon millions of ways customers interact with financial firms daily, let alone anticipate how new rules guiding them will work in practice. The profit motive is the mother of invention. The private sector will adapt—that's what it does—even as regulators can't or won't. Mind you, the slew of new rules introduced this year and last aren't terrific for Financials, but the flexibility demonstrated by credit card issuers is encouraging.
Is ingenuity in the face of regulations wrong? No. Profitable banks are good! They make more loans. They innovate. They pay employees more and increase shareholder value. And profitable banks are good for consumers too—the very people regulators hope to "protect." People value convenient ways to buy stuff and access debt. What would be the surest sign folks are getting ripped off? If credit card companies went the way of the dinosaurs. Firms charge fees commensurate with the risks they assume. If fees get too far out of whack, folks stop using cards and banks change course or go out of business. While that works in the private sector, there is no such signal or incentive for regulators—so often their rules hit wide of the mark or become outdated almost as soon as they're enacted.
Sentiment continues to be pretty dour regarding Financials and likely will be for some time. But it seems to be easing. One doesn't need to look past the much watered down Basel accord for proof financial regulation is already starting to lose steam. Eventually, at some point in the future, Washington (and the media) will stop bashing the bank piñata and move on to something else. (Don't worry, they'll find another sector to bash. Always happens that way.)
*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.