Yesterday, the whole regulatory gang showed up for a meeting at the White House with President Barack Obama. Representatives from the OCC were there, as were folks from the CFPB, FHFA, the Fed, CFTC, FDIC, NCUA and SEC. (Alas, the team from TGIF was not invited to the acronym festival.)
The regulators came to discuss “the significant progress that has been made to strengthen our financial system and protect consumers, including the ongoing implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act.”
They should have been talking about banking innovation.
One of the negatives of Dodd-Frank is that regulators are single-mindedly focused on preventative medicine. How can we avoid a credit crisis? is the predominating stance. Indeed, the president yesterday only reinforced this position. This is from the White House’s official “readout” from the meeting:
Protecting consumers is and has been a priority for the President since day one. He understands that in order to build a strong and secure middle class, we need a stable financial system and common sense protections for families across the nation.
But is that really all that is needed? Would not the middle class benefit from not just a stable financial system, but a better one? I can’t imagine anyone would answer that question “no,” yet the federal government is so saddled with implementing Dodd-Frank that the question is not even raised.
I would argue that no entity within the financial system is better positioned to foster banking innovation than the federal regulators, yet doing so is farthest from their minds. The meeting yesterday, at its core, was about regulators pitching the president on more funding. It should have been about something else entirely.
When President Obama came into office in 2009, he put innovation front and center. Early in his first term, he said the following:
If this is truly going to be our Sputnik moment, we need a commitment to innovation that we haven’t seen since President Kennedy challenged us to go to the moon.
At that meeting on Dec. 6, 2010, in Winston-Salem, N.C., President Obama was talking about clean energy. But why can’t he talk about banking innovation? Why is there a presumption that banking innovation is any less important than clean energy or mobile apps? The truth is, there shouldn’t be.
My hope is that the next time the whole gang o’ regulators treks over to the White House, the discussion should not just center on Dodd-Frank implementation and budget, but on what the administration can do to propel banking forward, not just make sure it won’t fall backward. I’m hoping, but I’m not counting on it.
Good post/rant JJ. Agree.
Love this quote by Kevin Kelly – “The nature of an innovation is that it will arise at a fringe where it can afford to become prevalent enough to establish its usefulness without being overwhelmed by the inertia of the orthodox system.”
Government can help by fueling the innovation efforts of the ‘fringe’; the start ups and smaller players that we see consistently driving innovation in the Financial Services (and other) spaces. Government doesn’t need to be the roadblock in these instances. Then again, neither do the bigger players. Collaboration is critical for improving the consumer experience and rebuilding trust (both in Financial Services and Government) when it comes to the consumer.
Agree fully.
JJ,
I agree broadly with your sentiment. However, I will say that at @getMoven we’ve made an effort to engage with the FED, FDIC, CFPB, US Treasury, etc and have been very well received. I think that there is an acceptance that change needs to happen.
The problem in my experience is not the strategic side of the regulators, because at that level they know the US has to shift to stay competitive as a financial market. The survey/enforcement side of the business, however, changes very, very slowly and they don’t respond to change well as it is perceived as a risk to the status quo or legal framework. This biopic/split personality within the regulatory environment means even if you have a regulator that wants, for example, to digitize customer onboarding and eliminate the bias towards physical KYC or signature forms, that the survey teams will push back against that trend because it is new and different for them.
There are two key problem with regulators in this respect. The first is simple Inertia that resists change because change = risk (perception). The second is the speed of change is such these days (i.e. see Bitcoin) that regulators can’t get out in front of change, and are forced simply to respond in most cases. When you have to respond to a changing environment as a regulator, all you can do is try to create rules that reduce risk to the market/system/consumers. Thus, your only real response to changes is more regulation, rather than opening up the industry in creative ways.
In the end we need less regulators, but a better system of industry and regulator involvement to craft transitions to new states.
IMHO
Brett King
BANK 3.0
Well put, Brett. You really fleshed out an aspect of what I am trying to convey. With supervision so entrenched, the only way to begin undoing their reactionary approach is from the top, which is why when President Obama has a meeting with all the regulators, as he did this week, he has the unique opportunity to unwind the risk/fear cycle within supervision. But he didn’t, which is unfortunate.
Could there be any more pointed commentary on the sorry state of the US financial industry than having the President forced to call the heads of all the regulatory agencies to the White House to remind them of the urgency of their active participation in implementing the regulatory reforms contained in the Dodd-Frank Act? Over 5 years after the Financial Crisis and 3 years after D-F and the agencies are still dithering over the most significant actions. They are allowing the foxes to opine on improvements to the hen house. And not a single bank or person has been held accountable for anything. Meanwhile the bailed-out banks are reporting record profits and committing serial scandals while taxpayers and the economy continue to limp along. How is this not a national disgrace?