New banking bureaucracy may not help consumers

Jul 22, 2011 By Neil Schoenherr

(PhysOrg.com) -- There's a better way to help banking customers than the new Consumer Financial Protection Bureau (CFPB) that opened for business July 21, says a banking expert at Washington University in St. Louis.

“I’m a big advocate of and of transparency,” says Anjan Thakor, PhD, the John E. Simon Professor of Finance at Olin Business School.

“But I would like to have seen a case made for where the existing consumer protection legislation failed and what the alternatives were for dealing with that, as opposed to creating a new government ,” he says.

The CFPB, which was formed as part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, is an independent bureau housed within the Federal Reserve system. Its aim is to promote fairness and transparency for mortgages, credit cards and other consumer financial products.

“I think the premise of this bureau is that somehow current disclosure laws are not enough, and that’s what complain about,” says Thakor, a prolific author and internationally noted expert on banking and financial institutions. “I don’t think anyone argues with the need for consumer protection, transparency and information disclosure.

“The disagreement is over the best way to do that. The answer from the administration seems to be to create an oversight watchdog bureau to tell banks what they should do.”

Banks are not necessarily happy about that, Thakor says.

“What banks are nervous about is that they don’t know what this bureau is going to ask them to do,” Thakor says. “Their biggest concern is that many of these bureaucracies eventually devolve into offices that impose enormous reporting duties on banks. It becomes a bureaucratic nightmare to keep track of, document and report so much information. It is going to be costly.”

Thakor says the benefit of the bureau is transparency so consumers don’t get fleeced on credit card fees or mortgage fees, hidden fees or predatory lending.

“But there are already consumer protection laws on the books for all of these things. It’s not like these are neglected items of consumer protection.

“We have regulatory agencies entrusted with enforcing these laws. If people think these laws don’t work, and there are examples of where they have not worked well, we should find out why these laws did not work and what we can do to improve them before creating a new bureaucracy.”

Thakor hasn’t seen any concrete cases listing the failures of current consumer protection laws and in particular why these could not be modified/improved to ensure better consumer protection.

“If the laws are broken, let’s fix them,” he says. “That’s how regulation evolves. We enact legislation in response to crises or market failures, and then we learn that we did not do it right the first time, so we tweak things until they work reasonably well.

“We do not always enact new laws simply because there is some belief that the previous with the same intent did not work perfectly. I just haven’t seen that evolution and refinement process in this case,” he says.

The bureau, which will be funded through bank fees, may raise costs for consumers, Thakor says.

“Anything that banks pay for, we end up paying for,” he says. “It doesn’t come out of thin air. It’s very expensive. This may be extremely worthwhile in intent, but it may turn out to be just an albatross.

“Bureaucracies, once created, never go away.”

Explore further: Entrepreneurs to venture capitalists: Don't be a Scrooge

add to favorites email to friend print save as pdf

Related Stories

Bodies for sale

Dec 22, 2010

For some people, intellectual property is about faster computers and better apps. But for Kara Swanson, a new professor at the Northeastern University School of Law, it’s about body products — literally.

The kids are alright

May 26, 2011

Children should be seen and not heard... who says? A Philosophy academic at The University of Nottingham is challenging the adage by teaching primary school children to argue properly.

Recommended for you

Over-identifying restrictions in economic analysis

18 hours ago

The analysis of empirical economics has long made use of a tool called the generalized method of moments (GMM). This method is used as a generic way of estimating parameters in an empirical model where the ...

Tracking Chinese aid to Africa

Nov 24, 2014

Is a fancy new school in an African government official's hometown a coincidence, or evidence of systematic favouritism in the distribution of aid?

User comments : 0

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.