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How regulations affect the banking industry and its customers.

Banking regulations are like medications. Some work fine to keep the system running. Others may do more harm than good. Yet others are used because a better cure hasn't been discovered.

Virtually every aspect of banking is regulated by federal and state agencies, and different types of banks are regulated by different types of agencies. For example, national banks are regulated by the Comptroller of the Currency, a part of the U.S. Treasury; bank holding companies are regulated by the Federal Reserve; state-chartered institutions are regulated by the State Banking Commissioner; and the infamous savings and loan banks are ruled by another set of regulators. The FDIC is the main federal regulator of state-chartered banks.

In regard to having state and federal regulatory agencies to answer to, Chief Executive Officer Benjamin Rawlins, Jr., of Union Planters Corporation said: "Having two opinions is not a bad thing for this country. I think the plurality is good."


If regulations are like medications, then regulatory agencies are like physicians: the more you have the more chances that their dictates will overlap. For example, as many as three separate agencies may have a hand in bank examination procedures. According to the study "Vision 2000: The Transformation of Banking" by the Arthur Andersen Institute, the banking system as presently structured "allows state authorities to grant bank-product powers that can adversely affect the federal deposit-insurance fund. The thrift industry has been plagued by this type of conflict--and it is costing taxpayers billions of dollars as a result."

On the other hand, there are areas that are under-regulated. One of those involves disclosure activities. Says attorney Anita Lotz, whose practice with the law firm of McDonnell Boyd emphasizes banking regulations: "I think there's a feeling in Congress that people aren't getting all the information they need concerning savings account and credit card disclosures. Also, in the last few years, people have bought uninsured investments thinking they were fully insured bank products. Obviously, there's a problem there."

Another area that's underregulated concerns Community Reinvestment Act disclosures. Banks are required to report their community reinvestment activities to their regulators. Those activities are subject to regulatory review when a bank wants to engage in other types of new activities. "A lot of that information doesn't become public," said Lotz, "partly because the data is so voluminous that it's hard to make it meaningful to the public."

The community reinvestment issue becomes more significant as national banks become more of a reality. As banks and holding companies get bigger, legislators and regulators will be concerned about the issue of whether or not one community is being sacrificed to benefit another.


When a would-be borrower goes to a bank and fills out a loan application form, the regulatory process begins. In this case, the Equal Credit Opportunity Act applies. This act prohibits banks from discriminating against loan applicants.

"Anyone who has taken out a home mortgage and looked at the stack of papers put in front of them...that's a very real example of how regulations affect borrowers," said Lotz. When a person applies for a home mortgage, there are certain pieces of information in that application that the bank is required to report to its regulators. This information provides regulators a statistical picture of the mix of people from whom and for whom the bank is receiving and approving applications.

If a loan is not approved, the applicant is entitled to know why, according to Lotz. "A lot of these regulations are inapplicable to commercial loan customers above a certain size. There is a feeling on the part of regulators and the Congress that these are sophisticated customers who can get this information on their own. They probably carry equal clout across the board with their lenders."

Loan documentation is another area affected by regulations. There are certain kinds of information with respect to consumer loans that a bank needs to spell out in the loan document; for example, the way interest rates are stated or the way consumers are to be notified if there are prepayment penalties. There are also fair credit reporting regulations which provide banks with guidelines for using and reporting consumer credit information as well as procedures for correcting errors in customers' credit histories.

Regulations also apply to the type of collateral being put up for a loan. If a customer is using marketable securities as collateral, there are federal laws that proscribe how much a bank can lend against that person's stocks and bonds. If a customer is putting up real estate as collateral and the loan is over $50,000, the bank has to obtain an appraisal on the property. In addition, banks routinely require environmental assessments because of EPA and state environmental protection provisions. "Those are additional costs, which can be considerable, that you as a borrower have to contemplate," said Lotz.


Deposit insurance is perhaps the most visible result of regulations' effects on depositors. Early withdrawal penalties are another example of how regulations affect deposits and depositors; however, the interest rate offered on a deposit account or on a certificate of deposit is determined by the market, not regulations as it was in the past. One problem with market-driven deposit accounts is that there are numerous ways of calculating interest, which means these rates are not uniform from institution to institution.

With the Truth in Savings Act, Congress intends for there to be more uniformity in the disclosures about deposits made by financial institutions to their customers. Congress also wants to see more uniform information on how banks calculate interest. "You can find all this out, but you have to ask the right questions," said Lotz. "Most of that information doesn't appear in advertising."


Banks are pleased to see the enactment of recent uniform wire-transfer laws and regulations. At one time, there was no uniform set of rules that applied between banks and their customers. Bankers sat down with their customers and either negotiated an agreement or pulled out a standard form agreement that the customers might or might not sign.

Banks would also like to see regulatory changes in the bankruptcy area. "A House committee has proposed legislation in the consumer area making consumer liquidation a less attractive alternative, putting more pressure on consumers to go through the Chapter 13 route," said Lotz. "There have also been some very non-uniform interpretations of some sections of the bankruptcy act by different bankruptcy courts here in the United States creating uncertainty for secured lenders."

According to the Arthur Andersen study, many banks favor eliminating regulations on product powers and on geographic expansion. The study also points out that banks favor eliminating social mandates--the reason being that many feel uneasy about the government's "mixing of social-policy goals with the workings of private industry."

Rawlins does not want to see the FDIC being used to control monetary policy because it ends up paying off things that are uninsured. "The only thing the FDIC should do is insure deposits. That's what it's chartered to do, and that's what it's paid to do."


How do large banking mergers affect consumers? "It depends on whose press you believe," said Lotz. "On one hand, a larger institution can bring a broader variety of products and services to the consumer. On the other hand, with more mergers taking place, there is a perception that funds may be withdrawn from one community and be used to make loans to another community."

The Arthur Andersen study states that "the emergence of large interstate banks makes jurisdictional responsibility increasingly unclear, and the problem would be made worse with interstate branching." Rawlins, however, does believe interstate banking will materialize even more so. "I do feel like we will probably get some sort of interstate banking. I think that will be changed where we will be able to branch across state lines."

Rawlins believes there will be some consolidation in the next 10 years or so, but adds, "I don't think that large banks are in and of themselves better."

Mr. Lyons is editor of publications for the Bureau of Business and Economic Research at Memphis State University.
COPYRIGHT 1992 University of Memphis
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Author:Lyons, Chris
Publication:Business Perspectives
Date:Mar 22, 1992
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