Friday, July 27, 2012

While writing rules, financial regulators talk to banks 5 times more often than reform organizations

The American Banker reports that Dodd-Frank rule makers met 5 times more frequently with the big banks than with reform organizations.

Regular readers know that these meetings are one of the ways that banks influence the Financial-Academic-Regulatory Complex (FARC).  Specifically, to the extent that the regulators rely on the banks or their lobbyists for technical understanding, the banks or their lobbyists shape how the final rule turns out.

Let me give you an example from the SEC's proposal to revise the disclosure requirements for structured finance securities.  The SEC is proposing that loan level data be disclosed.

The banking industry and its lobbyists have put forth the idea that while loan level detail makes sense for a mortgage-backed security with 1,000 to 5,000 mortgages, it does not make sense for a credit card receivable backed security with 40 million receivables.

The SEC has accepted that this is true.  Proof of this acceptance can be shown by the inclusion of this argument in a recent paper written by Henry Hu, a former senior SEC official.

However, to anyone with any experience using a computer or monitoring a loan portfolio, they know this statement is factually not true.

Nobody looks at 1,000 or 5,000 mortgages by hand.  They use a computer.

A computer doesn't care if it looks at 1,000, 5,000 or 40 million records (and yes, the buy-side can afford computers that can process 40 million records).  So if it makes sense for 1,000 to 5,000 mortgages, it also makes sense for 40 million credit card receivables.

In Mr. Hu's case, he confesses that he doesn't really know anything about computers.  Hence, he is susceptible to being manipulated by the banks and their lobbyists for their benefit.
Regulators implementing Dodd-Frank met with big banks nearly 1,300 times in the past two years, but held only 242 meetings with reform-oriented organizations, according to a reportfrom the Sunlight Foundation. 
The numbers “call attention to the intensity of resources that big banks are devoting to Dodd-Frank rulemaking," Lee Drutman of the Sunlight Foundation tells American Banker’s Rob Blackwell. 
Though it does not necessarily prove influence, “to the extent that regulators are relying on bank representatives to understand the technical side of these rules, they are likely to see the world from the banks' perspective. This is bound to have at least some impact on how the final rules turn out," Drutman says.

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