Many people want financial industry reform. And few want to see a return to the unstable, “innovative” (read, downright precarious) collateralized debt obligations and complicated financial structures of the past decade.
But more regulation, proposed by the Obama administration, is not the answer, said Mariner Kemper, chairman and CEO of UMB Financial Corp.
While Kemper is “eager” to see the nation implement long-term solutions and deal with troubled institutions, he said the task needs to be approached realistically and rationally — “rather than rush to do something that may do real damage in the long run.”
Pundits, reactionaries and politicians insist that more regulation will solve the problem.
“But there’s been plenty of regulation,” Kemper said. “The big issue is enforcement and execution — regulation has not been well-enforced over the years.”
As people look for scapegoats to blame for all the problems, they want answers — which often include demonizing the banking industry — and solutions.
“Traditional banking — which gathers core deposits in a bank’s territory and lends those funds out to customers whom bankers know and understand — did not cause the economic crisis,” Kemper said.
But financial service conglomerates are a “different” story.
“By inflating their leverage in a low-interest rate environment, they created liquidity and transferred risk by packaging loans into exotic financial products, selling them all over the globe,” he said. “Banking didn’t get out of hand — the products did.”
One of the weaknesses in the regulatory industry is lack of understanding about the products and their systemic impact, Kemper said.
And keeping “too big to fail” institutions on taxpayer-funded life support only “prolongs the agony.”
The goal, instead, should be to resolve these situations, by “shutting down failed businesses, and spinning off viable enterprises as agile, focused competitors,” Kemper said.
“We already have five regulatory agencies that don’t work together and have rules that sometimes conflict,” he said. “Instead of more Big Brother — we need a systemwide regulation,” which would make the agencies coherent amongst one another.
“The proposed Consumer Financial Protection Agency would be a disaster,” Kemper said. “It’s so far-reaching that it flies in the face of a free-market system.”
As for reform, the nation would derive much greater benefit from “incentives-based reform,” rather than using a punitive system.
His suggestions for incentives to “drive behavior” include a “much more robust tiering system” for Federal Deposit Insurance Corp. insurance.
“The more risk you take, the higher the premium should be, just like with car insurance,” he said.
Financial institutions should have to cover their own costs for the risks they take, Kemper said, “So conservative banks aren’t faced with paying for the irresponsibility of others — or having our reputations lumped together with theirs.”
And capital requirements could be regulated in the same fashion — via incentives.
As proof that increasing regulations and adding agencies has not worked, nor has the government learned a lesson, he said, the nation has had 32 recessions since the mid-1850s.
“We don’t teach people to (mitigate) risk by looking over their shoulders,” Kemper said. “We teach them by rewarding for quality and charging for risk.”
During 1873, the U.S. had a Great Depression — something people tend to forget about.
“We’ve been here so many times — and with each recession, depression and crisis, we’ve had (or added) regulatory bodies, yet we still have another recession,” Kemper said. “Instead of more eyeballs, let’s put the burden on the institutions that take the risks — by having them reserve for the risk through higher premiums and higher capital levels, which also protects shareholders and depositors.”
He said reform is needed, but not more regulations and more institutions.
“Instead, we could solve most of our industry problems by offering incentives — it’s a fact of human behavior,” Kemper said. “We need incentives to behave.”
Rebecca Tonn covers banking and finance for the Colorado Springs Business Journal.