U.S. Bank Regulator: It’s ‘Backwards’ To Put Consumer Protection Above Bank Profits

Comptroller of the Currency John Dugan

Comptroller of the Currency John Dugan

The American Bankers Association is currently in Washington, DC for its annual government relations summit, which coincides nicely with the lobbying blitz that bankers are launching against Senate Banking Committee Chairman Chris Dodd’s (D-CT) financial regulatory reform bill. As Bloomberg noted, “about 800 bankers fanned out across Capitol Hill yesterday, pressing lawmakers to resist” many of the provisions in Dodd’s bill.

Already, House Minority Leader John Boehner (R-OH) made quite a splash at the summit, explicitly telling the bankers to fight against reform. “Don’t let those little punk staffers take advantage of you and stand up for yourselves,” Boehner said. And yesterday, the bankers also received the unmitigated support of one of their current regulators, Comptroller of the Currency John Dugan, who was “unusually forthright” in asserting that bank profits should trump consumer protection:

In every case consumer protection has the edge and will trump safety and soundness [in Dodd’s bill] and I think that is backwards,” said John Dugan, the comptroller of the currency, at an American Bankers Association conference.

Got that? It’s backwards to put consumer protection before bank profitability! According to Dugan (whose agency oversees nationally chartered banks), consumer protection is only worthwhile so long as it doesn’t hurt the banks’ bottom lines. Sadly, this response is indicative of the attitude of many regulators during the buildup to the financial crisis.

Dugan himself, though relatively unknown, played a large role in setting the stage for the financial crisis. The Nation called him the “master of disaster,” noting that he “crusaded to defang state regulators” in “a deliberate attempt to preserve the ability of the nation’s largest banks to earn short-term profits from predatory loans.”

This perfectly encapsulates the argument for creating an independent consumer financial protection agency, as bank regulators like Dugan clearly side with the banks when given the choice. This is one of the worries with placing Dodd’s Bureau of Consumer Financial Protection within the Federal Reserve. While Dodd’s clearly tried to isolate the Bureau from the Fed’s banking regulators, if the Fed culture permeates into the Bureau, consumers will lose what is supposed to be their sole voice.

This also comes back to an important point regarding the structure of Dodd’s bill. The legislation certainly empowers regulators with a lot more information about the financial system and where potential problems could arise. But it also gives them a lot of discretion in taking action, including letting them decide whether to pursue implementing the “Volcker rule,” which would ban banks from trading with federally insured dollars.

Paul Volcker himself addressed this yesterday, saying that “in my opinion, it’s very unlikely that the regulators and supervisors would evoke a strict prohibition until a crisis came and then it’s too late.” “Look, I’ve been a regulator for 20 years,” Volcker said. “So I know how they are.” Indeed, if Dugan is any example, we might want to think twice about letting regulators unilaterally decide when and how to rein in the banks.