Under the current version of the bill, federal rules issued by the proposed Consumer Financial Protection Agency (CFPA) would override “weaker” state laws, but the states would be free to adopt “stricter” laws. That change would encourage states to reintroduce a scattering of local rules and regulations — the polar opposite of streamlining.
{mosads}Why can’t 50 state regulators be trusted to impose the efficient level of regulation on multi-state banks? The answer is subtle yet clear to an economist: State regulators have no way of gauging the broader impact of their actions, nor is it their charge. A state regulator cannot in any way appreciate the aggregate costs that multiple — and often conflicting — state rules and regulations will have on the ultimate cost and availability of financial product to consumers, including those in his or her own state. By eliminating the level, regulatory playing field that allows national banks to seamlessly offer financial products across the country, the price of financial products will go up and their availability will go down. We do not favor a patchwork quilt of regulation here or, more generally, for any business that transcends state borders.
Since the National Bank Act of 1864, U.S. banks and their customers have benefited enormously from the preemption of state and local rules, as has our national economy. Uniform, national regulatory standards that flourished under this regime have allowed banks to issue a more consistent set of terms for mortgages, credit cards, and business loans in a highly efficient manner. By encouraging competition among banks, uniform standards lead to lower costs of credit and greater capital availability.
Proponents of the new financial plan fail to recognize the clear benefits that preemption has generated for U.S. banks and their customers.
First, preemption eliminates state-sponsored protectionism. For example, in 1993, the Office of the Comptroller of the Currency (OCC) preempted a Connecticut law that prohibited national banks from selling annuities in Connecticut; in 1996, the OCC did the same in Texas; and in 2001, the OCC preempted a Florida law that prohibited out-of-state banks from operating ATMs in the state. These state laws were created to protect local business interests from competition. The OCC’s actions struck down these parochial efforts, and consumers saw the benefits of greater choice, more convenience and lower prices.
Second, preemption increases the availability of credit while reducing its price. It has done so by removing obstacles to the creation of national credit markets, and by limiting the ability of states to impose price controls. Economists at the San Francisco Federal Reserve compared the behavior of ATM operators in Minnesota, where surcharging has been allowed since 1996, to ATM operators in Iowa, which upheld a surcharge ban until 2003. The authors found that the Iowa surcharge ban reduced ATM entry by an average of approximately 12 percent in the counties along the Minnesota border.
Third, preemption creates a uniform regulatory climate for multi-state banks, allowing them to operate more efficiently. One can only speculate about the havoc that 50 different state laws, let alone the effect of thousands of differing municipal ordinances, would have on the cost of providing banking services — and the price of the product — to everyday consumers. Multiply that by the hundreds of other laws in which state and local legislatures may choose to involve themselves, and you can see the significant negative economic impact that may be involved here.
Finally, one should not confuse preemption with deregulation. For example, critics have claimed that preemption contributed to the subprime mortgage mess; according to this theory, states were allegedly impeded from regulating national banks and their lending actions. Yet empirical analysis shows that the overwhelming majority of subprime mortgage loans were originated by companies that were not subject to preemption, illustrating that loan-origination problems were mainly centered on state-regulated entities, a point that both leading policymakers and the administration acknowledge.
To address the gaps that were painfully exposed by the financial meltdown, including the subprime crisis, new federal regulations are likely needed. (How you do that is an open question, with the creation of the CFPA just one of the potential solutions.) But those potentially more stringent regulations should be uniformly imposed across the nation, so that banks and their customers can continue to reap the benefits of common regulatory standards. The preemption doctrine should be preserved. And the patchwork quilt should go back in the attic.
Mason is the Moyse/LBA chair of banking at the Ourso School of Business at Louisiana State University, senior fellow at the Wharton School, and a partner of the consulting firm Empiris LLC. Singer is president and managing partner of Empiris, which has clients with a financial interest in the policy advocated here.