Repeating assertions that the pending “arbitration rule” by the Consumer Financial Protection Bureau (CFPB) will raise the cost of credit, the acting Comptroller of the Currency in a speech Thursday also took aim at random asset thresholds in regulations, calling them “competitive barriers.”
Speaking to the Midsize Bank Coalition of America Chief Risk Officer Meeting in Dallas, Acting Comptroller of the Currency Keith Noreika said the consumer bureau’s final rule on arbitration agreements is an example of regulation that may adversely affect the business of banking, have systemic effects, or result in perverse unintended consequences.
(The “arbitration rule,” finalized by the CFPB this summer, would ban mandatory arbitration clauses in loan agreements, such as clauses covering consumer financial products, including credit cards and bank accounts, and which block consumers from joining in class actions to sue for alleged wrongdoing).
Restating comments he made last week, Noreika said that Office of the Comptroller of the Currency (OCC) economists completed an analysis of the CFPB’s final arbitration rule last month. “Our economists found that despite the CFPB’s statement that analysts could not find any evidence to indicate that banning mandatory arbitration agreements would increase costs to consumers, the Bureau’s data actually show that there is an 88% chance of the total cost of credit increasing, and the expected increase is almost 3.5 percentage points.”
Noreika said the analysis means that a consumer, living week to week, could see the average credit card rate of 12.5% rise to nearly 16%. “That 25% increase in the consumer’s cost of credit is a significant economic impact, particularly when it is unclear that the rule will achieve its ultimate goal of greater compliance and fairer treatment of consumers by financial institutions,” he said.
In other remarks, the acting comptroller said that “arbitrary thresholds” of fixed asset sizes in regulation often have the “perverse effect” of acting as competitive barriers. “Even famous large bank CEOs see the disparate treatment of the largest banks and various thresholds that exist as widening the moat around those institutions, protecting them from competition,” he said.
He said that the OCC sees “a phenomena” in which banks choose to stay at $9 billion or $49 billion in assets, because by crossing to $10 billion or $50 billion they would incur additional costs and scrutiny by regulators. “In practice what we see are banks either remaining below the threshold or leaping far beyond the threshold,” he said.
He pointed to the stress test requirements for banks under the Dodd-Frank Wall Street Reform and Consumer Protection Act as evidence of adverse effects for the thresholds. (The 2010 law requires an annual stress test for all banks with assets of more than $10 billion, and outlines the parameters for conducting the tests).
“In certain circumstances, the burden of annual stress testing, particularly in accordance with prescriptive statutory requirements, is not commensurate with the systemic risks presented by an institution,” he said. “There is tremendous diversity in the business models of banks around $10 billion, and regulators need the ability and authority to tailor their supervision to the unique risks presented by individual banks.”
An option to address this issue, the acting comptroller said, would be for Congress to give the federal banking agencies broad authority to tailor by rule the statutory stress testing requirement, without regard to an asset threshold. “This approach would avoid the potential for over and under inclusiveness associated with fixed-asset thresholds,” he said. “It also provides regulators flexibility to calibrate rules and requirements to be commensurate with the systemic risks presented by individual or groups of institutions.”