In Shift Since Credit Crisis, Regulators Now Appear to Micromanage Banks

While many actors within the financial system share blame for the credit crisis, including bloggers and journalists, certainly one of those fingers can be pointed at regulators.

In its famous report, the Financial Crisis Inquiry Commission in 2011 lambasted regulators for essentially being asleep at the wheel. The commission’s conclusions as they related to regulators deserves mention:

We conclude widespread failures in financial regulation and supervision proved devastating to the stability of the nation’s financial markets. The sentries were not at their posts, in no small part due to the widely accepted faith in the self-correcting nature of the markets and the ability of financial institutions to effectively police themselves. More than 30 years of deregulation and reliance on self-regulation by financial institutions, championed by former Federal Reserve chairman Alan Greenspan and others, supported by successive administrations and Congresses, and actively pushed by the powerful financial industry at every turn, had stripped away key safeguards, which could have helped avoid catastrophe. This approach had opened up gaps in oversight of critical areas with trillions of dollars at risk, such as the shadow banking system and over-the-counter derivatives markets. In addition, the government permitted financial firms to pick their preferred regulators in what became a race to the weakest supervisor.

Bank Innovation has found evidence of just how far that pendulum has swung in the other direction.

In a discussion buried in the American Bankers Association’s LinkedIn group last week, a regulator from the Federal Deposit Insurance Corp. slipped in a comment that offered a unique window on regulatory compliance today. The discussion — entitled “How do you envision the branch of the future?” — centers on whether banks should use video banking as part of their “transformation of the branch.” G. Kurt Veale, an examiner for the FDIC based in Memphis, shared his view of branch banking, and it is remarkably detailed:

As a bank examiner, I see the customer traffic flow in bank lobbies continuing to decrease; to the point of making it hard to justify a traditional teller line and the floor space it contains. This trend will likely continue as tech-resistant customers who expect a traditional lobby die-off and are replaced by younger customers who expect “technology excellence” from their banks. I think the lobby of the future will lose that stoic teller line in favor of islands and computer kiosks, EXCEPT in urban areas where crime and staff safety are issues. And in those urban areas technology will be used to deter robbers and protect staff (and examiners?) as we see now, but in more subtle ways: for example our beloved TSA has the airports wired with systems to observe and detect travelers with ill-intent or the flu, which could be easily adapted to existing bank security systems. Net: any banker who asks his architect to build him/her a traditional lobby is wasting money that cannot be justified to shareholders or the Board!

While we don’t disagree with the substance of Veale’s comments, that a regulator would get so detailed as to question “a traditional teller line and the floor space it contains” is striking.