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In a "CFTC Talks" podcast interview with CFTC Chief Market Intelligence Officer Andrew Busch, Acting Comptroller of the Currency Keith Noreika asserted that Dodd-Frank regulation has become a "competitive barrier" to entry for banking entities.
Mr. Noreika described how Dodd-Frank Act "statutory thresholds" impose regulatory burdens on banks based on asset size. These thresholds, Mr. Noreika said, create a competitive imbalance – only banks that significantly exceed an asset size threshold are able to justify the additional regulatory burdens that accompany surpassing that threshold. As a result, the largest banks are able to gain a "monopolistic or oligopolistic" position while smaller banks are disincentivized from scaling up to challenge the largest banks.
Mr. Noreika also discussed the lack of de novo banking charters in the United States. Mr. Noreika explained that banks must receive charter approval not only from the Office of the Comptroller of the Currency ("OCC") but also from the Federal Deposit Insurance Corporation ("FDIC"), and while the OCC has chartered 14 institutions since 2001, the FDIC has not acted on any of the corresponding deposit insurance applications. Mr. Noreika concluded that potential new banks have been discouraged and no longer view applying for charters as a viable option. He claimed that the FDIC "just let [applications] hang out there forever, so that the organizers wasted all their money trying to get insurance, and then they gave up." He characterized the FDIC's failure to act on the applications as "unconscionable."
Mr. Noreika pointed to recent OCC development and innovation in the FinTech sector. He suggested that granting non-depository banking charters for FinTech companies is one potential avenue to increase banking competition. He expressed hope that banking entities will explore partnerships with FinTech companies:
"I think at the end of the day you have to remember that banks provide products and services to consumer[s] like any other company, and the more they can offer them in new ways that meet their needs in a changing and dynamic marketplace at lower costs, the better off we all are."
| Commentary / Bob
Zwirb Mr. Noreika's discussion of how laws like Dodd-Frank can create barriers to entry that benefit large firms over small ones dovetails with what economists have known for decades. For example, in 1971, economist George Stigler wrote that a "major public resource commonly sought by an industry is control over entry by new rivals," and illustrated his point by referring to a problem highlighted here by Mr. Noreika, the government's power to insure banks. George J. Stigler, "The theory of economic regulation," The Bell Journal Economics and Management Science, Vol. 2 No. 1 (1971), pp. 3-21. In that article, Stigler observed that the "[t]he power to insure new banks has been used by the Federal Deposit Insurance Corporation to reduce the rate of entry into commercial banking by 60 percent." This theory of using regulation to limit competition also has relevance beyond the world of banking. As Stigler predicted nearly 50 years ago with regard to the regulation of mutual funds: "The power to limit selling expenses of mutual funds, which is soon to be conferred upon the Securities and Exchange Commission, will serve to limit the growth of small mutual funds and hence reduce the sales costs of large funds." |
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