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Banks Need A Little Skin In The Game

Banks are still whining about the so-called “skin-in-the-game” requirement that was part of the financial reform bill Congress passed last summer.

And I’ve got to say that those complaints are soooooo unattractive.

What the law does is require banks to maintain at least a 5% interest in the mortgages, credit card debt and auto loans they bundle and sell to investors.

The idea is that they’ll vet borrowers more closely if they can’t pass all of the risk along to someone else.

Some loans Congress considers safe, such as traditional 30-year fixed-rate mortgages with at least a 20% down payment, are even exempted from the 5% requirement.

So what we’re really talking about is trying to make the banks act more responsibly when they agree to more risky loans such as interest-only or adjustable rate mortgages.

In my view, this is the absolute least we can ask of the banking industry.

These are exactly the kind of loans that nearly wrecked the financial industry two years and pushed the economy to the brink of another Great Depression.

If I had my way, we’d ban the securitization of consumer debt and require the banks the keep all of the loans they make.

That’s the way the financial industry worked before banks began packaging consumer debt to sell to investors in the late ’80s, and the system worked very well.

Bankers embraced selling the loans they made because they were always grousing about the risk involved in making long-term loans (primarily mortgages) with money from short-term deposits (think savings accounts and CDs.)

There was some truth to that.

When interest rates went up the spread between what banks had to pay for deposits and what they were collecting from the mortgages they held, did narrow and reduced their profit.

What bankers never seemed to mention was the nice boost they got when rates went down and that spread increased.

Everyone took for granted the stable and ethical banking industry this system created.

The 5% rule is not a modest effort to rein in irresponsible lending. It’s a minor effort to rein in irresponsible lending.

It’s time for the banks to stop bitching and moaning about every new rule or regulation that tries to restore public faith and confidence in their industry.

Comments (2)
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2 Existing Comments
  1. Candy Cane said:
    on October 6th at 02:55 pm

    I am not surprised by the banks reaction to this law. Look at what happened when the chairmen of the largest banks were called to testify in Congress, flying on private jets and taking huge multi-million dollar bonuses while the banks were bailed out with our money. They have no concept of reality and have no regard for customers or the public who’s hard earned tax money was used to pertetuate the actions of these crooks. Two years later, we are still paying for the bank’s greedy deals, with the Fed keeping interest rates at ZERO, while the banks realize record profits. The American dream has really been destroyed by the decisions of a few in very high positions.

  2. Terry said:
    on October 11th at 03:29 pm

    Interesting that they love “regulating” their customers with fees and rules but they aren’t too keen on it when it’s the other way around.