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.