The writer, a former us comptroller of the currency, is chief executive of promontory financial group, a consultancy
Despite pleas from federal reserve chair jay powellfor more robust support for the us economy, president donald trumphas abandoned negotiations with congress.
With no fiscal stimulus in the offing, that puts the onus on regulators to do what they can to get financing to the economy. the fed has led the way, committing last month to maintain astrong labour marketby keeping interest rates low, and not fixating on inflation.
But present markets will probably prompt lenders to serve wealthier individuals and bigger companies first, exacerbating inequality. fortunately, regulators have within their grasp several tools to direct lending to the businesses and low-income families including many minority communities where it will do the most good.
Congress and banking regulators should start by expanding the community reinvestment act, which requires banks to lend to their entire community rather than avoiding particular neighbourhoods. during the early 1990s, i worked in the clinton administration to rework cra regulations and use a spate of mergers to spur the banks involved to do more for disadvantaged communities. lending to low and moderate-income americans subsequently grew dramatically.
But the rules have again fallen behind the times. the comptroller of the currency tried this summer to refresh them, but other federal agencies havent been rowing in the same direction. regulators must now move beyond the cras focus on banks alone and on using prospective mergers for leverage.
Financial institutions will only embrace less lucrative lending opportunities including many loans to minority communities if regulators are willing to use the right carrots and sticks. in the 1990s, banks generally served the areas surrounding their various branches. today, financial institutions raise deposits and make loans and other investments far afield from their physical presence. regulators need to ensure that the cras requirement that lenders serve the entire community extends everywhere they do business.
Such new rules should also extend beyond banks to the lenders, investors, insurers and payment providers who have emerged as powerful influences in the financial marketplace. history makes clear that, when conditions sour, nonbanks also require and receive government assistance. accordingly, they should be made to meet the same community-wide service standards.
Washington should also give additional lending capacity to non-profit lenders who serve credit-starved low and moderate-income communities. community development financial institutions, such as sunrise banks in minnesota, may look like traditional banks but because they are driven more by mission than profit they make a disproportionate impact in lower income communities.
In difficult times, financial regulators should also give lenders leeway to take certain calculated risks. no lender should be able to abandon safety, soundness and high consumer compliance standards. but loan officers are often more conservative than they need to be. black americans have historically been thefirst fired and last rehired, which affects their ability to repay small business and mortgage loans.
Regulators can empower lenders to deal with the higher risks of lending to lower-income people by allowing lenders to value the properties used as collateral over longer periods of time, reflecting their inherent value, and to tap rainy day funds designed to cushion cyclical blows. much of america is desperate for the credit that the fed is trying to make more available. policymakers need to drive lenders to serve the small businesses and working and middle-class families who will fuel a broad-based economic recovery.