Shane Smith

Bankers complain with considerable fervor about a “tsunami of new rules.”  There has certainly been a flood of standards indirectly implemented by supervisors, simply demanded by the CFPB, proposed, and finalized.  It’s thus understandable that bankers think they’re drowning.  But, as forest fires rage in Brooklyn and much of the nation is conserving water, it’s important to recall that too little rain is also dangerous.  Which brings me to the strategic hazard banks run if deregulation, while alleviating a bit of bank burden, leaves untouched all the regulatory asymmetries that make it easy for shadow banks to dominate still more profitable activities once considered core banking services.  If shadow banks offer better products, so be it.  However, much of their market power derives only from adroit regulatory arbitrage.  That’s not just bad for banks; it’s also dangerous to financial consumers, investors, and stability.

Regulators can go only so far in easing banks’ burden because the law requires many of the rules that bind them.  Nonbanks are not governed by much federal law and there are scant state safety-and-soundness standards.  Tech-platform companies are outside the law unless federal regulators use their inter-connection and antitrust powers to rein them in.  That these nonbanks have their eyes on core intermediation and payment services is now indisputable.  That banks will end up as little more than bedraggled “partners” or ancillary-service providers to nonbanks is inevitable unless necessary bank-regulatory reform comes with long-overdue nonbank safety-and-soundness and resolution standards.

Our forecasts of financial policy under President …