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Consumer protection or just more red tape?

Wednesday 12 May 2010 - by Bernadette Mill


Since the savings and loan crisis in the eighties, Prof Littwin says people have known that the Government would not let financial institutions fail. She says: “That was alright when they were not able to take huge risks but due to increased deregulation, banks have actively engaged in highly risky activities in the full knowledge that the Federal government would bail them out. Most people engaging in these activities never thought they would need a bailout as they did not expect a downturn of this scale.

“Firms had freedom to choose who they would prefer to be regulated by - therefore no one agency had overall supervision of the risk financial institutions were taking.”

She says the regulators started to compete with each other as they had an incentive to keep firms on side. For example, in her opinion Bank of America Home Loans, formerly known as Countrywide Financial, was a company with a reputation for aggressively marketing sub-prime loans to people who could not afford repayments. In 2006, the company changed its charter so that it was classed as a savings and loan company as opposed to a bank and subsequently moved from being regulated by the Office of the Comptroller of Currency to the Office of Thrift Supervision.

She says: “This case illustrates how some firms used the lack of tighter controls in the system to escape necessary regulation.”
The United States – one of the most powerful trading blocks, has taken steps to build safeguards into its respective financial sectors. The next twelve months will be a crucial test as to how successful policymakers will be in curbing resistance from those in the industry.




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