President Obama’s push for a formalized, financial regulatory consumer structure to aid the nation’s recovery from one of the worst financial crises in history would be “the worst kind of nanny-state regulation,” according to Paul Schultz, John W. and Maude Clarke Professor of Finance at the University of Notre Dame.
“The proposed Consumer Financial Protection Agency (CFPA) is intrusive, petty and probably very expensive,” says Schultz, who specializes in market microstructure and corporate finance.
Potential actions of the CFPA include warning consumers who use debit cards or ATM machines that doing so would overdraft their account; prohibiting charging for overdraft coverage under a plan unless the consumer has “opted in” to the plan; and limiting the types of credit cards and mortgages that are made available to consumers.
Part of the mission of the CFPA, according to Schultz, will be to ensure that “traditionally underserved consumers and communities have access to lending, investment and financial services,” and that the CFPA should maintain a group of examiners specially trained and certified in community development to conduct CRA (Community Reinvestment Act) examinations of larger institutions.
“In other words, the CFPA will pressure banks to make loans to borrowers that they would not otherwise make,” Schultz says. “Isn’t that one of the reasons we got into so much trouble in the first place?”
In addition to the CFPA, other changes proposed by the Obama administration include an oversight council to identify systemic risks, a national insurance regulator, comprehensive regulation of over-the-counter derivatives, and registration of hedge funds.
“Financial innovation has outpaced regulation. Much of the U.S. regulatory structure dates back to the 1930s. The last three decades have seen an explosion of new financial products and services,” Schultz says.
“This is the normal course of events – unless we stifle innovation, it will proceed faster than regulation. Wall Street is full of very smart people who can make a lot of money by creating successful financial innovations. In fact, regulation is often a spur to innovation as the financial industry looks to evade expensive or restrictive regulations.”
A member of the Notre Dame faculty since 1998, Schultz is the co-author of a landmark 1994 study that led to a $1 billion class-action lawsuit against the Nasdaq stock exchange and to major changes in the rules governing share trading on Nasdaq. More information about Schultz is available at http://newsinfo.nd.edu/for-the-media/nd-experts/faculty/paul-schultz.