Big Banks Remind Us Why We Should Be Scared

Three separate events in Washington Thursday served as reminders that America’s big banks continue to pose risks to college students, consumers, and taxpayers.

Sen. Elizabeth Warren (D-Mass.), the Center for American Progress and the U.S. Public Interest Research Group were among lawmakers and organizations warning that college students and their families are being harmed by financial institutions that either refuse to reduce student debts, push borrowers into default, or prey on low-income students through campus-sponsored banking products that hit them with high fees when they try to access their federal student loans.

Meanwhile, the federal Consumer Financial Protection Bureau said it would explore whether new rules were needed to limit the tens of billions of dollars in overdraft fees large banks reap at the expense of households. The agency found that consumers, on average, pay higher fees than the amount by which they’ve overdrawn their accounts.

And an 18-month examination by the Government Accountability Office found that investors likely perceived the nation’s largest banks as “too big to fail” in the years immediately before and after the latest financial crisis, resulting in lower funding costs than their smaller peers simply because investors thought that taxpayers would prop up a failing big bank. Though the watchdog’s report carried "a heavy dose of caution and nuance,” its main author, Lawrance Evans, told the Senate Banking Committee, the same probably would happen in another financial crisis as investors would assume that federal authorities would use taxpayer funds to prevent a big bank from failing. Washington trade associations representing big banks and the Treasury Department cheered part of the report that noted big banks may have had to pay investors more to fund their operations last year than small banks -- evidence, they said, that "too big to fail" is over.

Six years after the height of the financial crisis that triggered the most punishing economic downturn since the Great Depression, Thursday’s reports and warnings collectively suggested that the measures President Barack Obama signed into law four years ago intending to prevent another financial crisis didn’t go far enough.

“These banks are not just too big to fail,” Sen. Sherrod Brown (D-Ohio) said during an interview with Bloomberg TV. “They're too complex to regulate. They're too big or too complicated to manage. Look at the problems these largest banks have had.”

Since 2008, big U.S. and foreign banks have spent close to $100 billion to settle federal and state allegations of wrongdoing, including accusations that they:

1) Illegally seized borrowers’ homes.

2) Cheated towns across the country that had issued debt.

3) Ripped off troops.

4) Manipulated benchmark interest rates.

5) Misled investors when selling them home loans that had been bundled into securities.

6) Duped homeowners into taking out expensive mortgages.

7) Rigged markets to bolster their trading positions.

8) Processed payments for alleged terrorists and genocidal regimes.

9) Helped Americans evade U.S. taxes.

10) And enabled Mexican drug cartels to launder their money.

Authorities also have accused large financial institutions of misdeeds that include ignoring signs that Bernie Madoff was engaged in a massive Ponzi scheme, and tricking households into paying for worthless credit card products. In most of the settlements that ended government probes into banks’ misbehavior, the banks neither admitted nor denied wrongdoing.

Regulators around the world now are investigating whether big banks attempted to manipulate the foreign exchange market, where currency prices are set and more than $5 trillion is exchanged daily.

Last year, during a speech focused on banks perceived to be “too big to fail,” one of the top U.S. financial regulators said that some of America’s largest financial institutions appear to lack respect for "law, regulation and public trust."

“There is evidence of deep-seated cultural and ethical failures at many large financial institutions,” William Dudley, president and chief executive officer of the Federal Reserve Bank of New York, said in November.

Brown suggested that the litany of wrongdoing committed by big banks stems from the perception that they're either too big or important to be allowed to fail. “Ultimately the problem is that this just encourages risky behavior,” Brown said.

Some of the behaviors that could be considered risky or wrong were detailed on Thursday.

In its report and during an accompanying call with the news media, the federal consumer bureau noted that the typical fee consumers pay when overdrawing their bank account is $34. But those fees are usually levied for transactions of $24 or less, and the majority of overdrafts are repaid to banks within three days.

“If a consumer were to get a loan on those terms, that would equate to an annual percentage rate of over 17,000 percent,” said Richard Cordray, CFPB director. “Overdraft fees should not be ‘gotchas’ when people use their debit cards.”

Cordray added: “We need to determine whether current overdraft practices are causing the kind of consumer harm that the federal consumer protection laws are designed to prevent.”

In response to the CFPB’s report, Richard Hunt, president and chief executive of the Consumer Bankers Association, a Washington trade group, said, “These debit card services are completely optional, and consumers who freely choose to utilize the service can subsequently opt-out at any time.”

Separately, during a hearing held by the Senate Banking Committee, Christine Lindstrom of the U.S. Public Interest Research Group warned lawmakers that students at colleges that have entered into partnerships with individual banks typically get a raw deal through steep and unusual fees, such as being charged for not using their debit cards.

“On a college campus where students are a captive audience and a bank is getting an exclusive deal, that deal should actually be far superior for the students who are exposed to that deal and being marketed to than is available on the open market. But, in fact, that is not the case,” Lindstrom said.

The hearing touched on a variety of bank-caused concerns bedeviling college students and recent graduates, including lenders’ reluctance to forgive education debt incurred by students who subsequently died and saddled their parents with the bills. Hunt, the financial industry representative, said he expects banks to broaden their efforts to help borrowers in distress.

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