Secretary’s column does not address fiduciary responsibility of banks

The Washington Post column by Secretary Timothy Geithner on April 13, 2010 was a breakdown of the failings of the financial industry, and the explanation for the necessary reforms to avert the next financial crisis. The article was clear and precise in the breakdown of the system, and the regulations to be implemented to avoid a future crisis. However, the column did not address enhancing current regulations to insure restrictive measures in different aspects of risk behavior, and the bank’s fiduciary responsibility in offering programs to meet the needs of everyone in the bank’s service area.

First, the enforcement or enhancement of current regulations such as the Regulation B or Equal Credit Opportunity Act (ECOA) would prevent the banks to insure risk tolerance is not utilized to decline opportunities to the bank’s service area. First, the bank could not decline a mortgage loan applicant in their footprint of service to avert upfront risk, with the capability to invest in the same risk on the back end via a mortgage back security that is composed of the same credit grade loan that would be declined as an applicant to the bank. Second, the regulation of correspondent lending programs are essential to insure the same lending standards in product and credit risk are being held in correspondent opportunities outside the bank’s deemed footprint. The bank’s risk practice behavior should be consistent to include the inability to pursue the same risk in a security or correspondent lending programs outside the primary service area.

In addition, the banks should be required to provide programs for unbanked consumers including second chance programs via public-private partnerships for lending services. The program would provide literacy and educational programs to insure success of the issuance of loans to be successfully repaid. An example of the program is a government funded program of $10 Billion. However, this fund would operate as the Federal Deposit Insurance Corporation (FDIC). The fund would be sustained and grow in size by repayment of loans with interest charges. The program could use the Bank On program in the literacy programs and involvement of community associations.

In the construct of the column, Secretary Geithner was successful in making the case for reform to avoid the next time. However, the bank’s need to be held accountable via meeting the needs of the consumers served under the bank’s primary footprint. The behaviors to promote economic health and stability should be incorporated in reforms to insure the next financial crisis is not an extension of the current crisis in process.

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