Excess regulation risks instability, discriminatory pressures in bank

07Oct 2017
The Guardian
Commentary
Excess regulation risks instability, discriminatory pressures in bank

RISKS of excessive regulation seem to be rising into the spotlight, partly owing to the need for ministerial departments and executive agencies to show in word and deed how they are active in implementing reform, whose key word is discipline.

 

While there are undeniable parameters where this has done the public a mammoth service, namely in the stoppage of oozing of public funds for all sorts of excuses and instances of deliberate oversight, the rather spontaneous character it  takes has its inevitable downsides. 

That is what seems to be taking place in banking and financial institutions but commercial banks principally and one result in that area has been an unexplained, massive drop in export earnings.

Sources of these pressures were lately indicated in a media training workshop by senior officials of the Fair Competition Commission (FCC), underlining that there are ‘secretive’ ways in which banks and other credit handling institutions intensely exploit their clients. 

The idea wasn’t new for those familiar with criticisms of contractual practices generally, that ‘the devil is in the details,’ where some critics prefer to use the term ‘small print,’ implying annexes, footnotes of a sort, tucked at the bottom of a contract. 

Conspiracy theories have in several generations located this area as structural inequality between the borrower and the lender, where the latter has information that the former doesn’t dispose, or grasp.

For starters, it is this sort of hunch that provided the framework of a doctoral thesis by former Stanford University and then Columbian University don Prof. Joseph Stiglitz, of asymmetric information in the conduct of business decisions earned in around 1972. 

It eventually fetched the don a Nobel Prize in Economics, after he had passed among other appointments a few years as chief economist at the World Bank, and immediately earlier, head of the panel of economic advisors for erstwhile US President Bill Clinton.  

It is on the premise of those intuitions that in the early 1990s  the don delivered a withering criticism of structural adjustment policies of the IMF and the World Bank, leading to their abandonment.

This background is helpful to measure up to the fact that notions of asymmetric information between clients and big banks or large firms like telecommunications or other entities present a picture of extremely powerful cabals of individuals chaining a mass of powerless and helpless consumers. 

As a matter of fact the reality is a bit more sobering, that there is cut throat competition instead of collusion between large firms, and that the margin of profit they operate with doesn’t leave them with much room for deliberately misleading information, as it would soon work to the advantage of a competitor. That is why the most effective check against commercial abuse is competition, not the hand of a big regulator.

Indeed, it is owing to the trust that the government bestowed on regulators, after other government agencies failed the government when it was attempting to control and oversee production itself – for nearly the same reasons as current thrust towards industrialization - that regulation became the norm, instead of nationalization of industries. 

But as  bureaucracy must have its way, regulation soon started to become an instrument of controlling producers against the state in more than strictly fiscal need to pay taxes, and more onerously, protecting consumers against banks to the detriment of banks. They are pushed to absorb inefficient use of credit by pushing back on conditionality, small print, to help clients.

That is basically that senior FCC officials were targeting at, for instance in seeking to ensure that the client is fully educated on what the terms and conditions imply, whereas the interest of most clients is to make it impossible for collateral to be acquired in case of failure to repay at a set time framework. 

Put differently, there is no additional conditionality in small print that would not be communicated verbally or   existing already in the law, as any such measure could lose the banks massive projected income when queried in a court of law. 

So FCC is saying that seizing of collateral is tucked away in the small print, etc.In addition, it is well known that the need for money usually overwhelms an individual, the strategic need at a given moment, in comparison with the burden of payment in future, even set against decidedly uncharitable or Shylockian terms of this or that lender. 

In that case it is up to the borrower to weigh the real need for cash that presents itself to him, and hence evaluate the proper cost of repayment on the terms and conditions set out, that is, margins and time schedules, none of which can be in too small print for the borrower not to see or grasp.

 In that sense, concern for these conditions appears moral and righteous, but in actual fact it paves the way for inept demanders of credit to squeeze out efficient clients, ruining banks.

That is why plenty of care is needed in that direction, so that the commission does not see borrowing as a necessary line of credit that ought to be approached positively, with a view to help the borrower, as that lax attitude is unhelpful, leading banks to pile up non-performing loans. 

It is better is the contrary is taken into account, that borrowing out to be a last resort initiative after other ways of raising funds have been used, including downsizing of client outlays so as to remain efficient within the means he disposes at that moment. 

Seeking to make a difference in the market by the use of borrowed funds is practically only in the background of an ongoing concern whose business margins are not at issue, only expansion. In all other instances entrepreneurs seek funds to cover up for poor strategy; the result is acquiring of collateral almost at the earliest opportunity by the lender, to which then comes up this criticism of ‘small print,’ etc.