FDIC Chair Jelena McWilliams outlined the risks and benefits associated with the migration of financial products and services from banks to nonbanks.
In remarks at the Finance, Law and Policy Fourth Annual Financial Stability Conference, Ms. McWilliams stated that a substantial migration of mortgage origination and servicing to nonbanks occurred since the last financial crisis. Ms. McWilliams noted that the nonbank migration will, among other benefits, help consumers by expanding access to the banking system, lowering transaction costs and increasing credit availability.
Ms. McWilliams stated that while these activities migrated to nonbanks, some of the risks remain with banks and could adversely affect the stability of the banking system. The FDIC reported that bank lending to nonbanks increased by 636 percent from 2010 to June 2018. The FDIC also found that, based on supervisory experience, nonbank mortgage originators receive funding from bank loans. She said that a similar trend can be seen in mortgage servicing where 60 percent of outstanding mortgage loans guaranteed by Ginnie Mae are serviced by nonbanks.
Ms. McWilliams also advised regulators and policymakers to consider the potential risks and benefits of nonbank financial activity. She stated that regulators should encourage banks to innovate, and added that banks will attempt to keep pace with nonbank technological and service developments.
Lofchie Comment: This answers the question of why nobody starts a new bank. And why the price of NYC taxi medallions has crashed. It’s the Uberization of financial services.
How do, and should, regulators respond? More specifically from a regulatory standpoint, should the banking regulators consider whether regulations have made starting or maintaining a bank so unattractive from a business standpoint that the exodus from the banking industry becomes a material systemic risk? It’s not an easy question to answer; it’s not even remotely obvious how one would approach the question. That said, if you have a political mindset that treats banks as inherently bad, this is the way the markets will go. And that might very well be ok, or even better, but politicians and regulators should be mindful of the direction of change and of the extent to which they are accelerating that change.