The Regulatory Ring

Story Highlights:

• In a 5-4 decision, the Court ruled in favor of state attorneys general wishing to prosecute national banks for so-called "fair lending" violations.
• To avoid litigation, banks will have to increase loans to borrowers who have poorer credit ratings—despite the claim risky lending practices sparked the financial crisis.
• Adding state-level "enforcers" to the long list of federal regulators further confuses an already rickety regulatory apparatus—increasing banking costs along the way.
• We've survived many a regulatory shake-up (Sarbanes-Oxley being only the most recent) to thrive once more—this bout in the regulatory ring should be no different.

The headlines continue to play their favorite pair of kings this week—the controversial yet talented King of Pop and the universally hated King of Con. But how much will Michael Jackson fervor and Bernie Madoff malignity affect future investment decisions? Unless you were one of Madoff's unfortunate investors or shelled out $20,000 for a Mickey Mouse painting by a young MJ—hopefully not much at all. A lesser heralded Supreme Court verdict, however, might be worth watching. In a 5-4 decision, the Court ruled in favor of state attorneys general wishing to prosecute national banks for so-called "fair lending" violations.

For more than 140 years, since the National Bank Act of 1864 established nationally chartered banks, similar cases have been struck down in the courts. It was thought the federal Office of the Comptroller of the Currency (OCC) adequately protected consumers. But after Tuesday's ruling, no more. Now states' attorneys can get in on the game too. To avoid litigation, banks might have to increase loans to borrowers who have poorer credit ratings. Yet the feds claim Wall Street's risky subprime lending was responsible for the fall panic. The solution? Clearly: Punish banks who limit risky lending.

But that's not the only reason the Court's decision could harm banks. The US has a long and storied history of layering one regulatory apparatus on top of another. Nationally chartered banks are already answerable to a number of federal regulatory bodies—notably the OCC, but also the Federal Reserve, the FDIC, and for those dealing in securities, the SEC. Adding state-level "enforcers" to the list further confuses an already rickety regulatory apparatus—increasing banking costs along the way. It appears real improvements, like significant regulatory consolidation, will have to wait—at least for now. (Even President Obama's recently announced regulatory agenda seems to mix things up more than simplify them.)

The feds continue pushing the mutually exclusive goals of at once punishing and fixing financial firms. The cycle of finger-pointing and regulatory jiggery-pokery is still in its earliest stages—so for investors, banks, and consumers alike, anticipating the ultimate outcome remains hazy at best. Not so good for bank stocks, but not a death blow for the financial system or economy as a whole. We've survived many a regulatory shake-up (Sarbanes-Oxley being only the most recent) to thrive once more—this bout in the regulatory ring should be no different.