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The leader of one of the world’s largest banks believes that consumers need more protection, and banks need more regulation, for the world economy to recover from its current malaise.
Not only that, but America’s entire credit score system should be trashed, Vikram Pandit, CEO of Citigroup, told hundreds of his fellow bankers on Friday.
“I will not win any popularity contests for supporting these changes,” Pandit said at the annual Bretton Woods Gathering. “But given the extent to which excessive consumer leverage fueled the last crisis, more attention needs to be paid to consumer product regulation.”
The speech, from one of the banking industry’s leading members, was a major repudiation of efforts by banks and Wall Street firms, which together are spending nearly $40 million a month to lobby against new rules requiring more transparency and stronger consumer protections.
Such regulations are exactly what’s necessary now, Pandit said, since individual consumers and Wall Street professionals pursuing their own short-term self interest is exactly what caused so many consumers to borrow so much money during the recent economic boom.
Since individuals can’t be expected to foresee the long-term impacts of their behavior, Pandit said, government must do it for them.
“But if—or when—that private risk brings down the system, everybody loses,” he said. “That cost, though predictable, probably never enters into the initial calculus.
The biggest changes Pandit suggested have to do with consumer credit. He blasted America’s dependence on credit scores, calling such a system “an imperfect and backward-looking measurement that focuses on past borrowing.” Instead, the U.S. should consider the “forward-looking” model implemented in some Asian countries, where lenders consider not just a consumer’s debt but also his income and assets to help make better loan decisions.
“This obviously is not an inexpensive or simple fix. Yet the potential savings from increased safety should far outweigh the costs,” Pandit said.
Next, the bank leader agreed with consumer advocates including Elizabeth Warren, the former leader of the Consumer Financial Protection Bureau, who enraged many Wall Street leaders by saying that the current pricing and contracts for credit cards and mortgages are too complicated for most consumers to figure out.
What’s a problem for consumers is also a problem for banks that are trying to act responsibly. Citi has something it calls the Simplicity Card, which costs more upfront but may save consumers money in the long-run by not charging annual fees or late fees, Pandit said.
“Yet we can’t make that crystal clear because other card issuers are not required to disclose the total potential cost of credit for their products,” Pandit says. “Hence consumers can’t make direct comparisons. They should be able to.”
That’s why all credit card issuers should be required to explain the true costs of their cards in simple English. The Consumer Financial Protection Bureau is just beginning the process of writing new rules that would require such simple disclosure, but the proposal won’t be ready for at least several more months.
Even more protections are needed for mortgages, Pandit says. The explosion of subprime mortgages in the U.S. was based partly on lenders offering teaser rates to homebuyers, Pandit said, while hiding interest rate increases or balloon payments that would hit them in later years. Other countries have found ways to ban such products, including some that have enacted strict down payment requirements.
Whatever the U.S. decides to do, Pandit said, some type of new regulation is needed to prevent bad decisions at the individual level from taking down the entire world economy.
“As we learned from the credit crisis and housing bubble, bad individual consumer decisions are not necessarily isolated events that hurt only the decision makers,” he said. “The point of rules … is less to protect individuals from their own poor decisions than it is to protect the rest of us.”
Image: Leo Reynolds, via Flickr.com