The chairwoman of the Federal Deposit Insurance Corp. (FDIC), Sheila Blair recently talked about the importance of banking values to a gathering in the Robert J. Dole Institute of Politics of the University of Kansas. She said that the U.S. economy can prosper and avoid setbacks only if better lending standards are adopted by the banks. She also talked about the need for greater transparency in markets in order to keep recession at bay.
Blair said that the banks must follow the same ethical practices that they used to follow in 1970s, at the time of her graduation. She also talked about the clean lifestyle of Americans in the older times when they believed in taking as little loan as possible and used to save money for bad times. It was a matter of pride for people to be able to repay their loans in full.
According to Blair, recession resulted from the unregulated high-risk shadow credit market in which the greedy lenders tried to trap innocent citizens. The big financial institutions gave credit without following their traditional lending and investment values in order to compete with the shadow lenders. These practices started way back in 2001 when Baltimore lenders gave mortgages to homeowners, which led to foreclosures of homes that were taken at low prices and sold at higher rates.
Institutional investors are also to be blamed, as they did not keep a check on the way their money was being used and because of the unjustified high level of fees and compensation that were being paid.
There is a need for legal reform for greater transparency in the markets. The law should protect the consumers who are seeking credit. It should put restrictions on loans, credit cards and various unregulated financial products. She also said that the troubled banks should be broken up by the FDIC in a way that their losses are recovered, but they do not leach on taxpayers’ money. She said that proposed laws by the current government would help in rebuilding the same values in the banking sector that existed earlier.
The banks will need more proof of the fact that the borrower is in a position to repay the loan and to be a homeowner. Before crisis, loans were given without any contribution from the borrowers, but this would not be possible after the new laws are passed.