Lessons learned and relearned about lending other people’s money.

Consumer finance companies are accustomed to doing business in a heavily regulated environment. After all, we deal with consumers who are often borrowing substantial sums of money relative to their income and net worth. Consumer loans are routinely taken out to allow our customers the opportunity to enjoy goods and services in the here and now. I write this with full knowledge that in days past acquiring consumer goods was often done only with cash. No longer. Clearly that ship has sailed.

Doing business in a regulated environment was driven home to me last week when two mid-size banks in the United States suffered failure Silicon Valley bank and signature bank. Bank failures are not a rarity, although we are fortunate that we haven’t seen too many since 2008. Last week’s failures occurred despite a host of bank regulators whose sole purpose is to help assure through oversight, the safety and soundness of our banks.

There is now the usual Monday morning quarterbacking asking whether the bank regulators failed at their sole responsibility. There were mitigating circumstances including inflation and the federal reserve’s tinkering with interest rates to whip inflation. But someone was likely asleep at the switch certainly the officers and directors of the banks were.

Unlike the banking industry, where banks make loans, but also take deposits, the consumer finance industry only makes loans. We are not fiduciaries of our customers funds on deposit because we don’t take deposits. So, indeed the level of scrutiny in the banking world required of officers and directors and the regulation in the banking world should be much higher than in the consumer finance world. And, in reality, it is.

Consumer finance companies are only answerable to their shareholders. Banks are answerable to their shareholders but also to their depositors.

Shareholders are investors. If their investments are lost, then that is a risk that they take. Depositors are not investors. Depositors’ deposits are not supposed to be at risk at least not at the same type of risk that investors investments are. We have a system developed after the great depression to insure deposits. Interestingly, deposit insurance is required of banks and is paid by the banks.

My lesson learned and relearned from the recent bank failures is that regulation remains an important ingredient in financial services. Safety and soundness depend upon it. And we, as depositors and investors, look to regulators to keep a watchful eye out for us and on us.


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