Oral Testimony of William K. Black before the Oireachtas' Joint Committee of Inquiry into the Banking Crisis

Consider How Depraved a "Race to the Bottom" is v. other Crimes

Blue collar criminals rarely have trade associations. Assume that there was a trade association of burglars and that it successfully lobbied the government to weaken the rule of law, make it far harder to arrest burglars, slash the number of police, and virtually cease prosecuting burglars for their crimes or even "clawing back" the proceeds of their crimes. That would obviously be insane.

What I am Not Saying

Let me stress what I am not saying. I am not saying that bank regulators can, or should, prevent all bank failures. I am not saying that the seven lending practices I identified are the sole or even the most common cause of bank failures. The lending practices I have discussed that we know how to counter are simply the most common cause of catastrophic bank failures and financial crises. I am not saying that they are the sole cause of catastrophic bank failures and financial crises. Indeed, I turn now to two other causes of catastrophic losses that occurred in the most recent crisis. That discussion demonstrates that important aspects of how regulators can identify and respond to lending crises are applicable in these other crises.

Banks Ripping off their Customers

Another source of potential enormous losses to banks is the pervasive defrauding and abusing the bank's customers. As with the five lending fraud characteristics I set out above, the senior bankers craft a criminogenic environment through shaping perverse compensation systems even for junior employees in order to generate a "Gresham's" dynamic. Anti-customer frauds and abuses involving the sale of financial products such as PPI and hedges to small business borrowers by bankers have never caused a material U.S. failure, much less a financial crisis in the United States. These abuses only reached catastrophic proportions in one highly developed nation -- the United Kingdom -- the nation that "won" the regulatory race to the bottom. We need to end the Gresham's dynamic and replace it with a race to integrity, competence, and vigor that will allow honest bankers to dominate banking.