Saule Omarova is a Professor of Law and the Director of the Jack Clarke Program On Law And Regulations Of Financial Institutions And Markets at Cornell University; she testified in front of the Senate Banking Committee in a hearing entitled “Fintech: Examining Digitization, Data, and Technology.”
Omarova noted in her opening statement that fintech has the possibility of transforming the world.
“Cryptography, cloud computing, big data analytics are changing financial markets by making transacting faster and easier to automate and scale up.” She said.
Omarova then said that in the run-up to the 2008 financial crisis this committee was likely told by many stakeholders not to stifle growth with burdensome regulations.
“For years before the crisis, you and your colleagues probably sat through many hearings like this one listening to many confident and articulate gentlemen with impeccable industry credentials tell you that you should not let outdated regulations stifle financial innovation. They told you and the American public that innovative financial products like derivatives and sub prime mortgage loans were making the financial system more efficient, resilient and democratic.”
Omarova said in the run-up the benefits of these financial products were played up while the risks were downplayed, “so risky derivatives and predatory sub-prime loans were allowed to grow unregulated until they crashed the financial system ten years ago.”
Omarova then brought the argument back to the present: “Today, the same rhetoric of financial innovation and consumer choice that brought us the crisis of 2008 returns to the center stage on the policy debate on fintech. Of course, this time it’s different. It’s not about derivatives but crypto-assets. It’s not about predatory sub-prime lending but marketplace lending. Once again new technologies promising to make the system more efficient, resilient and democratic, to expand consumer choices and give low income Americans access to financial services.”
In July 2018, the US Department of Treasury produced a report entitled: “A Financial System That Creates Economic Opportunities Nonbank Financials, Fintech, and Innovation.”
Omarova stated that this report “adopts this rhetoric and translates it into a strategy of significant deregulation in the US banking sector, meant to enable banks to form large scale business partnerships, and even outright corporate affiliations with technology companies. For example, the reports advocates for a significant rollback of existing regulations in order to make it easier to give unaffiliated tech companies, data aggregators, cloud service providers, and various fintech firms much more access to their customers account and transaction data.”
The last time the US banking sector went through significant deregulation was in 1999, when the Gramm–Leach–Bliley Act (GLBA) repealing parts of Glass-Steagall, which was passed in the 1930s and forbade banks which took deposits to also engage in investment banking.
Many blame this bill for at least part of the crisis because these same banks then proceeded to engage in the very risky behavior which Omarova described, like derivatives and securitizing risky sub-prime loans.