Market Watch reports that the Treasury Department wants to solicit ideas about how to change the banking regulatory system, and they offer a few suggestions of their own about which parts may be flawed.

My own assessment is that the whole thing is flawed and ought just be chewed up and spit into the nearest garbage can. Right from the outset, our current central banking system was doomed to benefit the people who ran it, not the customers. (There's an excellent book titled The Creature from Jekyll Island that details how the current federalized banking system started.) But being a practical libertarian, I would be content to make some small changes.

Please note that I do work in the banking industry, and some of my suggestions are likely influenced by my job. But I'm also a banking consumer!

Changes I would propose

1. Get rid of savings account transaction limits. Section 2 of Regulation D provides descriptions of the various types of deposit accounts that banks can have. I think it's silly that this level of specificity needs to be dictated, but I'll gloss over most of it. The part that really irks me is the Reg D.2 (d)(2), which states consumers can have no more than six "covered" transactions – i.e., checks, ACH transfers, and so on – from their savings deposit account in single month. Regulations rarely have explanations behind why they are implemented (they really should...), but since Reg D is all about depository requirements, presumably this asinine detail is supposed to help institutions keep enough money on hand to meet depository requirements. However, in practice, it doesn't do any such thing, since transactions such as ATM withdrawals, teller withdrawals and other certain transactions are not covered by this limit. Basically, it just becomes a hassle that people have to work around, and it generates needless fees and account conversions for even more inconvenience.

2. Allow interest on demand deposits. Reg Q has two purposes, the first of which is to prohibit paying interest on "demand deposit" accounts (AKA, checking accounts). "What?" you ask, "but I get interest on my E*Trade Max Checking, ING Orange Checking, or other similar high-yield checking account. Shoot, most checking accounts offer some pittance of interest, even if it's a joke." And that's exactly my point. This provision of Reg Q is an unnecessary encumbrance leftover from the 30s. Banks get around this joke of a regulation today, and they will continue to do so in order to find ways to attract more customers. A number of bills have been introduced to the Senate in recent years to eliminate Reg Q, but there's been no real progress. Let's get rid of it now.

3. Get rid of non-interest premium limits. The second purpose of Reg Q is to determine the amounts and frequencies of premiums that are considered non-interest income. This is, of course, primarily for tax purposes – god forbid someone get a $25 premium and not pay $5 of it to the government. (The rate for interest income is generally 20%.) Ideally, we would not be taxed at all on interest income, but that's probably a bit too hopeful for this round of changes. Anyway, a quick look at the Bank Deals blog will show that banks rarely stick to the $10 limit, and for the most part people assume that bank promotional bonuses are going to be taxed. Eliminating this requirement will mean banks won't have to keep track of different levels of promotions (under $10 vs. over $10).

4. Allow electronic payments for online gambling. The Unlawful Internet Gambling Enforcement Act was passed about thirteen months ago, and is the biggest crock of donkey dung that I've ever heard of. It's yet another step in the unfortunate trend toward regulating the internet. Now, the Treasury Department is looking to add a Reg GG to implement regulations based on this heinously invasive piece of legislature. Now, don't get me wrong, as someone who is intensely interested in personal finance, I believe that gambling is the worst form of spendthrift. But there's no reason to keep people from doing it if they want to – just like if someone wanted to throw thousands of dollars down a storm drain, they should be allowed to. As for the risk of allowing people to run up thousands of dollars in gambling debt, that should be left up to the lending institution. Government shouldn't step in to make "good" decisions for others, individuals or institutions alike.

Note: The Treasury Dept. and Fed are soliciting comments separately on the proposed Reg GG. More info on the How to Comment section below.

5. Get rid of "community reinvestment" requirements. This is a pipe dream that would take an Act of God (and no, I'm not deifying congress here), but I strongly believe that the Community Reinvestment Act (CRA) – which is regulated in part by Reg BB – does much more harm than good. Take the recent subprime mortgage mess, in which billions of dollars were loaned out to people who could not afford them. This type of risky lending is actually encouraged by the CRA, because the CRA requires lending institutions to show that they have a "record of helping to meet the credit needs of its entire community, including low- and moderate-income neighborhoods." In other words, to give more (or larger) loans to people who can afford them, banks have to give more (or larger) loans to people who can't. This is plain silly.

6. Stop discrimination by requiring lending "disclosure." Reg C is the enactment of the Home Mortgage Disclosure Act (HMDA), passed in 1975. I actually like parts of this regulation, because I think it is important to have access to information. It is one of the few areas where I think government has a legitimate purpose and why I am not a complete rational anarchist, though perhaps I could be persuaded that this sort of information could be made available in an anarchist society. Anyway, the part that I don't like is §203.4 (b)(1):

A financial institution shall collect data about the ethnicity, race, and sex of the applicant or borrower as prescribed in Appendix B of this part.

Honestly, what do these traits have to do with lending money? Absolutely nothing. Credit should be extended based on one's financial considerations, not on silly geographical and genetic characteristics. There's no really good reason to collect this data, except to abuse it.

Final thoughts

If I dug for a few more hours through the regulations, I'm sure I'd come up with tons of additional comments. But like I said before, I think the whole system is flawed. If we can't scrap it and start over, I think fixing the parts I outlined above will be a good step in a long journey toward the right direction.

How to comment

To submit comments to the Treasury Department, do the following:

• Visit Regulations.gov.
• Scroll down to the "Search Documents" section on the home page.
• Complete the fields as follows:
  1. Select "Documents with an Open Comment Period" (should be selected by default).
  2. Select "DEPARTMENT OF THE TREASURY -- ALL" from the dropdown list.
  3. Select "ALL DOCUMENT TYPES" (default).
  4. Select "Document ID" and then enter the following ID, depending on which item you want to comment on:
     • TREAS-DO-2007-0018 – General comments on regulatory policies (comments accepted through Nov. 21, 2007)
     • R-1298 – Comments specific to Reg GG (comments accepted through Dec. 12, 2007)
  5. Press "Submit".

Let me know what comments you make!