In contrast, the government insures depositors and makes payments to them upon the failure of their bank. The public thus has reason to worry when banks take actions that increase the likelihood of failure. Subprime lending has proven to be a profitable and safe business for lenders with strong management, well-conceived risk management, controls and operations, and pricing that accounts for the risks the bank takes. Yet, subprime lending clearly requires banks to take on credit risk that many had previously shunned. The failure-strewn subprime market provides ample evidence that without proper controls, success can be elusive.
Regulators thus face a balancing act.
One method for helping regulators determine what constitutes excessive risk taking is the selective incorporation of market assessments of bank risk taking into the supervisory process. Some observers of subprime lending have also expressed concern about the high rates that subprime borrowers face, and more generally the potential that subprime borrowers will wind up with more debt than they are capable of repaying. In any discussion of consumer borrowing a bright line must be drawn. Regulators and other authorities should respond with full legal force against deceptive, fraudulent or discriminatory practices. As long as markets are competitive, a very high interest rate may be appropriate given the chance of default that some borrowers pose.