Alternate Banking Universe
- Keith Reagan
- 1 day ago
- 4 min read
Imagine, for a moment, a financial world without regulation.
No oversight. No capital requirements. No liquidity coverage ratios. No stress testing, fair lending rules, or exam cycles. A world where financial institutions were limited only by their imagination and/or their appetite for risk.
At first, it seems like paradise. The market is free to do its work. Banks and credit unions lend aggressively, unencumbered by paperwork, reporting, or examiner scrutiny. Margins soar. Balance sheets expand. The competition for deposits is fierce, but that’s just business, right?
But beneath that optimism, the cracks are already forming.
From the Editor
"Integrity: Doing the right thing when no one is looking."
This quote was posted above the doorway in the college hockey locker room I had the privilege of using for four years. It was to serve as a constant reminder of all the sacrifices that contribute to the success of a team and a student athlete. The reality is that so much of performance is related to decisions made in relative obscurity.
Did you shoot any pucks after practice? How about a few extra reps in the weight room? Did you skip the pizza and burger options in the cafeteria? Did you complete your academic work at a reasonable hour so that you could get to sleep? It never ends. You are truly a summation of the decisions you make throughout every day…decisions that are made when no one is looking!
Will your bank “do the right thing” when no one is looking?
It’s no secret that the regulatory agencies have publicly discussed lessening the burden on community financial institutions. While not formalized yet, it’s highly probable that some requirements might be replaced, adjusted, or “done away with” altogether.
In this evolving landscape, is it prudent to throw caution to the wind? Or should we continue to manage risk to the best of our abilities?
In this month’s Bulletin, DCG Executive Director Keith Reagan writes about the “Alternative Banking Universe” in a world devoid of regulation and how banks should manage risk. He asserts that “the smartest institutions would still manage liquidity, interest rate exposure, credit quality, and model integrity, because doing so is simply good business.”
The best-run banks have never needed regulators to tell them how to manage risk. They simply do “what is right when no one is looking.”
Vinny Clevenger, Managing Director
The absence of oversight doesn’t eliminate risk; it simply hides it.
Liquidity risk quietly grows as balance sheets become increasingly dependent on higher concentrations of rate-sensitive funding. With no required stress scenarios or coverage ratios, few notice how fragile liquidity really is.
Interest rate risk builds as institutions chase yield by stretching maturities. Without regulators requiring sensitivity testing or exposure limits, duration mismatches go unchecked until a rate shock hits and the mark-to-market pain becomes impossible to ignore (circa 2023-2024).
Credit risk intensifies as competition fuels a race to the bottom. In the absence of lending standards, loans that should never have been made find their way onto balance sheets. When the economy stumbles, delinquencies and defaults spike with no capital cushion to absorb the blow.
Model validation and governance disappear, replaced by unchecked optimism. Models are built to justify decisions, not to test them. Data quality weakens. Bias and error creep in quietly, unchallenged.
It’s a textbook example of how freedom without discipline can become dangerous.
In this alternate universe, there are no regulators to blame. There are also none to help when needed.
Regulation tends to follow excess, not precede it. Oversight emerges in response to pain. When memories fade and rules relax, the cycle repeats.
That’s why, even as some advocate for rolling back regulatory requirements, it’s worth remembering that good regulation doesn’t invent discipline – it reinforces it.
Liquidity planning, capital adequacy, credit risk management, and model validation aren’t burdens imposed by government agencies; they’re pillars of sound business.
They protect depositors, shareholders, and the institution itself.
They’re the practices any prudent banker or credit union leader should want, even in a world where no one is watching.
Risk Management Is Just Good Business Practice
In our real universe, regulation often feels like red tape. But in truth, the best-run institutions view it as reinforcement of practices they already value.
Liquidity management formalizes what we already know: cash is king when confidence falters.
Interest rate risk modeling provides clarity, not constraint.
Credit review processes protect long-term viability, not short-term yield.
Independent validation of assumptions and models ensures that decisions are grounded in reality, not optimism.
The irony of the unregulated universe is that even without rules, the smartest institutions would still manage liquidity, interest rate exposure, credit quality, and model integrity, because doing so is simply good business.
They would build buffers not because they are required, but because markets reward resilience.
They would validate models not to check a box, but to protect against their own blind spots.
They would plan for outflows, shocks, and downturns, because in finance, risk never disappears; it only changes form.
In other words, the best bankers don’t need regulation to tell them what prudence looks like.
But history shows that when prudence becomes optional, it inevitably becomes rare.
So yes, reducing regulatory burden may feel like progress. It may even be warranted in some areas. But as we move toward lighter oversight, let’s not forget what those rules were designed to prevent.
Imagine again that unregulated alternate universe. It’s efficient, exciting, and utterly unsustainable.
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Keith Reagan's passion for educating and mentoring serves him well in his multiple roles over a 30+ year tenure at DCG.
As one of the advisory consultants, Keith works directly with financial institutions of all sizes to improve their overall performance by providing proactive strategic advice on liquidity, interest rate risk, and earnings by developing strategies that best fit the risk/return dynamics of their balance sheets.
As the leader of the team of advisory consultants and a member of the senior management team, Keith strives to continuously mentor those around him.
He has been a frequent industry speaker/author and has served on the faculty of multiple banking schools.
Keith received a B.S. in Business Administration/Finance from the University of New Hampshire.
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