Empirical evidence says that the myriad of alphabet soup regulatory agencies didn’t work to prevent the systemic breakdown of the financial system on a global scale, stemming from CMBC activity. Of course, I’m not naive to think that they would have prevented it, but I do think the scale of the crisis was significantly larger as a result of the lack of logical oversight.

It’s not about lack of regulation, it’s about limited coordination, lack of responsibility and most importantly, departmental turf wars.

Hopefully this may change in a few weeks as the administration takes the wraps of an emerging plan to reorganize regulatory oversight.

Senior administration officials are considering the creation of a single agency to regulate the banking industry, replacing a patchwork of agencies that failed to prevent banks from falling into the worst financial crisis since the Great Depression, sources said.

Ideas include

  • Federal Reserve – becomes a powerful systemic risk regulator
  • Create a new agency to protect consumers of consumer products
  • Merge the SEC into CFTC to protect investors from fraud
  • OCC and OTS would go away and their responsibilities would be distributed to FDIC and the Federal

One of the key issues, which runs parallel to investment banks being able to select the most favorable ratings agency or mortgage brokers to pick their own appraiser, is the fact that banks can pick whichever regulator is most lenient: FDIC, OTS or OCC.

Seriously, a regulator that is competing with other agencies to get more banks to work with them to justify their existence is inherently flawed.

Of course the American Bankers Association is against this:

“As a practical matter, I think the idea is a nonstarter,” said Ed Yingling, president of the American Bankers Association. He said the administration should focus on the two ideas that command the broadest consensus: the creation of a system risk regulator and a resolution authority for collapsing companies. “That’s probably all Congress can handle,” he said. “They can propose a lot of things, but there’s a real risk in doing so that you just overload the system.”

Good grief. Use of the word “Risk” and “Overload” seems kind of quaint at this point, doesn’t it?

The proposal also urges creation of a new government agency to conduct “prudential regulation,” with supervision authority over state and federally chartered banks, bank holding companies and insurance firms, the source said.

Yes the Fed will have new powers, but seriously, why have any of these agencies if they aren’t very effective? In the current format, it all seems like a colossal waste of taxpayer dollars unless the system is streamlined and reorganized. However, the turf wars will move from the regulators to Congress as everyone tries to hold onto their power base.

The new bank regulatory agency could prove controversial because it would consolidate the Office of the Comptroller of the Currency and the Office of Thrift Supervision and strip supervisory powers from the Federal Reserve and the Federal Deposit Insurance Corp.

Ideally, it is in everyone’s benefit to reduce the regulatory clutter and create clean lines of responsibility and authority. My worry is that we don’t jettison enough of what didn’t work after the power struggle/compromise struggle shakes out.

Housing doesn’t stabilize until banking/credit stabilizes. Period.


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One Response to “[No OCC, OTS in T-E-A-M] Reducing Banking Regulatory Clutter”

  1. Edd Gillespie says:

    Jonathan, Speaking of regulatory breakdowns brings to mind a book I have been reading by the page and paragraph for some time. Cadillac Desert, Marc Reisner, Viking, N.Y, 1986. I think it is well written and informative on many levels. Also, the choice of a GM make in the title was a stroke of genius given the pending bankruptcy. It deals with the tensions between and redundancy of the Bureau of Reclamation and the Corps of Army Engineers in building dams all over the nation, but mostly in their efforts to survive beyond their usefulness. We can’t get rid of either. The bureaucratic competition and political manipulation from the agencies and to them is as entrenched as the sunset. I think we can pretty well dismiss any idea that the banks will accept oversight or welcome accountability to anyone let alone the government.
    I just don’t see the banks giving a hoot if anything stabilizes. There will be spectacular as well as surreptitious opposition from the banking industry, and no doubt bipartisanship will be delirious with the opportunity to attack yet another “left wing, socialist” idea. If there is anything I can do to help this administration in its endeavor to bring the banks into line so the economy works well for all of us I’ll do it. What would you suggest?