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[No OCC, OTS in T-E-A-M] Reducing Banking Regulatory Clutter

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 [1].

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

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 [3] 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 [4].

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.