Booing bankers should be watchdogs’ badge of honor

March 18, 2011

By Rob Cox
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Sheila Bair may unwittingly have discovered a simple litmus test for bank regulator effectiveness. The Federal Deposit Insurance Corp chairman this week faced catcalls from a mob of U.S. community bankers. She was taken aback by the booing. But in fact, watchdogs should bask in such disdain if it means they’re doing their jobs.

While a decent working relationship between regulators and the entities they oversee is helpful, harmony isn’t necessarily a good thing. It can, for example, be a sign of regulatory capture. That’s when a supervisor winds up in thrall to the industry it is meant to view critically.

That is arguably what happened before the financial crisis with the Office of Thrift Supervision, the savings institution regulator mercifully abolished by the Dodd-Frank Act. The agency tellingly called the firms it oversaw “customers” and failed to spot trouble brewing at some of the biggest financial crisis casualties, including Countrywide, Washington Mutual, IndyMac and American International Group.

Regulatory capture isn’t just a financial phenomenon, of course. Officials at the Minerals Management Service, the agency within the U.S. Department of the Interior that was meant to ensure the safety of ultra-deep-sea drilling, took intimacy with the industry to extremes. A 2008 probe reported that some of its people had engaged in illicit sex with oil industry employees. Needless to say, the MMS did a poor job overseeing BP’s Gulf of Mexico rigs.

So the guffaws and snorts FDIC boss Bair elicited from small bank chiefs at Wednesday’s American Bankers Association confab in Washington may represent something of a badge of honor for her. The odd part was that Bair seemed surprised that the ABA’s members didn’t appreciate Dodd-Frank’s toughened rules. She even argued she’d been something of a friend to community banks.

That may be true, at least relative to America’s biggest banks. Either way Bair, who is to address the annual meeting of the Independent Community Bankers Association in San Diego on Tuesday, needn’t sweat it. Her job is to enforce rules that minimize taxpayers’ losses from bank failures, provide a competitive banking market and claw back ill-gotten gains. If bankers don’t like her for that, so be it.

Comments

At least the fdic isn’t an subsidiary of the big banks as is the fed.

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