Financial regulation: The alphabet soup gets much worse

By Felix Salmon
June 17, 2009

Do you know a FHC from a BCBS? If not, you’re going to have a hard time wading through the government’s white paper on financial reform, which is full of such things. (An FHC is a financial holding company; the BCBS is the Basel Committee on Banking Supervision. The link is to the WaPo leak of the paper, there might be minor changes in the final document.) This, for instance, is a real sentence from the paper:

The United States will work to implement the updated ICRG peer review process and work with partners in the FATF to address jurisdictions not complying with international AML/CFT standards.

But never fear! Your tireless blogger has waded through all 85 pages, and I’m pretty sure I’ve got the gist of it at this point.

In a nutshell: If you thought this was going to make the current horribly-complicated system of financial regulation less complicated, think again.

And so to the specifics. Were you hoping that the present alphabet soup of regulators would get rationalized and downsized? I know that I was. But there’s only one place that’s going to happen: the OCC and the OTS are going to be folded into a new regulatory entity called the National Bank Supervisor (NBS), which (along with the Fed, natch) will oversee federally-chartered banks.

The National Bank Supervisor will not oversee state-chartered banks: those will remain under the umbrella of the FDIC, which is not being folded into the NBS. And the NBS will similarly not oversee credit unions: the NCUA will retain its independence and continue to regulate those itself.

Why perpetuate these distinctions between federally-chartered banks, state-chartered banks, and credit unions? I have no idea. But in order to get some measure of cohesion over all this, a second brand-new regulatory entity, the Financial Services Oversight Council, or FOSC, which will consist of the leadership of the NBS; the FDIC; the NCUA; the SEC and the CFTC (yes, they are remaining separate too); the FHFA (that, too, gets to remain independent for no obvious reason); the Treasury; the FOMC; and the brand-new Consumer Financial Protection Agency.

Or, to put it another way, FOSC = NBS + FDIC + NCUA + SEC + CFTC + FHFA + FOMC + CFPA + Treasury.

I know what you’re thinking — it can’t possibly be as simple as that. And you’d be right! There’s also a Financial Consumer Coordinating Council, which comprises the Consumer Financial Protection Agency, the Federal Trade Commission, and the SEC’s Investor Advisory Committee.

Oh, and I almost forgot, they’re also creating an Office of National Insurance.

In other words, if you thought the bureaucracy was bad until now, just wait until you see what’s coming down the pike.

Which is not to say that there aren’t any good ideas in this white paper. I like the fact that the CFPA will have the power to conduct Community Reinvestment Act examinations, for instance, and I love the fact that stockbrokers will — finally — have a fiduciary responsibility to their clients. The Obamacrats have also managed to sneak in legislation forcing opt-out, rather than opt-in, retirement plans for corporate employees.

But there are weaknesses here, too, and not just at the org-chart level. Treasury has decided that no financial institution can be allowed to engage in any nonbanking activities at all — basically there’s no way that Walmart, for instance, or Safeway, will ever get a banking license. That’s bad for consumers.

The white paper also punts on trying to clear up the mess of conflicts between the SEC and the CFTC: it basically just tells the two agencies to go away and work it all out on their own.

And the new extra-stringent regulations on what the white paper calls “Tier 1 FHCs” — the systemically-important financial institutions — don’t seem particularly stringent to me. For instance, there’s this:

Tier 1 FHCs should be required to have enough high-quality capital during good economic times to keep them above prudential minimum capital requirements during stressed economic times.

This sounds good, until you realize that exactly the same language is used with respect to all banks, and bank holding companies, a couple of pages later.

But the main message of this white paper (and I’m sure Congress will do all manner of mischief to it before anything gets passed into law) is that there aren’t any problems of financial regulation which can’t be solved by setting up a high-level committee. In other words, it’s a bust.


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Nicely done. With respect to the part that says that non-banking companies cannot get a license to operate a bank, is there any parallel language that says a non-banking company can\’t own a bank? I ask that question because I would like to know if they addressed the issue of private equity buying failed banks from the FDIC. Since you\’ve waded through the whold thing maybe you can save me some time.

Guess this is in keeping with the Federal government’s attempt to help out on unemployment? What would voters think if the administration actually fired unnecessary government employees?

Posted by The Nam | Report as abusive

Thanks, Felix.I will put you in the “no” column on this one. Suspect you’ll have a lot of expert company in the next few days.

Posted by Kelli K | Report as abusive

I love it the way Wall Street turns around and pretends they had nothing to do with the financial crisis, they were all just innocent bystanders.

Posted by Imasickofthis | Report as abusive

According to the Washington Post, the new CFPA “… would have a mandate to increase the availability of financial products in lower-income and underserved communities, in part by enforcing the Community Reinvestment Act, which requires banks to make loans everywhere that they collect deposits.”Are you kidding me?!?!? This is what started the sub-prime mess in the first place!! What are they trying to do—start it all over again?!???

Posted by Bob W | Report as abusive

This column is a rather sarcastic over simplification of the administration’s proposals. McClatchy News has a more succinct explanation. It all sounds reasonable given the complexity of the situation and the number of players. Now we’ll have to wait to see what congress does with it.

Posted by purplepatriot | Report as abusive

Good job of framing this in a way that illustrates the impossibility of the concept. Now, staff all of it with left-over Reaganistas who know their collective job is to do nothing or incoming corporation-haters who know their job is to impede, blame and hold endless meetings. Nothing much will happen, but what does happen will be counter-productive. I voted for Obama (rather, against McCain/Palin) but I don’t think he gets it.

Posted by The Beav | Report as abusive

i swear your decoding of the 85page doc reminded me of pentagon analysts (or TIME Magazine columnists) decoding Kremlin utterances back in 1977 – has it really come to this?will nobody state that the emperor has no clothes?carry on

Posted by franko | Report as abusive

Did it say what the new Office of National Insurance is for? What will they be regulating?

Posted by joann swanson | Report as abusive

Why on earth is it bad for consumers not to be able to bank at Walmart or Safeway? That’s a minor inconvenience at worst. It sounds more like it’s bad for financial-sector executives — which is very good for consumers, and good for the nation as a whole.

Posted by PS | Report as abusive

whenever you get regulators pricing risk, which is what Basel essentially does, the market will always to to arbitrage it if the price is wrong. That is what arbitrageurs do and what is expected of profit-maximizing entities. The problems of banks, like all other heavily regulated, network industries; is that financial disclosures are obscure and the regulatory audits are undisclosed. There should be a greater push towards transparency and disclosure. Not more obscure regulation which will hamper innovation and potentially increase the cost of capital to finance, which, as a consequence, will increase the cost of capital to all. And we need a credible, transparent bankruptcy procedure for all financial institutions.

Posted by Jeffrey Wernick | Report as abusive

the reason why the regulators are so dead-set against banks engaging in non-bank activities is because they don’t want non-bank parent companies to be taking money out of their regulated bank subsidiary. there have been some instances of that already (Spiegel was doing it in the 90′s to the bank I worked at).Keep in mind that their legal authority over a non-bank parent is not as clear as the MSM or blogging community might think…

Posted by Eric Dewey | Report as abusive

If the raft of new financial sector regulation is put together it is woefully inadequate to stop another financial melt down.Now let the senate and the lobbyists pull it apart and it will not be worth the paper it is written on!!!After another couple of these boom and bust cycles the US will effectively isolated itself from the world economy because nobody will want to deal with it except China and Russia “their main creditors”. The rest of the world will see the US’s poor regulatory system as to much of a risk and will shun it and justifiably so. It will take time for this to occur but unless change its embraced the out come will in the long term be sustain instability where the few benefit mightily and most of the US citizens suffer under increased tax burdens to pay for what is essentially wanton greed.Hmmmm all sounds every familiar!

Posted by Zak | Report as abusive

“Why perpetuate these distinctions between federally-chartered banks, state-chartered banks, and credit unions? I have no idea.”There was this thing called the S&L crisis about 20 years ago. Go read up on it. Since then, there has been a distinction between these organizations.”Treasury has decided that no financial institution can be allowed to engage in any nonbanking activities at all — basically there’s no way that Walmart, for instance, or Safeway, will ever get a banking license. That’s bad for consumers.”GM persisted as long as it did and did not correct its underlying difficulties because its banking arm supported its crumbling industrial arm. If this was not the case, the problems with the latter would have been worked out before they became systemic. Having powerful retailers and employers also have power of banker over citizens opens the way to corporate dictatorship. It has happened before, and that was why reforms were undertaken in the first half of the 20th century.”In other words, if you thought the bureaucracy was bad until now, just wait until you see what’s coming down the pike.”Regulation did not lead us down this path to ruin – absence of regulation did. It is because these organizations cannot regulate themselves bureaucracy has been put in place to do it for them. This has been the case after each and every systemic failure for centuries and nations are without exception the better for it, from John Law to the world of Sinclair to FDR to today.

Posted by Ethan Farber | Report as abusive