Where will effective bank regulation come from?
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What kind of creature will the new National Bank Supervisor be? No one seems to be entirely sure. The NYT and WaPo say that Obama wants “merge” the OTS with the OCC. Reuters and the WSJ say the OTS will be closed, but make no mention of the OCC or the NBS at all. Bloomberg says the OTS will be “eliminated”, while the NBS will “assume the responsibilities of” the OTS and the OCC.
The white paper itself says that the NBS will “take over the prudential responsibilities” of the OCC and the OTS, and will “inherit” both agencies’ powers.
I suspect the vagueness is deliberate, but that by the time everything has shaken out, the OCC’s John Dugan will emerge as the head of the NBS, regulating federally-chartered banks, and will continue to spar with the FDIC’s Sheila Bair, who will regulate state-chartered banks. Banks, meanwhile, will continue to pick and choose whichever regulator they think will have the softer touch: Goldman Sachs, for instance, has decided to go for a state charter. Is there any particular reason why Goldman should be regulated by the FDIC rather than the NBS? Of course not — it’s all politics.
Meanwhile, “macroprudential” regulation of the banks — whatever that means — will be performed by the new Financial Services Oversight Council. But it’s hard to see either Dugan or Bair giving much if any of their current regulatory powers to the FSOC, which increases the already-high probability that the FSOC will be a Terribly Important Body which achieves essentially nothing.
There’s simply no way that this kind of structure is conducive to encouraging powerful and committed and intelligent regulators to do their job with a minimum of bureaucratic interference. Given how much such interference already exists within agencies like the SEC, I can’t imagine that it isn’t going to get even worse when you start getting turf wars between agencies. And remember that Congress hasn’t had the opportunity yet to take the white paper and make it even more complicated and less effective.
By the time this is all over, I’m sure a lot of time and effort will have been expended on creating the new regulatory architecture. But whether the outcome will constitute a significant improvement is far from clear.
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Replacing the OCC with the NBS terminates John Dugan’s term and they get to put their own guy in charge. These are Cook County Democrats and they don’t miss patronage opportunities.
The large, systemically significant financial institutions will be regulated by the Fed as Tier 1 financial holding companies, although the proposal also calls for all financial institutions to raise more capital.
The official did not provide details about which banks would be considered “systemically important,” with the decision likely to be left to legislators on Capitol Hill.
The official also said the proposal will call for the creation of a financial services oversight council, which will be chaired by the Treasury Department and made up of bank agencies.
Goldman is regulated by the Fed, not FDIC. The Fed regulates state-chartered banks that are members of the Federal Reserve system; the FDIC regulates state-chartered banks that are not. This does not of course affect your basic point.
You will remember that there was a massive failure by the banking regulators, including the Fed, leading up to this crisis. Let me offer the following comments:
1. The bank regulators had the authority to examine any aspect of a bank’s activities. They had the authority to figure out what was going on at the banks and to limit it. The regulators did nothing. So creating yet another regulatory bureaucracy will mean nothing if the regulators cannot or will not do their jobs.
2. Sending a regulator who makes $75,000 dollars a year to examine the activities of sophisticated financial traders who make millions of dollars a year is not a fair battle. And if you have ever worked in a bank regulatory agency, as I did for many years, you will be intimately familiar with the viciousness of the turf battles among the senior officials. There are dim bulbs and deadwood at the top of the agencies and all of it needs to be cleaned out. A Herculean task if there ever was one.
3. We recently saw the regulators “stress-test” the major banks and compute the additional capital that the banks required to weather the economic turmoil. Then some of the largest banks complained vociferously about the additional capital requirements and the regulators backed off. More spineless regulation is not a solution.
Steve’s point that “more spineless regulation is not a solution” seems to be the closest to the mark at the moment. Examing the many forms of collusion that occurred between entities that were supposed to act as checks & balances, plus the obvious conflicts of interest that are standard practice in the financial services industry, exposes the extremely dangerous state of this growing economic sector and the threat to our nation’s long-term sustainability that it represents. Now that the whole world knows that America’s moneymen & their scam-mates cannot be trusted and our political system is joined to them at the hip, we face the prospect that hyperdeflation may turn out to be the least of our worries in years to come. We MUST find a way to bring law & order, transparency and accountability to a profession that has come off the rails.
This is hilarious. I worked for the OCC for a decade and as the fox watching the hen houses, there were plenty of incentives to turn a blind eye to blantant violations of the federal rules and regulations! The OCC pampers their banks but for a higher price than the old FRB or FDIC regulators. Handholding is what we did and cover-up happened more than anyone will ever EVER know. Do you know why? Because they are PROTECTED by The National Banking Act. They are not subject to FOIA because they are protected by a LAW that the othe regulators don’t have. Let’s face it, we didn’t want those mega banks getting upset with us when they didn’t get the rating they wanted because they might just jump ship and take all those fees they paid for our salaries with them! The OCC is “quasi” govt in that salaries are paid by the banks they regulate and the bigger the bank, the greater the size of their assets and guess what? THE MORE THEY PAID US IN FEES! Check it out and verify what I’m saying. It’s 100% true. And Obama wants to give them COMPLETE control? Being that I’m retired these days, I get to just sit back and watch the fireworks and you can ALL rest assured, there will be plenty of that. Power corrupts but absolute power corrupts absolutely and when someone does something wrong in the OCC, they get promoted and they pay off complainants to merely go away. This is such a joke I can’t help but get a perverse thrill out of watching all these govt clowns pretend to have a clue as to what is REALLY going on behind closed doors!