Felix Salmon

Why there can only be one basket of regulatory eggs

By Felix Salmon
September 1, 2009

The prize for the weakest argument ever against a single strong bank regulator goes to Sheila Bair, with her tired and utterly inappropriate metaphor that “we can’t put all our eggs in one basket”. To the contrary, we have to put all our regulatory eggs in one basket, because otherwise the phenomenon of regulatory arbitrage will simply result in a race to the least-safe basket, as well as competition between regulators to see who can be most accommodating to banks.

The most corrosive aspect of the US regulatory infrastructure to date has been the ability of financial institutions to go regulator-shopping: that must be stopped. And the only way to stop it, in a world where AIG can end up being regulated by the Office of Thrift Supervision, is to have just the one regulator.

I was on KCRW this afternoon with economy.com’s Mark Zandi, who said that the financial crisis was a “scarring event, imprinted on our DNA” and that “for at least two generations”, regulators are going to “do the right thing enough times so that we don’t get into another crisis like this”. I don’t buy it. If there’s a choice of regulators, there’s inevitably going to be at least one which lets things fall through the cracks. And that one is going to be the one which ends up in charge of AIG. The only way to prevent that is to have just one regulator.

12 comments so far | RSS Comments RSS

I think regulators, and even to a significant extent private players, will “do the right thing enough times so that we don’t get into another crisis like this” for at least another 2 to 4 years.


I don’t know if she is that wrong. There are roughly 3 types of regulatory set-ups :
1 – the US, where there are myriads of by-the-rule petty regulators, which famously f***ed up in 2007/08 ;

2 – the UK and Germany, which are one-regulator countries (the FSA in the UK and BAFIN in Germany), which also spectacularly f***ed up in 2007/08 ;

3 – France, which has a dual system (AutoritĂ© des MarchĂ©s Financiers + Commission Bancaire), which sort of did quite OK this time in spite of a couple of mishaps at a couple of former state banks (Dexia & Natixis).

So maybe Sheila Bair is not that wrong after all.

Posted by Henri Tournyol du Clos | Report as abusive

Wow – Zandi thinks this time is different? How many times have we heard that? He may be scarred, but it remains to be seen if anyone else is. I don’t know the right answer to the regulatory puzzle, but from my micro perspective, nothing has changed yet. The game is still rigged.

Posted by Neil D | Report as abusive

Wow, I disagree with you again; that’s twice in a week! One of us needs to stop and re-think what we’re doing.

To think that a single super regulator with necessarily conflicting goals can serve all its masters equally in times of extremis is a little silly. Does anyone think that the Fed has served anyone except the banks in the current crisis? Why would we think it could serve the American consumer as well?

Also, multiple regulators can be, but aren’t necessarily “are”–competitors in enforcing their various regulations. If they are rewarded for effective regulation through additional resources, this can be a powerful incentive to be better than the other guy. The downside: Politicians who don’t like regulation reward ineffectiveness and ineptitude, and cut the budgets of effective regulators. (Hmmmm, seems like we’ve seen that movie already.)

Anyway, the point is that we need more than one regulator to help insure that the interests of all parties are protected.

Posted by Lilguy | Report as abusive

I suppose it’s impractical to have several regulators by type of business activity (i.e., the current SEC/OTS/etc. model), but require that a financial institution submit to all the applicable regulations. Then, if a future AIG does spawn a little division that does thrift-like things, they can’t use the “hey, we’re really a thrift” argument to move the whole company under the OTS. They’ll be under the OTS, of course, since that part of them is a thrift, but they’ll also have to comply with all other agencies that apply to any part of their activities. Who knows, it might also keep financials smaller and focused.

Posted by Ken | Report as abusive

The myriad of regulators in place worldwide have gone into ‘analysis paralysis’. There actually seems so many checks and balances in place, but no one knows what to do with it, co-ordinate or how to manage it. Maybe that is why the budget cuts get channeled to Hollywood to guarantee an image of a flag just before the final titles start scrolling…You are right, this is a movie, but is it a action comedy or an action thriller ?

Posted by Casper Lab | Report as abusive

The real problem is not enough regulators, but the insistence of the “very serious people” in Washington in making the Federal Reserve this regulator.

There is no organization that has less accountability, and performed worse during the bubble days.


This statement: “The most corrosive aspect of the US regulatory infrastructure to date has been the ability of financial institutions to go regulator-shopping: that must be stopped” implies that a smart, central regulator would do better than the current hodgepodge of regulatory regimes. It also implies that there were significant failures that could have been avoided by centralizing regulation.

The evidence points to the contrary, at least in the case of Fannie Mae and Freddie Mac. Their losses will likely dwarf the total losses in the rest of the financial system combined. Yet they were regulated by one federally charted regulator, OHFEO. The FDIC is also a centralized regulator, yet dozen of banks have already failed.

In the case of AIG, I haven’t heard of one state-level insurance subsidiary in trouble. The problem was at the holding company level. Basically, the company made alot of bad credit decisions, not that different from past credit debacles like the S&L crises (obviously different assets).


You can have a million regulating agencies, but if the businesses being regulated are basically dishonest and the people running the businesses are basically dishonest then the regulators can point all they want to and the problem still exists. Our government, at the highest level-(Presidents-Dah) condoned a system of non oversight. Have you seen any bankers going to jail, or even being charged with losing their investors money? We have greater problems than regulators. We have constitution problems,law enforcement problems, and a congress that passes laws for money.

Posted by f belz | Report as abusive

Would anyone draw analogies to the experience of combining multiple agencies under the DHS label? Regulators will always be at a disadvantage, regardless, and the talent those agencies attract can typically find better pay within 5-10 years in the private sector.

I don’t think Homeland Security was a resounding success, necessarily

Posted by Griff | Report as abusive

Greenspan in Congressional testimony last year admitted to “discovering a “flaw” in the model that I perceived as the criticical functioning structure that defines how the world worked”.

We all know the flaw; that it was in everyones self interest not to bring the system down, so back off, was a catastrophic error.

The astounding fact that the flaw was undiscovered by the head of the Fed till everything fell apart basically means the most powerful man in the world was,self admittedly, a complete fool and gives me pause when I consider putting all regulatory eggs in that basket.

The one basket solution means any voice of reason, think Brooksley Born will not even be heard, let alone subject to ridicule and defeat. I’m reassured to hear Sheila Bair challenging and fighting. She may prove to be wrong but consolidating regulators is an extremely dangerous move at this point.

Posted by michael | Report as abusive

I don’t think your argument here — “there’s inevitably going to be at least one which lets things fall through the cracks” — is much stronger than Bair’s. If there is only one, what is to stop it from being the one that fails?

A single point of failure is a risk in itself. While I do think there should be an agency with the primary responsibility of overseeing systemic risk across the full scope of financial institutions — banks, brokers, mortgage originators, ratings agencies, insurancers, hedge funds, etc. — I do not think it should be the one and only regulator of all those institutions.

Better to trap the institutions in a web of regulators according to function. Do you accept retail deposits? You’re subject to the FDIC. Do you also sell insurance? That’s another regulator looking over your books. Engage in proprietary trading on your own account? Someone else will keep an eye on what you do there. Just bought a savings and loan, a la AIG? That doesn’t mean your whole business is now under the purview of the OTS, it just means that part of your business is: the other regulators to which you were previously subject are still on your back.

“Defense in depth”: no single points of failure.

Posted by skeptic | Report as abusive

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