Financial Regulatory Forum

U.S. bank “super-cop” idea gains support in Senate

By Reuters Staff
September 9, 2009

By Karey Wutkowski
WASHINGTON, Sept 9 (Reuters) – Decreasing the number of U.S. agencies that police banks is an idea gaining momentum in Congress, even though bolder efforts to rip up the overall financial regulatory system and start fresh have stalled.

The Obama administration has proposed cutting the number of U.S. bank regulators to three from four.

Senate Banking Committee sources said there is an appetite to streamline more than that to prevent banks from being able to shop around for the most lenient regulator.

The idea of creating a single, super bank regulator has been discussed, raising the ire of some officials, while experts have said that simply reshuffling the organizational chart does not guarantee a better cop will be on the beat.

But a single regulator would attack a key problem in the financial crisis of 2008-2009 — ‘regulator shopping’ by firms such as Countrywide Financial and American International Group, both poster children for unfettered risk taking.

“You eliminate the risk of arbitrage or a race to the bottom,” said David Min, associate director for financial markets policy at the Center for American Progress, a Washington, D.C., think tank.

The administration has proposed folding the Office of Thrift Supervision — which largely regulates mortgage lenders and has gained a reputation for lax oversight — into the Office of the Comptroller of the Currency, which regulates many of the nation’s largest banks, such as Bank of America and JPMorgan Chase.

Under the Obama plan, the Federal Deposit Insurance Corp (FDIC) and the Federal Reserve would still supervise smaller state-chartered and federally chartered banks, respectively.

An aide for the Senate Banking Committee said lawmakers are still discussing how to slice and dice the bank regulators.

DODD, WARNER ON BANKS
The aide, who requested anonymity because the negotiations are private, said there is a consensus among committee members to go further than the administration’s plan.

Senator Christopher Dodd, Democratic chairman of the Senate Banking Committee, at a hearing last month asked if paring back to three bank regulators was “really enough.

Democratic Senator Mark Warner, also a banking committee member, has promoted the idea of a single bank regulator.

The Senate has taken the lead on this aspect of the Obama administration’s regulatory overhaul, with members of the House of Representatives less vocal.

“At the end of the day it would be positive because it would be true reform versus a band-aid approach,” said Lawrence Kaplan, a banking attorney with Paul Hastings in Washington, about a single bank regulator.

Kaplan said the administration’s plan stops short of fixing the current duplicative system and would still let regulators apply rules differently to different banks. A single regulator, he said, would eliminate arbitrage and confusion.
EXISTING REGULATORS PUSH BACK
Existing federal regulators have resisted a catch-all regulator for banks, albeit to different degrees.

FDIC Chairman Sheila Bair has come out most strongly against the idea, telling lawmakers last month that one regulator would likely focus on the needs of the larger banks to the detriment of community banks.

She also argued against “putting all your regulatory and supervisory eggs in one basket.” She said regulatory tension makes better rulemaking and puts more critical eyes on banks.

Comptroller of the Currency John Dugan and Fed Governor Dan Tarullo were more even-handed at the same Senate Banking Committee hearing, arguing there are advantages and disadvantages to each approach.

Despite regulators’ reservations, legislation to consolidate banking agencies likely has a better chance of passing than other regulatory reworkings.

The idea of merging the Securities and Exchange
Commission and the Commodity Futures Trading Commission has been scrapped amid congressional committee conflicts.

And legislation to create a powerful new consumer agency to police financial products faces a tough battle against resistance from regulators and financial firms.

The Center for American Progress’ Min said the debate over the number of regulators misses the point, which is to ensure there are robust rules in place that are applied to all banks.

“To me you can be agnostic about how many regulators there are because it’s about what the regulators do,” Min said. “Ultimately it’s not about the structure at the end of the day, but how it’s executed.”

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* FACTBOX-Major US financial regulation initiatives, click here.

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