Magazine article American Banker

Viewpoint: The Roadblocks for Regulatory Revamp

Magazine article American Banker

Viewpoint: The Roadblocks for Regulatory Revamp

Article excerpt

Studies and proposals aimed at streamlining financial regulation seem to emerge at least once every decade.

In 1993, we saw the first Clinton administration propose the creation of a federal banking commission. In 1984, there was the report of then-Vice President George H.W. Bush's task group on regulation of financial services, and during the 60s and 70s there were a variety of commissions and study groups formed to inquire into the subject, as well as perennial legislative proposals to consolidate regulation.

As is obvious to any current observer of the regulatory structure, none of these efforts resulted in change.

Against this background, one has to be impressed by the Treasury Department's willingness to open up these issues once again, and the department deserves credit for the thoughtfulness and political courage reflected in the comprehensive list of questions it has put out for comment as a prelude to yet another study.

Nonetheless, one has to ponder whether this effort will have any more tangible results than those that went before.

It is axiomatic that no one would invent the system we have today if we were to start with a clean slate. Yet the very basic political obstacles that have caused earlier efforts at rationalization to founder remain quite present today - the insistence of the Federal Reserve to have a hands-on role in financial supervision, and the strong commitment of the states to maintain the viability of a state charter. No one has yet found a way to overcome these obstacles.

Consider the role of the Fed. Any proposal to rationalize federal supervision would have to take the Fed out of that role or transfer all supervision to it - either choice would be intensely controversial - or face the prospect of continued fractionalization.

One could imagine taking an intermediate stance, as some past proposals have done, but it inevitably would result in a structure characterized by multiple agencies and jurisdictions and would do little in the way of rationalization.

The prospect that all jurisdiction might be transferred to the Fed seems to be a nonstarter, and the trend around the world seems to be in just the opposite direction: taking jurisdiction away from the central bank. Even former Federal Reserve Chairman Alan Greenspan, recognizing this reality and arguing for a Fed role in supervision, has frequently spoken about the undesirability of a "monolithic" regulator.

In fact, maintaining a substantial role in supervision has always been critically important to the Fed, although not for the reason it generally puts forth (to have a "window" into the banking system to aid it in conducting monetary policy, operating the payments system, and acting as lender of last resort). There are a variety of means for the Fed to get all the information about the system it needs for these functions.

I believe there are really two quite different reasons the Fed wants to maintain a substantial role for itself.

First, as the regulator of bank holding companies, the Fed has significant "clout" over banks. No banker who has to go to the Fed to get an acquisition approved, or to secure one of a number of other approvals, wants to get crosswise with the central bank. Thus, when the Fed decides to pump liquidity into the banking system to address financial stress - as with the recent subprime experience - and wants to be sure that banks will respond by making credit more readily available, its calls to bank CEOs are likely to be responded to with alacrity.

Second, to strip the Fed of supervisory jurisdiction would likely decimate the 12 regional Federal Reserve banks, the continued rationale for which is already questionable. Their boards of directors generally are comprised of highly influential members of the community and are an important factor in the maintenance of the Fed's independence and its ability to achieve its political objectives. …

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