The Financial Regulations

The President unveiled his regulatory overhaul today, refraining from leaving the details to Congress and instead putting together an extremely detailed document. The idea on the top line was to streamline the bureaucracy, as evidenced by the elimination of the Office of Thrift Supervision, a small regulatory agency which has become something of a scapegoat since they were the regulator for AIG. But Felix Salmon says that there is anything but streamlining in these rules:

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.

It's so dense it requires a glossary of terms. And in addition, the Fed has kind of oversight provisions over the entire system, by becoming a systemic risk regulator (because they didn't miss the whole thing the first time around).

The streamlining matters less to me than whether or not this thing will actually work. And I think it has a chance. Rhetorically, its heart is in the right place (even Geithner and Summers' take). Obama means to base the regulation of banks on what they do and not what they say they are; seeks to end banks shopping around for their own regulator; and create a Consumer Financial Protection Agency to "protect consumers across the financial sector from unfair, deceptive, and abusive practices." There's also a fair bit on increasing international cooperation on these issues, which is crucial. This excerpt from an interview with Obama is a good look at his thinking on the subject:

Pres. OBAMA: No. I think that what we focused on was, number one, do we have the tools to prevent the kinds of risks that we saw back in September? And our conclusion was we didn't, and we had to make sure that we had a systemic risk regulator. So that is in place. We asked, do we have the resolution authority if an individual institution like an AIG breaks down, to quarantine them so that they're not bringing the whole system down? We didn't have that authority; we wanted to put that in place. Did we have a means of anticipating problems and properly regulating the nonbank sector of the financial system, which obviously has grown massively over the last decade? And we concluded we didn't have that power. So we got those things in place.

Were we sufficiently focused on consumers? And it turned out that consumer protection, investor protection was scattered among a whole bunch of different agency; we wanted to streamline, consolidate and give somebody line responsibility for that. So what we've started off with was identifying what were the biggest problems that we had, and are we putting in place the tools to prevent the kind of crises that we've seen from happening again?

HARWOOD: But you don't...

Pres. OBAMA: Now...

HARWOOD: ...have a single bank regulator, and some people have talked about judge shopping among banks for favorable regulation.

Pres. OBAMA: This is something that we've been concerned about in the past. What we do have, under our proposal, is that for tier one institutions, the big institutions who, if they fail, require us to shore them up, for those folks they are going to be under a single regulatory body. When it comes to some of the smaller banks, community banks, the FDIC has done a good job on that, and we feel confident that they can continue doing what they do. So our overall concept has been not to completely abandon those aspects of the system that worked, but rather focus on those aspects of the system that didn't, try to close gaps. Did, you know, any considerations of sort of politics play into it? We want to get this thing passed, and, you know, we think that speed is important. We want to do it right. We want to do it carefully. But we don't want to tilt at windmills, we want to make sure that we're getting the best possible regulatory framework in place so that we're not repeating the mistakes of the past.

I guess the best that can be said is that the banking lobby hates it. Unfortunately, they'll have another bite at the apple - Congress has to approve all this, and in so doing they could easily de-fang it.

Robert Reich has some good first principles that any financial regulation should include.

...Kevin Drum, er, doesn't like this much at all.