THE STASH SEPTEMBER 6, 2009
I'm coming a little late to Sheila Bair's intriguing Times op-ed from last week, but I think Tim Fernholz basically got it right over at The Prospect: Bair wasn't kvetching about the administration's regulatory proposals--the kind of thing that got her in Tim Geithner's crosshairs a few weeks back. She was taking aim at even more radical proposals for regulatory consolidation, like what Sen. Mark Warner lays out here.
Basically, the administration wants to fold the underwhelming Office of Thrift Supervision (OTS) into the Office of the Comptroller of the Currency--the two agencies that regulate federal-charted banks--and rename it the National Bank Supervisor. (Under the status quo, big banks and other institutions can essentially pick their regulator. In the run-up to the financial crisis this tended to bring them to the doorstep of the OTS, which was perceived as weak and did its best to live up to those expectations. It "regulated" AIG Financial Products, for example.) Sen. Warner proposes consolidating not just those two agencies, but also the bank-regulatory functions of the FDIC and the Federal Reserve, both of which currently oversee state-chartered banks.
Bair says this isn't about protecting her turf, arguing that there are real advantages to keeping state- and federal-chartered banks separately regulated:
Concentrating power in a single regulator would inevitably benefit the largest banks and punish community ones. A single regulator’s resources and attention would be focused on the largest banks. This would generate more consolidation in the banking industry at a time when we need to reduce our reliance on large financial institutions and put an end to the idea that certain banks are too big to fail. We need to shift the balance back toward community banking, not toward a system that encourages even more consolidation.
If Bair is hinting at a political economy story here--the big banks, with their slick lobbyists and vast revolving-door potential, would be in a better position to "capture" the regulator, while the small banks would routinely get the book thrown at them--then I completely agree. That could create an incentive for banks to get bigger through mergers and acquisitions, which isn't something we want to see. On the other hand, as I understand it, the biggest reason large banks have an advantage today is that they're perceived as too big to fail, which allows them to borrow money at lower rates than small-enough-to-fail banks. And that would seem to be the case whether big and small banks get separate regulators or end up with the same one. So if we're really concerned about advantaging big banks over small ones, the relevant question may not be how many regulators we have.
Meanwhile, though most of the op-ed is in fact a response to Warner-like proposals, Bair does eventually take aim at one of the administration's signature ideas: putting the Fed in charge of "systemic risk regulation"--which is to say, overseeing the ways various institutions interact to threaten the whole financial system. Of this Bair writes:
The risk of weak or misdirected regulation would be increased if power was consolidated in a single federal regulator. We need new mechanisms to achieve consensus positions and rapid responses to financial crises as they develop.
I have advocated the creation of a strong council of federal financial regulators. This council would monitor the financial system to help prevent the accumulation of systemic risks and would also have the authority to close even the largest institutions. But we don’t need — and can’t afford — to depend on one supreme regulator to have sole decision-making authority in times when our entire financial system is in flux.
I don't quite understand this. You can argue that the Fed didn't acquit itself well in the run-up to the crisis--that it missed obvious signs of a housing bubble and the threat that housing-related assets (and derivatives of those assets) posed to the system. But that's an argument for why you shouldn't put the Fed in charge of overseeing systemic risk. It's not an argument for a council of regulators (i.e., multiple agencies versus one). Or, put differently, if the problem is that it took the Fed too long to respond to the bubble, then it's hard to see why creating an even slower-moving entity--a council that required the assent of several different regulators--would be the answer.