The most important line in Barack Obama’s speech yesterday on the need for new financial regulation may have been his endorsement of Sheila Bair’s plan to form a “financial council” of regulators rather than radical plans before Congress to concentrate all regulatory powers in the Federal Reserve.
“While holding the Federal Reserve fully accountable for regulation of the largest, most interconnected firms, we’ll create an oversight council to bring together regulators from across markets to share information, to identify gaps in regulation, and to tackle issues that don’t fit neatly into an organizational chart,” the president said.
This sounds like Obama is standing behind Bair—who wrote a New York Times Op-Ed arguing against the single regulator idea—and against plans like the one proposed by Senator Mark Warner. In the Financial Times, Warner had forcibly argued for the single regulator.
“We need a single agency combining the OTS and OCC while absorbing the responsibilities of the FDIC and Federal Reserve for prudential regulation and supervision of banks and their holding companies, affiliates and subsidiaries. This agency should have a level of independence commensurate with the FDIC and Federal Reserve (including an independent chair) with the authority to oversee banks from top to bottom and end to end.
But Obama seemed to side-step who would ultimately have the “resolution authority” to authorise an orderly wind down in the case of the failure of systemically important wind down. The idea of seating this power with the Fed has been one of the signature ideas proposed by the Obama administration’s Treasury Department. But it has met resistance from Bair and others.
From Bair’s op-ed:
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.
While Obama clearly favours giving the Fed primary oversight of systemic risk, he didn’t explicitly endorse granting it resolution authority. It’s quite possible to require the Fed to exercise oversight without giving it the powers to execute resolution plans based on its findings.
Dividing the monitoring of systemic risk from resolution authority seems fraught with risk—inter-agency bickering could cause delays in the middle of a crisis and regulatory log-rolling may make the process inefficient—but it also may assure that the power isn’t abused. It creates a check on the power, something akin to the separation of powers between the executive branches and the legislative that is at the heart of our constitutional order.
Of course, there’s a danger of over-interpreting Obama’s ellipses. Perhaps his refusal to firmly endorse the idea of giving the Fed resolution authority is more akin to Obama’s post-election maneuvers on health care and the idea of a “single payer.” The president may just be trying to see where legislative and public opinion falls before getting behind one version or another of this controversial idea.
Interestingly, Obama didn’t mention the other part of the debate between Bair and the Treasury—the role of federalism. Bair seems to fear that eliminating the dual system of state and federally chartered banks in favour of a solely national system would disadvantage small, community banks. Big banks would be more able to capture the national regulator and warp its regulations in their favour. The “Too Big To Fail” problem would only get worse, as more banks were incentivized to get bigger and bigger through mergers and acquisitions.
In short, despite Obama’s fierce rhetoric yesterday, the president is still leaving crucial questions about the shape of regulatory reform wide open.