In a NYT op-ed, FDIC chief Sheila Bair says she’s on board plans to overhaul the financial system… except for the idea of creating some uber-regulator overseeing the whole thing.
We think she’s right on:
…some are advocating even more drastic changes, like the creation of a single regulator for all banks (and bank holding companies). We clearly need to streamline the system, but a single regulator is not the solution. Calls for consolidation beyond the administration’s plan fail to identify the real roots of last year’s financial meltdown. The truth is, no regulatory structure — be it a single regulator as in Britain or the multiregulator system we have in the United States — performed well in the crisis.
The principal enablers of our current difficulties were institutions that took on enormous risk by exploiting regulatory gaps between banks and the nonbank shadow financial system, and by using unregulated over-the-counter derivative contracts to develop volatile and potentially dangerous products. Consumers continue to face huge gaps in personal financial protections. We also lack a credible method for closing large financial institutions without inflicting severe collateral damage on the economy.
The creation of a single regulator for all federal- and state-chartered banks would not address these problems. Rather, it would endanger a thriving, 150-year-old banking system that has separate charters for federal and state banks. Within this system, state-chartered institutions tend to be community-oriented and very close to the small businesses and consumers they serve. They provide loans that support economic growth and job creation, especially in rural areas. Main Street banks also are sensitive to market discipline because they know that they’re not too big to fail and that they’ll be closed if they become insolvent.
Concentrating power in a single regulator would inevitably benefit the largest banks and punish community ones.
Some (such as perhaps Felix Salmon or the Baseline Scenario guys) would argue that this effect could be counteracted by a size tax — added fees or capital requirements for big institutions. And to some extent, this could even out the costs. But that’s just part of it — the real point is that the small banks would have no idea how to manoeuvre federal regulations the way large banks do (even with the tax) and over time, you can be sure that the agency would be captured by the large ones, not the small ones.
This is the case with all the new regulatory ideas, such as the Consumer Financial Protection Agency. Sure, at first you might put in an uncorruptable idealist like Elizabeth Warren, who’d insure that it will always look out for the little guy, and stand athwart the big-bad Citigroups and Bank of Americas of this world. And for a while, that’d work fine. But what mechanism can you build in to ensure that the agency will be like that in 20 years? And if you can’t build in such a mechanism, that what are you accomplishing, really?
Obviously Bair is protecting her turf here, a bit, but what she says makes a lot of sense.