Yesterday, FDIC Chair Sheila Bair wrote a fascinating, if opaque, op-ed arguing against regulatory consolidation. But the piece itself is less interesting than the politics behind it. Bair, in public and private, has offered a number of critiques of the administration's regulatory reform plan, released earlier this summer and currently wending its way through Congress. Her concerns often seem motivated by the need to protect her agency's turf, but Bair has been an honest and effective regulator, so it's important to understand her policy concerns as well.
Bair's piece is an argument against a "Super-Regulator," that is, consolidating all banking regulators into one agency. Some people immediately jumped to the conclusion that this was an attack on a controversial aspect of the administration's plan -- giving the Federal Reserve new powers to be a "systemic risk regulator," essentially to oversee companies perceived as "Too Big To Fail" by forcing them to hold on to more capital, limit leverage and prepare clear plans to break themselves up in the event of failure so the government won't be on the hook (i.e., no more bailouts). Bair has been critical of this plan, arguing instead that a council of regulators, also proposed by the administration to aid in systemic risk regulation, be given these powers, not just the Fed. Treasury Secretary Tim Geithner has argued that, in a crisis, a committee will not be able to make decisions quickly enough to prevent problems. (I think he has a point there.)
But I'm not so sure that's what Bair is arguing against in her most recent article. In her first two paragraphs, she explicitly supports some of the administration's goals (most notably the creation of a Consumer Financial Protection Agency) and then goes on to say "some are advocating even more drastic changes, like the creation of a single regulator for all banks (and bank holding companies)." That makes me think she's not arguing against the proposals enumerated in the administration's plan, although she does spend one paragraph enumerating her concerns about the Fed as systemic risk regulator, but rather the idea -- found in this op-ed by Senate Banking Committee member Mark Warner -- of combining banking regulators even more drastically than the Obama team has proposed. The administration's plan eliminates two lackluster regulators by creating a new office of National Bank Supervision, leaving the FDIC to handle state-chartered and depository institutions. Warner says all those offices, plus the Fed, should become one.
Some of Bair's arguments against consolidation do hold water. Her concern that community banks could lose an advocate is reflected in today's conditions, where major banks have been profiting at smaller institutions' expense because of the government's rescue efforts; consolidating regulators might exacerbate the situation. The administration's plan to consolidate bank regulators seems pretty effective to me; the real consolidation problem lies in the Treasury Department's unwillingness to advocate for the combining of the Securities and Exchange Commission and the Commodities Futures Trading Commission, which have confusing, overlapping jurisdiction.
Bair's decision to focus her op-ed on the Warner proposal is interesting because the conventional wisdom is that the administration's proposal is as drastic a consolidation as is politically feasible (the administration's legislative strategy continues to be, like it or not, offering their compromise rather than their Big Ask). But if Bair felt motivated enough to direct an attack against the idea of more ambitious consolidation than even the administration has asked for, she and her staff must feel like that idea is gaining steam. Major consolidation has plenty of supporters among independent financial experts and some members of Congress, but the regulators themselves and the financial industry both oppose the move. If Bair is concerned enough to go after it publicly, maybe there's a chance we'll get more ambitious regulation out of Congress after all.
-- Tim Fernholz