When this Washington Post article implied that FDIC Chair Sheila Bair opposes the Administration's proposal to create a new consumer protection agency, it was kind of shocking -- Bair has generally taken a tough, pro-consumer line throughout the crisis and has been the go-to federal official for holding major financial institutions accountable. After reading her testimony [PDF], it turns out that she supports creating a Consumer Financial Protection Agency, but wants to protect her own turf with two compromises:

The CFPA should have sole rule-writing authority over consumer financial products and services and the federal banking regulators should be required to examine for and enforce those standards. If the bank regulators are not performing this role properly, the CFPA should retain backup examination and enforcement authority to address any situation where it determines that a banking agency is providing insufficient supervision. By freeing the CFPA from direct supervision and enforcement of depository institutions, the CFPA would be able to focus its examination and enforcement resources on the non-bank financial providers that provide financial products and services that have not previously been subject to federal examination and clear supervisory standards.

Accordingly, the federal banking agencies should retain the authority to examine and supervise insured institutions for both consumer protection compliance and safety and soundness. The CFPA should be given the authority to examine and supervise non-bank consumer product and service providers and back-up enforcement authority over insured depository institutions.

... In addition, as the only federal regulator with exposure to all insured financial institutions, the FDIC should be represented on the CFPA Board. ... The FDIC’s direct supervision of the majority of the nation’s community banks provides it with a unique perspective and a "Main Street" orientation that resulted in it being an early proponent of affordable and sustainable mortgage loan modifications, improved economic inclusion, and the prevention of abusive lending practices. ... Some have questioned why prudential supervisors should have a position on the CFPA board when the views of the CFPA would not necessarily be reflected in the activities of the prudential supervisor. To address this criticism, the FDIC would support the addition of the CFPA Chairman as a member of our board of directors. ... this type of reciprocal arrangement could provide benefits for both safety and soundness and consumer protection regulation and supervision.

Bair is proposing that her agency and other regulators keep their powers to actually inspect banks and enforce rules while the CFPA writes regulations and focuses its enforcement powers on currently unregulated non-bank institutions. The CFPA would still have secondary authority to inspect banks but that's a much less powerful role. While Bair's concern about the CFPA's ability to field an effective enforcement team is reasonable -- especially when it will need to address a ton of previously unregulated institutions as well as the existing regulated bank structures -- it's extremely important that CFPA has first-option enforcement capability for the rules it writes; otherwise, there will be delay as the agency tries to get regulators that are closer to the banks to enforce pro-consumer rules, and controversy when the CFPA decides to use its secondary authority to enforce the rules if the other regulators don't come through. I don't think the Administration or Barney Frank will put this in the bill.

Her second idea, that the FDIC and CFPA should exchange board members, seems smart. It can't hurt to create some information sharing incentives, and the FDIC does tend to have a consumer bent even though it lacks regulatory authority in a lot of critical areas. By definition, the FDIC regulates "consumer" banks -- depository institutions -- so it makes more sense for a stronger connection between it and CFPA without actually combining their powers into a single office, which has the effect of diluting motivation to enforce, since one aspect of the agency's mandate -- usually the consumer aspect -- inevitably falls down the priority list.

She strongly criticizes the Administration's approach to the problem of "Too Big To Fail," which empowers the Fed to impose more onerous regulations on especially large or especially interconnected financial firms. That's a much thornier issue than CFPA, and one that I've been neglecting -- more TBTF analysis forthcoming!

-- Tim Fernholz

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