Readers may recall that Federal Regulatory Preemption, though obscure, is important! Before the financial crisis, banks were allowed to get away with more shenanigans because their primary federal regulators had total jurisdiction over their operations, while state-level officials couldn't even investigate their business practices. This had the effect of allowing tons of consumer fraud to go on, particularly in the housing market. Some State attorneys general, like Massachusetts' Martha Coakley (now running for Ted Kennedy's Senate seat), were able to use creative methods to investigate the banks, but on the whole most state officials had their hands tied and could only watch as the banks did whatever they pleased as Washington turned a blind eye to the whole fiasco. In response to this problem, the Obama administration has asked that the new regulator it's proposed, the Consumer Financial Protection Agency, only set a floor on consumer financial regulation, so that individual states can have higher standards if they so choose. The finacial services industry did not like this -- it makes it more likely that they will have to follow higher standards; if they want to operate in different states there will be some different rules -- and enlisted moderate Democrats like Illinois Rep. Melissa Bean to make sure that states wouldn't be able to exceed the requirements of the new agency. However, pressure to keep the states in play, from the administration and congressional leaders, including House Financial Services Committee Chair Barney Frank, seems to have prevailed, and states will now have the power to police the national banks that operate in their jurisdiction. This is a pretty important win for consumers, and for the administration, against large banks. It also gives an advantage to smaller, local banks who will already be familiar with the rules in their state and region, so this may have the side effect of shrinking the banks. Financial regulatory reform may be gaining momentum.
-- Tim Fernholz
