The New Regulatory Structure Begins to Emerge

The WaPo all-star team of Zachary Goldfarb, Binyamin Appelbaum and David Cho broke the news this evening that Elizabeth Warren’s dream of a Financial Product Safety Commission is likely to become reality, thanks to the Obama administration. The WSJ’s Damian Paletta then did a fantastic job with his follow-up (although weirdly Warren’s name is nowhere to be seen):

Under the patchwork of regulation that presently exists, oversight of financial products is now split between a myriad of state and federal agencies, including the Fed, the Securities and Exchange Commission, the Federal Trade Commission, and others.

One possible scenario is that government officials consolidate some government agencies, such as the Office of Thrift Supervision, and strip some powers from the Federal Reserve and others to centralize the policing of financial products within a new body.

Anything which spells the end of the OTS (which, you’ll recall, was in charge of “regulating” AIG) is surely a good thing. And if the consumer-protection arms of the Fed and the SEC are bundled together into a new entity, that would surely reduce the chances of regulatory capture. As would this:

The creation of a financial product regulator would match a theme that Mr. Geithner has suggested is central to his vision of financial supervision. Instead of having regulators that look at specific companies, he has suggested having regulators that look horizontally at products and practices.

For example, he has called for the creation of a systemic risk regulator that would look at the concentration of risks in specific sectors, such as subprime lending. A financial product regulator could detect abusive practices in specific products, regardless whether a bank or small finance company originated the loan.

My feeling is that regulation by product — one entity regulating derivatives, another consumer-facing products (including insurance), and maybe a revamped SEC regulating securities — makes a great deal of sense. Then the Fed would sit atop those “horizontal” regulators, get data from them, and try to keep an eye out for systemic risks, with a particular emphasis on institutions which are too big to fail.

I’m reminded of the silliness that is the fact that Lending Club is regulated by the SEC — something extremely onerous for Lending Club, on the one hand, and something which is clearly outside the scope of what the SEC was designed to do, on the other. Instead, it, along with other peer-to-peer lenders, should be regulated by the new entity.

Is such a radical revamp politically possible? I think so, yes. Pointless regulators like the OCC and the NCUA might go by the wayside, but I doubt anybody will much mourn their passing, and most of their functions will be incorporated into the new horizontal regulators. The tougher fight will be with powerful state regulators, who probably have quite a lot of clout with the federal legislature. But it just doesn’t make sense to regulate financial products on a state-by-state basis, and it’s long past time that anachronistic practice came to a welcome end.

Comments

[paulsjj:]

Sounds like the way it used to be before Glass-Seagal was "reformed". Shouldn"t ther regulators be doing all this anyway as part of their charters?

May 20 08:45 AM

[bonderman:]

The only argument I have with your position is the ease with which in the past various federal regulators were captured by those regulated.

Congress will be pushed to put in a "business friendly" individual as has happened in the past. If there is a way to prevent that your idea should greatly improve regulatory operations.

May 20 01:18 PM

[BerkeleyBob:]

I would add that the historic deal allowing state regulation of insurance makes less and less sense, whether or not any of the plain vanilla carriers (Allstate, State Farm) accept TARP money. State regulation was primarily for reserve adequacy, but the quality of the assets were dubious, and state regulation allowed a "race to the bottom" much in the same way that credit card companies found it irresistible to locate their headquarters in South Dakota.

May 20 01:27 PM

[TinyTim:]

"Anything which spells the end of the OTS (which, you’ll recall, was in charge of “regulating” AIG) is surely a good thing."

It's pretty obvious that AIG went looking for the lamest regulatory agency it could find, then took the necessary steps to fall under its purview. These actions need to be addressed by future regulators.

May 20 04:29 PM

[rogerk2:]

Geithner has already stated the first rule he wants to implement - don't cap executive pay and bonuses just because they're living off taxpayer money. The fat cats want their billion dollar salaries and bonuses and perqs back, and their "man" in Treasury wants to give it to them.

So far, these guys are all just re-shuffling the chairs on the deck of the Titanic. The same "good old boy" insiders as before are at the tiller, and they're just powering further into the ice field.

We won't get a "New Deal" as long as Geithner, Summers, Barney Frank, and all the other "Old Deal" cronies are still running things. They're part of the bunch that put the country in the toilet to begin with. By the time we get past the mess they made, we'll have so much national debt, it will take 10 generations or more to pay it off.

I can't believe they want to strip powers from actual government agencies and give more regulatory authority to the Federal Reserve. The Federal Reserve Banks are private companies, chartered by the govt. to oversee interbank relations and provide liquidity when needed. Most Reserve Bank directors are bank CEOs. There is just so much incentive for them to push "the Fed" into doing whatever it takes to keep the banks afloat and protect their own jobs, is it any wonder the govt. pumped all the money in there first? (Paulson was a former banker. Geithner was a former Fed head. Summers was Treasury Sec when the easy-money easy-credit bubble got started. Pals gotta stick together in tough times.)

May 21 04:47 AM