Financial Regulation: The Alphabet Soup Gets Much Worse

Do you know an FHC from a BCBS? If not, you’re going to have a hard time wading through the government’s white paper on financial reform, which is full of such things. (An FHC is a financial holding company; the BCBS is the Basel Committee on Banking Supervision. The link is to the WaPo leak of the paper, there might be minor changes in the final document.) This, for instance, is a real sentence from the paper:

The United States will work to implement the updated ICRG peer review process and work with partners in the FATF to address jurisdictions not complying with international AML/CFT standards.

But never fear! Your tireless blogger has waded through all 85 pages, and I’m pretty sure I’ve got the gist of it at this point.

In a nutshell: If you thought this was going to make the current horribly-complicated system of financial regulation less complicated, think again.

And so to the specifics. Were you hoping that the present alphabet soup of regulators would get rationalized and downsized? I know that I was. But there’s only one place that’s going to happen: the OCC and the OTS are going to be folded into a new regulatory entity called the National Bank Supervisor (NBS), which (along with the Fed, natch) will oversee federally-chartered banks.

The National Bank Supervisor will not oversee state-chartered banks: Those will remain under the umbrella of the FDIC, which is not being folded into the NBS. And the NBS will similarly not oversee credit unions: the NCUA will retain its independence and continue to regulate those itself.

Why perpetuate these distinctions between federally-chartered banks, state-chartered banks, and credit unions? I have no idea. But in order to get some measure of cohesion over all this, a second brand-new regulatory entity, the Financial Services Oversight Council, or FSOC, which will consist of the leadership of the NBS; the FDIC; the NCUA; the SEC and the CFTC (yes, they are remaining separate too); the FHFA (that, too, gets to remain independent for no obvious reason); the Treasury; the FOMC; and the brand-new Consumer Financial Protection Agency.

Or, to put it another way, FSOC = NBS + FDIC + NCUA + SEC + CFTC + FHFA + FOMC + CFPA + Treasury.

I know what you’re thinking — it can’t possibly be as simple as that. And you’d be right! There’s also a Financial Consumer Coordinating Council, which comprises the Consumer Financial Protection Agency, the Federal Trade Commission, and the SEC’s Investor Advisory Committee.

Oh, and I almost forgot, they’re also creating an Office of National Insurance.

In other words, if you thought the bureaucracy was bad until now, just wait until you see what’s coming down the pike.

Which is not to say that there aren’t any good ideas in this white paper. I like the fact that the CFPA will have the power to conduct Community Reinvestment Act examinations, for instance, and I love the fact that stockbrokers will — finally — have a fiduciary responsibility to their clients. The Obamacrats have also managed to sneak in legislation forcing opt-out, rather than opt-in, retirement plans for corporate employees.

But there are weaknesses here, too, and not just at the org-chart level. Treasury has decided that no financial institution can be allowed to engage in any nonbanking activities at all — basically there’s no way that Walmart (WMT), for instance, or Safeway (SWY), will ever get a banking license. That’s bad for consumers.

The white paper also punts on trying to clear up the mess of conflicts between the SEC and the CFTC: It basically just tells the two agencies to go away and work it all out on their own.

And the new extra-stringent regulations on what the white paper calls “Tier 1 FHCs” — the systemically-important financial institutions — don’t seem particularly stringent to me. For instance, there’s this:

Tier 1 FHCs should be required to have enough high-quality capital during good economic times to keep them above prudential minimum capital requirements during stressed economic times.

This sounds good, until you realize that exactly the same language is used with respect to all banks, and bank holding companies, a couple of pages later.

But the main message of this white paper (and I’m sure Congress will do all manner of mischief to it before anything gets passed into law) is that there aren’t any problems of financial regulation which can’t be solved by setting up a high-level committee. In other words, it’s a bust.

Comments

[Speedspirit:]

The Ron Paul strategy in HR 1207, now with 225 co-sponsors, the Federal Reserve Transparency Act of 2009, and the companion Bill in the Senate S604, The Federal Reserve Sunshine Act, sponsored by Bernard Sanders (I-VT) will uncover what the Fed and its owners – the major banks – have been up too; particularly in rigging markets.

It looks like HR 1207 will be passed in the House. Now train your guns on the Senate. Hit every Senator with: Dear Senator, Please co-sponsor S604, the Federal Reserve Sunshine Act of 2009, and make it become law. Sincerely, etc. Short and sweet and to the point. No comments or opinions.

Jun 17 06:20 PM

[PainfullyAware:]

It seems to me that this crisis will have the exact same outcome as all the other crisises - Rob The Tax Payer And Rearrange The Bureaucracy.

Complexity Favors The Sinister. So Much For Simplification.

It is good to see the HR1207 steadily gain support.

Transparency Is The Bane Of The Fraudulent.

Jun 17 08:39 PM

[Moon Kil Woong:]

Bing Ping: Money does grow on trees in America, just only in fields owned by financial institutions.

I personally find it distasteful that in the regulatory reoganization the Fed should be responsible for the too big to fail organizations (the very ones it has proven unable to control since its comprised of the too big to fail banks). Likewise, Felix Salmon has cut through the wall of sludge (you determine its composition yourself) to find out there is nothing really under ity all.

This reminds me exactly of a club where all the members get together, state a coming event and then say what they want to do. Then the leader, provided there is even one, says you can do whatever you want but you must work with someone else. Everyone smiles, shakes hands, and the meeting is concluded. As you probably learn if you were ever in such a club, your event ends up being the worst most disorganized event among all the other clubs. At best you can only hope some other club is even more of a basket case and not only did they forget refreshments, the table, and a donation box, their staff members didn't even show up.

What am I leading to? After siphoning through this mumbo jumbo there is really no real regulation that can or can not ever get passed under this structure. Thus, how can we call this strictor or better regulations? Where's the meat? There is none. Where's the potatoes? There is none. Just a bunch of agencies nodding their heads saying we can do it. They all happen to be the exact same agencies that failed us a year ago. Do you buy it?

Jun 17 10:45 PM

[Tony Petroski:]

Mr. Salmon: Thank you for wading through the WaPo leak of this paper. Your summary glazes my eyes.

My first thought was: FEAFAA,ETTGFILS. which stands for "Full employment act for all attorneys, especially those that graduated from Ivy League schools.

There was nothing in your article about Ivy League schools, but I couldn't resist a bash at those folks now that they run everything.

Jun 18 12:47 AM

[thinkb4uwrite:]

All of this bureaucracy is going to cost immense amounts of capital and necessarily reduces the efficiency of a regulated private sector which we have understood must be both ethical and efficient. The way to do this is through requiring education and strict licensing of those working within the industry the government desires to oversee. An alphabet soup of agencies spinning out endless forms and arcane operating regulations and issuing the regulatory fees necessary to keep it all going is not a solution. Its a formula for a restricted future and guarantees us falling behind.

This sounds like what the federal government did when they set out to revise the federal income tax system a few years ago... Their initial idea came about as a result of a decades-long public outcry to simplify an overly-complex and burdensome tax code. Everyone anticipated that the government would simplify and improve the system, making the calculations and filing for income taxes easier and less cumbersome, and eliminating much of the burden and expense that weighed on most of us every April 15th...

Yet in the end what did we get? The IRS actually made the system even more complex and more difficult, adding thousands of new pages to the federal tax code.

We ought to be able to have a national referendum on all proposed upsizing in the Federal Government for any purpose... a simple yes / no vote, put to the people in plainly worded paragraphs explaning the costs and benefits of the proposed upsizing in simple language. This actually works amazingly well. The people know what to do and act, on a whole very frugally, and intelligently.

California did this last month on the proposed initiatives that were put before the public as it voted to either continue or discontinue the funding that would support the way the state (bueaucracies) were to be run.

The people voted to let the state go broke so that lawmakers would receive a "get a life" message from the people and move toward real fiscal efficiency that was needed.

I believe this is the only way government will be forced into drafting efficient solutions to address most of the critical fiscal issues we have to re-engineer in the banking and investment industry. A simple straightforward solution is much too easy for a bueareaucrat when there's money to be spent even - especially if money can be siphoned from current or future generations through excessive taxes or regulatory fees.

Its the people who will foot the bill so the people should get to decide.

Jun 18 02:34 AM

[Sovestor:]

Many capitalists and risk takers will likely consider moving their assets and operations from US to less-regulated countries. The reform has good intention but will likely reduce growth rate on many financial firms operating in US.

Jun 18 03:04 AM

[thinkb4uwrite:]

The Bill referenced by Speedspirit in the first post, Senate Bill S604, is summarized below. I believe this is one that people need to support the passage of,,, just read the summary yourself:

Federal Reserve Sunshine Act of 2009 - Repeals the authority of the Comptroller General to carry out an onsite examination of an open insured bank or bank holding company only if the appropriate federal regulatory agency has consented in writing. (Retains the authority of the Comptroller General to audit a federal agency.)
Directs the Comptroller General to complete, before the end of 2010, an audit of the Board of Governors of the Federal Reserve System and of the federal reserve banks, followed by a detailed report to Congress.

Jun 18 03:04 AM

[one eye:]

FS: a very good article giving opinions based on facts. Loved every word.

Obama promised 3-4 million New Jobs. No one realized that they would be in Government.

Jun 18 09:44 AM

[steve graves:]

Excellent contribution Felix, as always. Thank you very much for your hard work in deciphering this mess - we appreciate it!

Jun 18 02:08 PM