I have written before that Sheila Bair, Elizabeth Warren and Eliot Spitzer are among the smartest and most out-spoken policymakers on how we need to restructure the regulatory frame work of the nation’s financial system and banking industry. In fact I think either one would be a tremendous improvement as Secretary of the Treasury as a replacement for Tim Geithner, who, in my humble opinion, is an industry tool.
In a terrific New York Times Op-Ed piece, Sheila Bair, the Chair of the Federal Deposit Insurance Corporation (FDIC) outlines a compelling litany of reasons why the Obama administration’s proposed changes, while good in many respects, does not sufficiently address the issues that caused the current – or will prevent future – financial sector crises. In her editorial, Bair said she supports “key pillars” of the plan, like the national bank regulator and consumer agency, but thinks lawmakers who advocate just one, central regulator are taking it too far, and too cozy with the Wall Street and Bank industry lobby. She blamed the financial crisis on banks taking advantage of regulatory loopholes and using exotic financial products that also fell between the regulatory cracks. I think she has a strong points and legitimate concerns.
I also admire her, integrity, independence and willingness to stand her ground and to maintain the need to enforce market discipline on ‘too big to fail’ companies. See videoInterestingly Sheila Bair, a Republican originally appointed by Bush 43, but re-appointed by President Obama as FDIC Chair is from, of all places, Independence, KS and was also one of only few regulators who openly opposed the deregulation fervor of fellow Republicans such as former Texas Senator, Phil Gramm, during the 106th Congress (2000-2001).
——–
By SHEILA C. BAIR
NYT, August 31, 2009 – The Obama administration has proposed sweeping changes to our financial regulatory system. I am an active supporter of the key pillars of reform, including the creation of a consumer financial protection agency and the administration’s plan to consolidate the supervision of federally chartered financial institutions in a new national bank supervisor. This consolidation would improve the efficiency of federally chartered institutions while not undercutting our dual system of state and federally chartered banks.
But some are advocating even more drastic changes, like the creation of a single regulator for all banks (and bank holding companies). We clearly need to streamline the system, but a single regulator is not the solution. Calls for consolidation beyond the administration’s plan fail to identify the real roots of last year’s financial meltdown. The truth is, no regulatory structure — be it a single regulator as in Britain or the multi-regulator system we have in the United States — performed well in the crisis.
The principal enablers of our current difficulties were institutions that took on enormous risk by exploiting regulatory gaps between banks and the non-bank shadow financial system, and by using unregulated over-the-counter derivative contracts to develop volatile and potentially dangerous products. Consumers continue to face huge gaps in personal financial protections. We also lack a credible method for closing large financial institutions without inflicting severe collateral damage on the economy.
The creation of a single regulator for all federal- and state-chartered banks would not address these problems. Rather, it would endanger a thriving, 150-year-old banking system that has separate charters for federal and state banks. Within this system, state-chartered institutions tend to be community-oriented and very close to the small businesses and consumers they serve. They provide loans that support economic growth and job creation, especially in rural areas. Main Street banks also are sensitive to market discipline because they know that they’re not too big to fail and that they’ll be closed if they become insolvent.
Concentrating power in a single regulator would inevitably benefit the largest banks and punish community ones. A single regulator’s resources and attention would be focused on the largest banks. This would generate more consolidation in the banking industry at a time when we need to reduce our reliance on large financial institutions and put an end to. . .
Read more here.
Web Resources:
Sheila Bair for Treasury Secretary
The Obama administration’s regulatory overhaul plan would incorporate the Office of the Comptroller of the Currency and the Office of Thrift Supervision – both of whom have a reputation of regulatory incompetence after its handling of IndyMac — into one national bank supervisor. The FDIC would then handle state-chartered banks and the Federal Reserve would act as a broader referee of sorts, overseeing the largest institutions and monitoring systemic risk. This last point leaves wide open legitimate concerns that the Federal Reserve would remain victim to regulatory arbitrage and influence peddling by Wall Street and the Banking industry lobby. A separate consumer-protection agency would also be created under the President’s plan. Bair insists that Wall Street and big banks in the U.S. be held accountable in their role in causing the financial crisis; and, she argues, that market discipline should be enforced to prevent future reckless risk-taking, and that financial institutions that are too big to fail, are simply too big and pose an inherent risk to our financial system. I think she’s right.
