the new financial regulators

The Dodd-Frank Act has placed unprecedented responsibilities on the financial regulators to ensure financial stability and bank safety and to promote consumer protection. Many commentators have been skeptical of the reforms contained in the Act for this reason: after all, weren’t regulators part of the problem to begin with? So it is critically important that the new regulatory structure be endowed with strong and committed leadership. Not only will the performance of each agency depend on this leadership, but the synergy among agency heads in the new Financial Stability Council will also have to be well nigh amazing if the Council stands a chance of preventing another major financial crisis.

Among key areas to watch is the role of the Fed. Defying all odds, the Fed has survived immense public criticism for its management of the financial crisis and now gained enormous additional powers. The leadership abilities of its chairman, Ben Bernanke and key governors such as Daniel K. Tarullo are going to be tested to the limit. Another critical regulatory appointment is the head of the much debated new Consumer Financial Protection Bureau (CFPB) which, though housed in the Fed, will enjoy a great deal of independence. Here the fight over who will be nominated has already played out prominently in the media, with the Treasury Department apparently doing what it can to prevent Elizabeth Warren, the obvious choice for her knowledge, commitment and courage, from becoming the head of this agency. We should not underestimate what is at stake here, ably analyzed by John Talbott. To start out with an agency that is already captured by the industry would be a tragedy.

But keep in mind that other agencies are also critical. The FDIC, for example, has also acquired extensive new resolution powers, adding to its existing receivership powers for banks, to wind up non-bank financial institutions (think AIG and Lehman Brothers). Here the good news appears to be that an effort to bypass Elizabeth Warren by recruiting the current and extraordinarily able and independent-minded head of the FDIC, Sheila Bair, has failed, indicting that Ms. Bair will stay on as head of the FDIC.

Also acquiring broad new powers is the Office of the Comptroller of the Currency (OCC). The OCC, one of the nation’s oldest and most venerable agencies, carries a greater burden of responsibility than ever before in supervising large financial institutions, despite having taken considerable though sometimes unfair criticism for its role in the buildup to the crisis. Like the head of the new CFPB (in the Fed), the Comptroller is an independent appointee of the President even though his or her office is located within the Treasury Department. The Comptroller charters national (federally chartered) banks and, under the new legislation, will also do the same for federally chartered savings and loan associations. In effect, the OCC is the primary regulator for the banks that form the inner cores of the largest financial conglomerates in the nation and those that pose most risk to financial stability. While it will be the job of the Financial Stability Oversight Council to detect the rise of systemic risks generated by such conglomerates, expert, day-to-day supervision of these banks will remain most likely to ensure their safety and soundness and prevent problems from getting out of control–and this will be the job of the OCC. It is therefore critical that the new Comptroller have a deep understanding of the banking system and the experience to ensure effective supervision.

Yet the trap we keep falling into with economic regulation is regulatory capture: the closer the regulator becomes to the industry the more likely he or she is also going be biased in favor of that industry. As the French say, “to understand all if to forgive all.” Independence and strong, experienced leadership is going to prove critical if the OCC is to regain its historical tradition as one of the nation’s premier regulatory bodies.

So watch for the nomination of the new Comptroller of the Currency. The choice to replace John Dugan, who leaves in a few days, will be one of many indicators whether the new financial reform legislation is going to have any meaningful impact on our severely damaged financial system. I have advocated elsewhere that it is important to appoint an experienced but independent and highly intelligent regulator to this role (in other words, a qualified outsider). Two obvious possibilities exist and both present the ideal combination of outsider experience, records and knowledge are North Carolina Banking Commissioner Joseph A. Smith, Jr., and New York Banking Superintendent Richard H. Neiman. New York and North Carolina are the nation’s two most prominent banking states. Both regulators supervise very large institutions and would not be daunted by the challenges facing the newly combined Comptroller’s office. Both are highly respected by their industries and both have credibility in the arena of consumer protection. In addition, both bring to the table another dimension that has been largely escaped public attention. Commissioner Smith, as immediate past chair of the Conference of State Banking Supervisors, has been spokesman for the important other, state chartered, part of our banking system, and Superintendent Neiman holds high office in the Conference.

The Dodd-Frank Act turns the spotlight onto the regulators with an intensity seldom seen in economic regulation. Can we realistically hope that regulators will perform better than they have in the past? To stand any chance that things will change, we are going to need strong, visionary regulators who are not enamored of the virtues of banking at all costs, who understand the harm powerful financial institutions can wreak if not effectively regulated while also working with industries that are vital to our prosperity, and who are able to adapt to new, more effective forms of regulation. This is a very tall order. The coming days will reveal the Administration’s nominees and the choices will be a good indication of how effective the Dodd-Frank reforms are likely to prove.

5 comments for “the new financial regulators

  1. Chris Rogers
    August 9, 2010 at 4:12 am

    Lawrence Sir,
    A well thought out analysis of the effect of Dodd-Franks on the regulatory and supervisory environment of the US, particularly the large discretionary powers the new legislation defers to the regulators.
    As you imply, and as William Black and many others imply, we have witnessed a huge amount of regulatory capture – extending even to the head of banking supervision and regulation within the Fed in Washington.
    I concur that all new regulatory bodies brought into existence by Dodd-Franks require actual independently minded heads if they are to be effective – I doubt this will happen though, given the Fed itself promoted an economist rather than an experienced regulator to replace Roger Cole.
    Given the nonsense surrounding Elizabeth Warren and the Consumer Protection Agency, does anyone really expect Obama to do the right thing with Geithner and Summers pulling the strings?
    We live in hope, but given the persistent failures of nearly all the federal regulatory bodies prior to 2008, and the Federal government willing to even usurp state regulatory bodies as witnessed under Bush and predatory lending practices after 2001, can one person alone make a difference?
    Obviously, one has a great deal of respect for the current head of the FDIC – Ms. Bair – but it strikes me that all federal regulatory bodies should have a Ms. Bair in place, rather than the tokenism we have currently.
    I live in hope, and hope to be proved incorrect, but all historical precedents suggest the same old story, rather than the radical change which is required if Main Street is not to suffer from the excesses of Wall Street and some of the larger financial institutions that exist within the USA.

  2. admin
    August 9, 2010 at 7:51 am


    Thanks for your comments, with which I fully concur. I think a lot of people are very disappointed with the weakening of the reforms, the obvious capture by the industry of so many components of regulation, and the numerous exceptions, big as barn doors, through which the same old risky practices will be driven through. Note that Sheila Bair has called the banks on their protestations about the impact of the Basel III capital recommendations, yet nothing has changed so far as I am aware. They are being weakened and weakened. Nevertheless, I do think that the identity and ability of each new regulator will make a small difference, and that there are some good elements to the Dodd-Frank Act. Let us hope that they will help tip the balance against the direction you and I (to some extent) foresee.


    • Chris Rogers
      August 9, 2010 at 1:06 pm

      For your good self and any others who catch this site, I’d like to recommend an excellent paper By Randy Waldman written in November, but, due to all the discretionary powers contained in Dodd Frank’s, the essay is more important now than when wrote – indeed, so impressed was i its included in the Journal of Regulation & Risk – North Asia – which finally finds the light of day early next week.
      The link appears below and will be interesting to get a few comments from some of your site visitors:

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