Hard as it is to defend the Byzantine nature of U.S. bank supervision, it's at least as hard to find a model guaranteed to provide a better defense against financial crises.
None of the four major approaches to supervisory structure seen in the rest of the developed world proved uniformly impervious to the latest boom-bust cycle. For example, the U.K. experience raised serious questions about the wisdom of the so-called integrated model, in which regulatory powers are consolidated into a single agency keeping tabs on all kinds of financial firms. A more "functional" approach, with separate regulators specializing in different aspects of finance, did not protect Spain from a real estate bubble severe enough to rival our own.
But the lesson here is not that structure is irrelevant. It's that structure by itself is not a silver bullet. There's another lesson, too: there are enough pitfalls in financial regulation as is; a country's supervisory structure should not present another.
And yet that's exactly the fear of some who have studied the U.S. approach to bank supervision, a hybrid model that blends different elements of the approaches seen elsewhere and layers them with all manner of oddities, leaving us with regulated and unregulated segments of the industry and messily dividing oversight among a ragtag collection of state and national agencies. It is the legacy of a system beholden to entrenched interests and confused by half-baked attempts at modernization that have come to the fore every few decades.
"You have to ask whether our fragmented system really did us any harm, and I think you can argue quite definitively that it did," said Richard Herring, a banking and finance professor at the University of Pennsylvania's Wharton School. "Part of it is that we don't hold our regulators and supervisors accountable for anything in particular because they're responsible for everything."
The crisis unveiled weaknesses in plenty of other systems, but few shared the more damaging features of the U.S. structure, such as the ability of financial firms to shop around for regulators. In that sense, other countries still have much to teach us, Herring said.
Congress already is pushing for rudimentary measures to help rein in the complexity of the U.S. system, proposing, for instance, to eliminate the Office of Thrift Supervision. But road maps for more sophisticated attempts at streamlining will be hard to come by, even in the estimation of Julie Dickson, who runs one of the most streamlined financial regulatory agencies in the world.
As Canada's superintendent of financial institutions, Dickson heads Canada's unified regulator overseeing banks, insurance companies and federally registered private pension plans.
"When you ask what makes an effective supervisory system," Dickson said in a recent speech delivered in New York, "there is not much material to look at."
Canada has been widely hailed for its steady navigation through the global crisis, and its successful execution of an integrated supervisory structure makes the failings of the similarly structured U.K. system seem all the more shameful. But there were other factors at work in Canada, including more stringent capital-adequacy rules and a population of banks with just a fraction of the complexity seen in large institutions regulated by the U.K.'s Financial Services Authority and in the U.S.
"As much as I like Canada, I can't give Canada's regulatory structure full credit," said Eric Pan, who studies financial regulation and international law as an associate professor at Yeshiva University's Cardozo School of Law. "Canada bet on safety and soundness over growth, and in this case it was a good choice. I don't think, though, that it's the model everyone should follow, and I don't think it's a model we could follow here in the U.S."
Pan sees no problem with the U.S. going its own way on supervision. After all, the American tradition of innovation may require a structure that is, itself, innovative.
"Structure matters only to the extent that structure determines how information flows," Pan said.
In other words, whatever the U.S. ends up with, it ought to incorporate improved methods for exchanging observations and data to help regulators spot trouble faster. It's not clear that the U.S. is heading in that direction yet — which is not surprising given that years of conventional wisdom about structural reform in this country suddenly got turned on its head by the crisis.
"If you would have asked people a few years before [the crisis] which model they would favor, there seemed to be a lot of what I would call FSA envy," said Annette Nazareth, a former Securities and Exchange Commission member who served as rapporteur for a 2008 Group of 30 report comparing supervisory models in 17 countries. "After the problems with Northern Rock [PLC] and other things that happened in the U.K., there was a sense that maybe that's not ideal either, and I think there was a greater move toward considering the approach that Australia and the Netherlands had adopted."
The model used by the Australians and the Dutch, referred to by academics as the "twin peaks" approach, typically splits oversight tasks so that safety and soundness issues fall to one agency, while business conduct and consumer protection issues fall to another. (The fourth commonly seen approach to supervision is the "institutional" approach, in which a firm's status — as a bank, broker-dealer, insurance company, etc. — determines its regulator.)
"The proposal that came out of the White House really to some extent looked like a very rudimentary twin peaks model, but it missed the opportunity to combine regulatory agencies," said Nazareth, who left the SEC in January 2008 and is now a lawyer in the financial institutions group at Davis Polk & Wardwell LLP in Washington. "The only consolidation was the OTS into the [Office of the Comptroller of the Currency]. Otherwise you still had this large number of banking regulators…and it then added a new agency, the consumer agency. It was twin peaks but without the benefits of true consolidation."
Legislation approved this week by the Senate Banking Committee looked a bit different, putting an independent consumer protection division under the watch of the Federal Reserve. The central bank also would get oversight of all bank holding companies with more than $50 billion of assets, and it would participate in an interagency council to identify and address systemic risks.
"It does look like the Fed gets a preponderance of the additional jurisdiction, particularly because of the role it will play in systemic-risk issues and 'too big to fail' entities," Nazareth said. "One has to wonder if that's a step toward greater consolidation. But that will depend, if it's adopted, on how well it works."