The labyrinth of agencies that passes for America's bank-regulatory system is once again under the microscope, but for the first time in decades, it is under serious consideration for reorganization. Three former supervisors recently sounded off about what works-and doesn't-among the web of agencies, which include the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., the Federal Reserve and the Office of Thrift Supervision. Supervision of the securities markets, regulated by the Securities and Exchange Commission and the Commodity Futures Trading Commission, is also ripe for revamping.
While at least three studies-including ones sponsored by the U.S. Treasury, Congress and New York state-are being done to answer that question, past reviews have found the system to be inefficient, complicated and duplicative. Not only do turf struggles abound, but complementary state agencies waste countless dollars fighting the federal regulators in court over territorial squabbles. Part of the impetus for the current thinking is the praise being garnered by the U.K.'s new single-regulator model for banks, securities and insurance, under the Financial Services Authority. Washington couldn't help but notice.
Meanwhile, the IPO drain from New York to London has nudged New York Gov. Eliot Spitzer into forming a panel to consider the modernization of the state's financial-services regulatory system, though he wants to maintain the state's strong tradition of investor protection. Four state agencies-the Insurance Department, the Banking Department, the Department of State and the Attorney General's Office-regulate the industry. A report, which will also consider whether to create a special international financial-services zone to benefit foreign companies, is due next year. Studies by Treasury and Congress are both due in January.
Federal reorganization has a hoary history: A committee created by President Truman in 1947 suggested a single agency: the Fed. The issue was reexamined by Presidents Nixon, Reagan, Clinton, and George H.W. Bush, with no changes made. Others have suggested Treasury combine the OCC and the OTS under one umbrella. Treasury has publicly mulled the merging of the SEC and the CFTC. Whatever the new recommendations, Treasury Secretary Henry Paulson seems antsy to act, promising sweeping alterations by early 2008. "To maintain our capital markets' leadership, we need a modern regulatory structure complemented by market leaders embracing best practices," he said in a recent press release.
"Parts of the system work very well, but as with almost anything, it could be dramatically improved," says Harvey L. Pitt, chairman of the Securities and Exchange Commission from 2001-2003 and now CEO of Kalorama Partners. He favors the single-regulator model, with Treasury at the top of the food chain.
L. William Seidman, chairman of the FDIC from 1985-1991 and now a CNBC commentator, is not optimistic about a makeover. "If you started from scratch, you would not have a system like we have," he agrees. "But politically, the chances of getting anything changed in a material way is very small. Even though our system is a nightmare, it seems to work reasonably well. Should we reform it if it's already doing its job? Yes, we should." He notes that competition among regulators might not be effective, but it improves efficiency and motivates agencies for innovation.
Seidman would like to see a single federal regulator, a combination of the OCC and the OTS with FDIC powers; and he'd turn the FDIC into a pure insurer that carries regulatory powers only when it examines banks on insurance issues. He also suggests phasing out the Holding Company Act, which he calls "archaic."
"The regulatory system is a product of history, not logic," observes Eugene A. Ludwig, Comptroller of the Currency from 1993-98, and now CEO of Promontory Capital Group. "It really reflects the founding fathers' view of appropriate economic operation and regulation. That is to say, [they] did not like concentration of final power or of governmental power. A multivariate, multipowered system is what was intended."
Ludwig would like to see "similar institutions similarly regulated, in terms of similar activities, but giving institutions a choice of charter," and he favors giving primary supervisors more authority. "What we don't need is a dozen regulators, though others can give their views to the primary regulator." Though he declined to define how he would rearrange the agencies, he says: "It is wrong to have multiple enforcement actions and so much complication that any institution has to go to two or three agencies to get something done."
Pitt says change is imminent, even though the system seems surprisingly effective. "The time has really come for us to move toward a uniform national regulatory system," he says. "The process needs to be rationalized. The way it exists right now is irrational and haphazard and chaotic." Let's see which wins: inertia or innovation.
(c) 2007
