In response the ever-increasing criticism of the federal banking regulatory agencies, each agency has tried to demonstrate how essential its particular role is in bank supervision — the Office of the Comptroller of the Currency being the only agency whose sole mission is bank supervision, the Federal Deposit Insurance Corp. being the only agency overseeing deposit insurance and the Federal Reserve Board being, well, that agency in charge of just about everything.

The agencies have also tried to demonstrate how forceful and effective they have been in the area of enforcement. This unseemly competition is changing former Fed Chairman Arthur Burns' "competition in laxity" maxim to an effort to resurrect former Comptroller Robert Clarke's self-professed image as the "Regulator from Hell."

But the long-term issue for effective regulation is not whether there should be more administrative actions, but whether it makes sense to have four federal banking agencies doing the same thing and implicitly — and sometimes explicitly — competing with one another. Currently, we have two agencies supervising state banks and dividing up the universe not by virtue of any rhyme or reason, but by virtue of a choice made by the banks.

Of course, there are also three agencies supervising the commercial banks of the country. (In light of the fact that there is no longer much difference between banks and thrifts, there are arguably four agencies all doing the same thing.) Again, the divvying of responsibilities rests with the banks, not with logic. This, of course, leads to regulatory arbitrage, which makes no sense at any time, but especially not when we are facing a financial meltdown.

The only way to eliminate this arbitrage and needless overlapping is to consolidate the federal banking agencies into one. Having one agency will not ensure that it will make all the right decisions — witness the Securities and Exchange Commission and the Madoff debacle. But consolidation will eliminate overlap and conflict and will establish uniform regulation.

It will eliminate the appearance of a conflict of interest whenever an agency grants a new power, provides a liberal interpretation of a statute, preempts a state law or takes an informal action instead of a formal one. This conflict is based on the fact that the OCC and the Office of Thrift Supervision live on assessments, and all the agencies strive for more authority and prestige.

(It is curious that the underlying competition among agencies — which started when the Fed was created and proposed legislation to abolish the OCC — includes the FDIC's recent criticism of preemption efforts by the OCC and the OTS. These efforts have spawned numerous lawsuits and raised questions as to whether consumers have been hurt by this conflict.)

Many, including the OCC, the FDIC and Senate Banking Chairman Chris Dodd, support regulatory reform, but they raise historical concerns which should be put to rest.

First, there is the argument that consolidation would eliminate the checks and balances derived from having multiple agencies. One forgets that the OTS has no duplicate agency overseeing thrifts or thrift holding companies that could assert a check or balance. More importantly, there really are no checks or balances between any of the agencies. The OCC, for instance, cannot overrule the Fed or the FDIC to resolve problems or to prevent improper decisions or actions. Only the courts and Congress can do so.

Second, there is the argument that a consolidated agency would have too much power. There are no multiple Department of Justices, Internal Revenue Services or, as Comptroller John Dugan noted, Food and Drug Administrations.

Further, this fear harkens back to the populist opposition fomented by President Andrew Jackson to the Second Bank of the United States (which he allowed to lapse in 1836). It wasn't until a series of panics, most particularly the 1907 one, that the country realized it needed a central bank. Similarly, we need a strong central bank regulator, not a "crazy quilt pattern" of bank regulation.

Third, there is the argument that a consolidated agency would not be innovative. Perhaps the current agencies have been too "innovative" in their "race to the bottom." Further, recent innovations (good and bad) — derivatives, mortgage-backed securities, interstate banking and the elimination of Glass-Steagall Act restrictions — have not been the result of agency action, but of industry efforts. In addition, most substantive changes have been through the legislative process, not the regulatory one.

I would suggest that there be a consolidated federal regulator in charge of bank supervision, and that the Fed and the FDIC be allowed to focus on their respective primary responsibilities of monetary policy and deposit insurance. (I don't agree with the argument that the Fed needs to be directly involved in bank regulation, given the fact that Bear Stearns, Lehman Brothers, American International Group and even Citigroup and Bank of America were not supervised directly by the Fed, and yet the Fed was able to respond to their issues.)

I would also suggest that there be a systemic risk supervisor — probably the Fed — that would oversee the risk of the entire financial system but would not duplicate the examination or supervisory duties of the consolidated federal banking regulator.

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