Watch for the nomination of a new comptroller of the currency. The choice to succeed John Dugan, who leaves on Aug. 14, will be one of many indicators whether the financial reform legislation is going to have a meaningful impact on our severely damaged financial system.
Like many others, I believe that the financial reforms, for all their faults, are better than nothing. But the new law turns the spotlight on regulators with an intensity seldom seen in economic regulation.
Congress placed enormous faith in the ability of regulators, who have not covered themselves with glory so far, to take sweeping discretionary actions to produce a more stable financial system, one that adds economic value and tolerates less exploitation of the public in pursuit of private profiteering for which neither skill nor contribution to gross national product is proportionate to the reward.
Can we realistically hope that regulators will do better than in the past?
Among the key areas to watch is the role of the Fed. Defying all odds, the Fed has survived immense public criticism of 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 will be tested to the limit.
Another crucial, impending regulatory appointment is head of the Consumer Financial Protection Bureau that, though housed in the Fed, will have a great deal of independence. Here the fight over who will be nominated has already broken out, with the Treasury Department apparently doing what it can to prevent Elizabeth Warren's appointment. We should not underestimate what is at stake here: To start out with, an agency that is already captured by the industry would be a tragedy.
Nominating a new comptroller has not gained much public attention, yet it is as important as any appointment. The comptroller charters national banks and, under the reform legislation, would do the same for federally chartered savings and loans. The Office of the Comptroller, a venerable agency within the Treasury Department, has taken a lot of (often unfair but sometimes accurate) blame for using federal preemption to dilute state consumer protections.
The comptroller is in effect the primary regulator for the banks that form the cores of the largest financial conglomerates in the nation and those that pose most risk to financial stability. Though it will be the job of a new 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 the most likely factor ensuring their safety and soundness and preventing problems from getting out of control. This will be the job of the comptroller's office.
It is therefore crucial 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 will be biased in favor of it. As the French say, "To understand all is to forgive all."
So the trick is to find an outsider, possessing knowledge, experience and credibility yet not already too close to the industry. Hard as this challenge might be to meet, two outstanding possibilities exist. They are not the people mentioned in the media, including, as American Banker reports, the Fed's Tarullo, Treasury Assistant Secretary Michael Barr (also said to be under consideration for the consumer bureau post) and FDIC Vice Chairman Marty Gruenberg. These are, by definition, already deep insiders.
The two possibilities who possess ideal combinations 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 enlarged comptroller's office. Both are highly respected in the industry, and both have credibility in the consumer protection arena.
Both bring to the table a dimension that has largely escaped public attention. Commissioner Smith, as immediate past chairman of the Conference of State Banking Supervisors, was a spokesman for the important, state-chartered part of our banking system, and Superintendent Neiman holds high office in the association.
I have observed both Smith and Neiman in action and have the highest regard for their sense of public service. They know how the whole banking system fits together and how to stand up to large financial institutions. Neither can be accused of too-cozy relationships with the bankers whom they might be supervising.
We need a strong regulator who is not enamored of the virtues of national banking at all costs and who understands the damage to local economies that global institutions can wreak, whether intentionally or not. Given the possibility of two very strong appointments, it will be interesting to see whom the administration nominates and what the rationale is if a Washington insider or Wall Street favorite is chosen over one of these two.