Congress is at a crossroads: Continue on a course that will guarantee a future of painful, too-big-to-fail moments, or embrace regulatory reform that will ensure the diversity and safety of our nation's financial infrastructure?

Despite the huge taxpayer-funded bailouts, it appears that a handful of the biggest banks, their federal regulators and other federal officials are pushing for the "bigger is better" approach.

The very premise of Tuesday's Senate Banking Committee hearing on regulatory reform is that consolidation equals reform and that creating a monolithic regulatory structure somehow inherently leads to a stronger and safer banking system. Those of us working at the state level know this premise is false.

Consolidated supervision eliminates valuable checks and balances and effectively minimizes resources and expertise that should be applied to financial supervision. Beyond that, consolidated regulation would undoubtedly lead to drastic consolidation in the industry itself, having huge impacts on smaller banks, the communities they serve and the financial infrastructure as a whole.

If the current financial crisis has taught us nothing else, it has highlighted the need for a diverse financial services industry to maintain the flow of credit, even while the largest institutions were incapacitated. President Obama, members of Congress and regulators have all praised the role played by community banks in maintaining credit availability, which kept the economy from complete collapse. The financial regulatory reform now being contemplated, however, would do irreparable damage to the state banking system, which has been the source of our financial system's diversity.

As my colleague Joe Smith, the North Carolina banking commissioner, recently told the House Financial Services Committee, Congress should reject "a highly concentrated and consolidated industry that is too close to the government and too distant from the consumer and the needs of our communities" in favor of regulatory incentives that focus on "consumer protection and directly address and end 'too-big-to-fail.' " As Joe said, "To prevail through the next crisis, we need a diverse industry, not a handful of megabanks."

The current crisis has reminded us once again that regulators are fallible. Sometimes the workload is overwhelming; sometimes regulators get too close to the institutions we supervise to fully appreciate emerging risks. Sometimes regulators are not close enough to an institution or a community and unfairly or inappropriately apply sweeping remedies.

Supervisory consolidation would only magnify these problems. A consolidated regulatory structure would have not only not prevented the crisis but also made things worse. With the powers they already had, federal regulators sought to block enforcement of state laws intended to protect consumers from predatory lenders.

Effective regulatory reform should create a system of supervision that promotes and maintains a financial services industry that is safe, sound, diverse and competitive while offering a broad range of borrowers access to sustainable credit. Most important, a reformed financial services structure must give consumers confidence that the system is protecting them from abusive practices and providers. And it must encourage industry innovation and prudent growth but also create robust safeguards to shield taxpayers from liability and to prevent excessive risk-taking and leverage.

To reduce the effects of the next inevitable crisis, we need a diverse industry held accountable by willing and able state and federal authorities armed with the legal and statutory tools necessary to provide comprehensive supervision and effective consumer protection.

As a first step, Congress must halt federal regulatory preemption of state consumer protection laws. Further, it should not limit the number of cops on the beat by consolidating regulators, should encourage better coordination among state and federal regulators and should remove barriers to effective supervision. Finally, Congress must give the Federal Deposit Insurance Corp. the authority to develop a resolution regime ensuring that no institution is ever again deemed "too big to fail."

Some in the industry see these checks and balances as impediments to their success. The notion that institutions that willingly enter into extremely complex financial deals are incapable answering to effective and thorough state and federal regulation is at best disingenuous. Requiring institutions to slow down a bit to comply with regulations and explain themselves to supervisors is the fundamental benefit of any kind of regulation. It is, in fact, the only way we have to ensure that consumers are protected and our financial infrastructure remains sound.

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