It would be difficult to argue that our current regulatory framework is perfect. But as the new administration and Congress examine possible regulatory reform, it should be clear that amendments must preserve banking regulation and supervision’s vital role in the proper functioning of our economy. We now have the strongest banking system in the world. This is a tribute both to the quality of bank management and to many sound supervisory decisions.
Almost 200 years of U.S. history has taught us that a serious level of bank regulation and supervision is mandatory. The “wildcat” banking system of the early 19th century was an experience no one would want to recreate, particularly with today’s interconnectivity and volatility embedded in a modern, technologically sophisticated global economy.
Furthermore, if changes to safety and soundness rules are too severe and we experience a crisis period even half as problematic as 2008, the pendulum will again come crashing back. The public and lawmakers on both sides of the aisle will not tolerate another 2008.
A blind rollback would not be productive. But there are some prudent changes to bank regulation and supervision that would reduce the burden on financial institutions while maintaining safety and soundness. Here are four ideas that this, or any administration, could consider:
Penalty-free right to appeal all regulatory and enforcement actions
Prosecutors have learned that the public threat of action can so damage a bank or an individual that the only course is to settle on unfavorable terms. In a free-market economy and a country that prides itself on freedom and civil rights, it is essential that everyone be granted a fair right to be heard before an impartial reviewer of the facts and relevant rules.
While our current system has bits and pieces of this — administrative law judges, ombudsmen and judicial relief — none of these mechanisms really work to offset the power of threatened regulatory investigation or action. Installing an appeals process within the regulator itself would provide firms with greater confidence that their position will be heard.
Streamline the regulatory agencies
The multitude of agencies that regulate, examine and/or enforce rules against banks increases the risk of regulatory redundancy, to say nothing of the complexity of having to deal with multiple bodies.
Most large banks answer to multiple regulators, which can have the unintended consequence of intra-agency competition. Reporting to one or two agencies would be enough.
Although streamlining the agencies would not be easy, virtually every presidential administration of both parties since World War II — including the one in which I served — has been in favor of it.
Simplify Volcker Rule compliance
I believe that even my friend Paul Volcker — the former Federal Reserve Board chairman and original architect behind banning banks’ proprietary trading — would agree that the regulatory compliance burden associated with the Volcker Rule is too complex. Simplification of these rules could achieve the statute’s goals while minimizing burden.
Put loss reserve calculations back in the hands of banks
As I have long said, the allowance for loan and lease losses (ALLL) is a key safety tool that the accounting profession, in essence, took from the banks in the late 1990s. Regulators and bankers alike understand that this has hurt bank safety and soundness. It is inexcusable that this transparent bank regulatory tool was turned into a wooden accounting mechanism.
This is not an exhaustive list, but if these specific reforms are considered, we could reasonably expect they would reduce burden while not harming safety and soundness. Indeed, I would argue that these changes would enhance the safety of the banking system. On the other hand, going too far in rolling back regulations and straying into areas that could weaken safety and soundness would again place our financial system and economy in a vulnerable state.