Restructuring U.S. federal financial regulation

Contemporary Economic Policy, July, 2007 by Rose M. Kushmeider

Horvitz (1982, p. 44) argued that the complicated regulatory structure that now exists came about in response to several traditional themes in U.S. history. Among them are a distrust of concentrations of financial power, including a concentration of regulatory power; a preference for market competition; and a belief that certain sectors of the economy should be ensured access to credit. The nation's complex regulatory structure was designed to deal with all these sometimes conflicting objectives.

It is precisely because the patchwork nature of the system remains an artifact of U.S. politics that there has been no comprehensive overhaul of the federal financial regulatory system. (8) Despite the complexity of the system and the resulting plethora of proposals for change, concerns about concentrations of power, preservation of the dual banking system, and the role of the central bank, among other issues, dominate the debate, now as in the past. The repeated failure of proposals to reform the system suggests how sensitive the issues are for the many parties involved.

III. A NEED FOR REFORM? ARGUMENTS FOR AND AGAINST

Proposals for regulatory restructuring have a long history in the United States. The arguments for reform focus primarily on the issues of regulatory overlap and duplication, while the arguments against focus on the notion that despite its faults, the present regulatory system works well. Virtually, every study of the federal financial regulatory system has recommended some form of regulatory reform. The goal of most of the studies has been to streamline regulation within the banking industry, so that there is less overlap among the federal regulators and fewer federal regulators examining the same banks and bank holding companies (BHCs).

A. Arguments for Regulatory Reform

The debate about reform is grounded in the complexity of the U.S. financial regulatory system. The complexity of the system has several undesirable consequences that reformers seek to mitigate or eliminate.

Overlap and Duplication. The system as it has evolved entails substantial overlap and duplication in the regulation and supervision of financial institutions, especially BHCs. It is common for BHCs and their subsidiaries to have more than one federal regulator and for their roles to overlap. For example, in its examination of national banks, the OCC looks at a bank's interactions with its nonbank affiliates; the Federal Reserve frequently repeats part of this process when it looks at nonbank subsidiaries in connection with its inspection of BHCs. Further, as the permissible activities of financial conglomerates have expanded, so has the potential for overlap and duplication between bank and other financial services regulators. Under the Gramm-Leach-Bliley Act of 1999 (GLB), for example, the securities broker-dealer of a financial holding company (FHC) is regulated by the SEC, but the Federal Reserve is the FHC's umbrella supervisor. Another often-cited area of duplication is in antitrust enforcement, which is carried out by the Federal Reserve, the DOJ, and the states.