Restructuring U.S. federal financial regulation

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

In addition to blurring the lines of authority, the current federal financial regulatory system makes it hard for any one agency to be held accountable for its actions or lack thereof. Such an absence of regulatory accountability enables regulators to pass the buck; but, more importantly, it may leave holes in the regulatory structure--regulatory gaps--that should not go unfilled. The complicated structure of regulation may lead to some problem or abuse not being detected because a particular agency believes that the problem lies in some other agency's jurisdiction. Determining whether there are deficiencies in laws or regulations may be difficult when those laws or regulations are administered by multiple agencies.

B. Arguments against Regulatory Reform

Critics of regulatory reform proposals have been effective at preventing a wholesale restructuring of the federal financial regulatory system and are likely to continue being effective. Experience suggests that the constituency for maintaining the status quo is strong.

Arguments against regulatory restructuring frequently revolve around two notions--that the present system has worked reasonably well and that a single agency will not assure uniform performance in all supervisory activities. It is hard to disagree with these notions. Despite the regulatory burden imposed by the present system, banks and other financial services providers appear quite profitable and the United States has developed the broadest and deepest financial markets in the world. In addition, there is much to be said for the notion that a single federal regulator may become too bureaucratic and unwieldy.

But the corollary argument--that multiple regulators are necessary to preserve the process of dynamic tension in bank rulemaking--seems at odds with the changes that have occurred in bank regulation and supervision. Over the past 25 yr, much effort has been made to bring uniformity and consistency to the federal bank regulatory process. For example, recognizing that insured depository institutions faced multiple federal regulators--with sometimes conflicting rules and regulations, in 1978, Congress passed the Financial Institutions Regulatory and Interest Rate Control Act. This act created the Federal Financial Institutions Examination Council to promote consistency in the examination and supervision of financial institutions. (10)

Supporters of the regulatory status quo also cite as important the goal of maintaining the dual banking system. Proposals for regulatory restructuring, however, have focused on regulation at the federal level and have not challenged the right of states to charter and supervise banks. Additionally, supporters of the status quo have not suggested how to deal with the stresses that bank mergers and consolidation have placed ont he viability of the dual banking system. Legislation--such as the Depository Institutions Deregulation and Monetary Control Act of 1980, the Financial Institutions Reform, Recovery and Enforcement Act of 1989, and the Federal Deposit Insurance Corporation Improvement Act of 1991--has reduced the differences in banking regulations and powers between state-chartered and national banks and has increased the regulatory authority of the federal bank regulators vis-a-vis state regulators over commercial banks.