A Few Notes On The Proposed Super Bank Regulator

In my summary of the Senate Banking Committee's new systemic risk regulatory proposal (.pdf) yesterday, I already mentioned its plans to consolidate bank regulators into one new regulator called the Financial Institutions Regulatory Administration (FIRA). This suggestion is significant enough that I think a little more detail is worth noting. I'm on board with the general idea, but I doubt it will happen.

Regulator Reorganization

As I said, the Senate draft hopes to create a brand new super bank regulator. Its power and scope would dwarf that of any current U.S. bank regulator. It would have sole power over all bank regulation, big and small, community and multinational.

In order to clear the way for the FIRA, the Senate seeks to abolish the Office of the Comptroller of the Currency and the Office of Thrift Supervision. It would also strip the Federal Reserve and Federal Deposit Insurance Corporation of all their bank regulating duties.

The Fed, then, would not lose any of its powers regarding:

monetary policy, open market operations, payment, settlement, or clearing activities, financial market utilities, or advances or extensions of credit under the Federal Reserve Act

The FDIC would not lose any of its powers regarding:

deposit insurance or resolution

Everything else would fall under the FIRA's enormous regulatory umbrella.

I think it makes a lot of sense to have just one regulator for banks. This would eliminate regulator overlap, shopping and gaps. Yesterday, Megan noted one concern, particularly with the FDIC losing its regulatory powers. I understand her worry, but think that if the FIRA works closely with the FDIC, then such an arrangement might turn out okay. Moreover, it should be noted that the Chairperson of the FDIC will sit on the FIRA's board.

The FIRA's Board

Speaking of that board -- who will it consist of? Well obviously, there will be a chairperson of the FIRA who will serve a five-year term, nominated by the President and confirmed by the Senate. There will be two additional board members appointed in the same manner (one of whom will be the "Vice Chairperson"), serving six-year terms. All three must also be U.S. citizens. The Board will then be rounded out with the Chairpersons of the Fed and FDIC.

Some Oddities

You might have noticed the odd term lengths of the appointed FIRA board members. Not only are they unusual periods -- five and six years, but they would be staggered. I guess there might be some argument that such an arrangement will help to ensure that there's always someone on the board familiar with what happened last year, but it just seems strange.

But here's what I find really amusing:

Not more than 3 of the members of the FIRA Board may be members of the same political party.

I find this requirement kind of bizarre. I get the idea that you want a bipartisan board, but how do you enforce this -- do you base it on voter registration? As far as I can see, the President appoints all of these directors. Since these are likely individuals who have not held elected office, it's hard to designate them as strictly Republican, Democrat or Independent. Staggered terms would make this requirement even more cumbersome.

Politically Difficult

Even though I like the general idea behind the regulator consolidation and refocus that the Senate offers here, I find it extremely unlikely that politics will allow a plan like this to happen. For starters, many in Washington detest the idea of creating gigantic new agencies with broad powers, no matter how good an idea it might be. It's also difficult to eliminate an agency; this plan seeks to kill two and take broad powers away from two more.

The Fed and FDIC are also unlikely to be amused. Neither will want to give up their powers, and both have considerable sway in Washington.

One option that the Senate might want to consider when revising this draft is to forget creating a new consolidated bank regulator and just consolidate all of the power to the FDIC. This would eliminate the problem that Megan mentioned yesterday. You would also likely have the FDIC on board. The ultimate result would be identical, but without the need for a new regulator.