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Democratic Sen. Chris Dodd is introducing legislation that could dramatically overhaul the financial regulatory system. His sweeping proposals would establish a new agency, the Financial Institutions Regulatory Administration, that would put all regulation under one roof, taking over the responsibilities of America's four current regulatory agencies. That means Dodd's bill would strip the Federal Reserve, now chaired by Ben Bernanke, of much of its oversight authority. Dodd would also establish the Consumer Financial Protection Agency and the Agency for Financial Stability. This plan is a sharp departure from measures preferred by the Obama administration. Dodd's plan to weaken the Fed stands in stark contrast to the House's regulatory bill, spearheaded by Democratic Rep. Barney Frank, which would increase the Fed's authority. Should our regulation be this centralized?


  • New 'Systemic Risk' Regulator  The Atlantic's Daniel Indiviglio surveys the proposed agencies. "This marks a big difference between the House and Senate versions. In the House version, a systemic risk council was created that had little actual regulatory power. Most regulation was left to the Federal Reserve. Dodd's version creates an entirely new agency to take on systemic risk regulation. The president would appoint an independent chairman to head the agency," he writes. "The Senate version also goes a little further than the House version in consolidating bank regulators. The House abolished the Office of Thrift Supervision. Dodd's bill, however, would end the bank regulation authority of Office of the Comptroller of the Currency, the Office of Thrift, the FDIC and the Fed, and concentrate it in just one new regulator."
  • Fed Best at Monitoring Risk  Econoblogger Felix Salmon is skeptical of the Agency for Financial Stability. "On this I think I have sympathy with Treasury: the Fed in general, and the New York Fed in particular, is better placed to monitor these risks than a brand-new agency with no direct ability to supervise banks or to break them up." But he likes the FIRA. "About time too."
  • Fed Shouldn't Regulate System Risk  Mother Jones's Kevin Drum insists the Fed has to get out of systemic risk regulation. "First, the Fed has demonstrated pretty conclusively over the past few years that it's too close to the banking industry, and too invested in its success, to ever be objective about the broad level of risk in the banking system. Second, pronouncements from the Fed are too powerful. The Fed would (rightly) be very reluctant to make public statements about systemic risk for fear of sending markets into a tailspin. So it wouldn't."
  • Cuts Wall Street Out Of Regulation  The New Republic's Noam Scheiber loves the idea of ending the Fed's practice of including private bankers in its leadership. "Dodd's idea of having the Fed Board nominate directors, and the president nominate the chairman, of the regional Fed banks strikes me as a huge substantive and political improvement. Substantively, it's insane that big Wall Street firms get to choose the directors of the New York Fed, which is often their chief regulator. Politically, it's even worse--it only fuels suspicions that the Fed exists to serve the interests of big banks. If, by proposing to basically neuter the Fed, Dodd is able to compromise at preserving the Fed's regulatory role while reducing the influence of big banks, he will have accomplished a ton."
  • FIRA and 'Moral Hazard'  The Atlantic's Megan McArdle cautions that having a single agency creates accountability problems. "This does indeed seem sort of crazy to me, and not just because the FDIC has indeed done a good job.  The agency works so well because it can control its risk exposure--banks that want the safety net have to abide by its rules, mostly.  Stripping that away introduces moral hazard to both the banking system, and the government--whoever this new central regulatory authority is, another agency will pay for its mistakes.  It also seems like this would make the FDIC's tricky job even trickier."
  • Don't Weaken FDIC  The National Review worries a new agency would pull authority away from the effective FDIC. "Of all the federal regulators, the Federal Deposit Insurance Corporation has performed most capably during the subprime fiasco. It has performed as well as it has because it has a fairly narrow, well-defined mandate — insuring Americans’ bank deposits — and because banks backed by the FDIC are obliged to play by its rules. It makes sense that the insurer of depository institutions is also their regulator: Because the FDIC is on the hook for bank deposits, it has a good financial incentive to manage banks’ risks intelligently. Under the Dodd proposal, the FDIC would still be on the hook, but its regulatory authority would be transferred to a new regulator, which would not have the same powerful financial incentive."
  • Not So Different From House Bill  The American Prospect's Tim Fernholz suggests Dodd's overhaul is philosophically similar to that backed by Barney Frank and the House, which does not call for a single agency. "Don't get confused: On the whole, the mechanisms and ideas are very similar to those in the House bill, but the structures are a different -- it's more about who than what or how, with different offices being created to do much the same tasks and enforce the same rules that are in other proposals," he writes. "If Dodd can overcome the objections of regulators, banks and Republicans, and pass his ideas in the senate, I think, somewhat counter intuitively, it won't be too hard to combine that version with the House bill because the underlying philosophies are so close."

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