Studying the U.S. Financial Regulatory Structure

Once again, studies of revamping and modernizing the U.S. financial regulatory system are under way. In my many, many years of experience, regulatory restructure efforts seem to come to the forefront about every decade or so. The results of these studies have uniformly conceded that the U.S. system is too complex, too duplicative, and too costly, and they have recommended various changes over the years. Yet in the past, almost none of these studies have resulted in any action. The last change of any substance was the designation of the Federal Reserve Board as the regulator responsible for the safety and soundness of the whole system. While this was a nice turf victory for its then-chairman, Alan Greenspan, it seems to have made very little change in the day-to-day regulatory world.

Of course the regulatory system for thrifts was altered as the result of the industry’s problems in the 1980s, but the change from FSLIC et al, to OTS, has not made a material difference. The reality is, the U.S. regulatory system is unarguably duplicative, complicated, and essentially uncoordinated.

So today, the financial regulatory system restructure is front and center again. There appears to be two reasons for a renewed examination at this time.

First, the UK has developed a single regulator system that removes the central bank as a regulator and provides one agency to oversee the entire financial system, including banks, securities, insurance, etc. Many financial enterprises have expressed a preference for this setup, which shows the logical result of a system designed from scratch by coordinating all the activities through one head regulator.

Second, many in the U.S. are concerned that the country is losing its position as the world leader of the financial markets and enterprises. In looking for possible reasons, the high cost and assumed “inefficiency” of the duplicative U.S. financial institutions regulatory structure has been highlighted as one of the possible culprits. Many people contend, with some justification, that in today’s global economy, business can and will move to the best business environment. As a result, studies are under way by the U.S. Treasury, the State of New York, Congress, and various academic institutions all seeking to address our nation’s inefficiencies and figure out where we should go from here.

I recently attended a meeting on this general subject held by the GAO (at the request of the Congress). A number of veterans of previous restructure studies and turf wars were present, including Wayne Abernathy of the ABA; Gerry Corrigan, former head of the New York Fed and now a Goldman Sachs partner; Roger Ferguson, former vice chair of the Federal Reserve; Mary Schapiro, chairman and CEO, NASO; Peter Wallison, well-known think tank (AET) leader; Julie Williams, senior deputy of the OCC; and many others with important real life experiences in the regulatory and financial world. The most interesting part of the excellent review of the subject by these distinguished pros was what I took to be the general agreement that while the U.S. system looks bad on paper, in fact, it has worked pretty well in the past.

Most of these past and present regulatory leaders agreed that important improvements could be made (combining agencies, centralizing control, etc.), but that the political fact was that, these major changes could not be accomplished, so let’s not spend a lot of time studying what should be done, but won’t be done.

Finally, on a personal aside, I once again noted that competition among regulators is not all bad. It improves efficiency, helps respond to the concerns of the regulated, and provides an incentive for innovation and experimentation. This thought is somewhat encompassed in the adage that “all powerful dictators can move rapidly and directly to the wrong action, while the diverse and competing leadership of a democracy will more likely stumble and stagger to the right action.”

The bottom line on the U.S.’s financial structure seems to be:

u2022 It looks worse than it is.

u2022 It could be improved, but that would require unobtainable legislation under current conditions.

u2022 Change will take place when enough financial businesses “vote with their feet” and move their headquarters and businesses abroad. So we’ll hang in there, for now.

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