Super-Regulator

[kent nickell]

More good advice from Sheila Bair....

http://www.nytimes.com/2009/09/01/opinion/01bair.html?_r=1

Op-Ed Contributor

The Case Against a Super-Regulator

By SHEILA C. BAIR
Published: August 31, 2009

Washington

THE Obama administration has proposed sweeping changes to our financial regulatory system. I am an active supporter of the key pillars of reform, including the creation of a consumer financial protection agency and the administration?s plan to consolidate the supervision of federally chartered financial institutions in a new national bank supervisor. This consolidation would improve the efficiency of federally chartered institutions while not undercutting our dual system of state and federally chartered banks.

But some are advocating even more drastic changes, like the creation of a single regulator for all banks (and bank holding companies). We clearly need to streamline the system, but a single regulator is not the solution. Calls for consolidation beyond the administration?s plan fail to identify the real roots of last year?s financial meltdown. The truth is, no regulatory structure ? be it a single regulator as in Britain or the multiregulator system we have in the United States ? performed well in the crisis.

The principal enablers of our current difficulties were institutions that took on enormous risk by exploiting regulatory gaps between banks and the nonbank shadow financial system, and by using unregulated over-the-counter derivative contracts to develop volatile and potentially dangerous products. Consumers continue to face huge gaps in personal financial protections. We also lack a credible method for closing large financial institutions without inflicting severe collateral damage on the economy.

The creation of a single regulator for all federal- and state-chartered banks would not address these problems. Rather, it would endanger a thriving, 150-year-old banking system that has separate charters for federal and state banks. Within this system, state-chartered institutions tend to be community-oriented and very close to the small businesses and consumers they serve. They provide loans that support economic growth and job creation, especially in rural areas. Main Street banks also are sensitive to market discipline because they know that they?re not too big to fail and that they?ll be closed if they become insolvent.

Concentrating power in a single regulator would inevitably benefit the largest banks and punish community ones. A single regulator?s resources and attention would be focused on the largest banks. This would generate more consolidation in the banking industry at a time when we need to reduce our reliance on large financial institutions and put an end to the idea that certain banks are too big to fail. We need to shift the balance back toward community banking, not toward a system that encourages even more consolidation.


A single-regulator system could also hurt the deposit-insurance system. The Federal Deposit Insurance Corporation currently supervises state banks. The loss of a significant regulatory role would limit its ability to protect depositors by identifying and assessing risks in the financial system.

We can?t put all our eggs in one basket. The risk of weak or misdirected regulation would be increased if power was consolidated in a single federal regulator. We need new mechanisms to achieve consensus positions and rapid responses to financial crises as they develop.

I have advocated the creation of a strong council of federal financial regulators. This council would monitor the financial system to help prevent the accumulation of systemic risks and would also have the authority to close even the largest institutions. But we don?t need ? and can?t afford ? to depend on one supreme regulator to have sole decision-making authority in times when our entire financial system is in flux.

One advantage of our multiple-regulator system is that it permits diverse viewpoints. The Federal Deposit Insurance Corporation voiced strong concerns about the Basel Committee on Banking Supervision?s relatively relaxed rules for determining how much capital banks should have on hand. In a single-regulator system, it?s very likely that these rules would have been put into effect much more quickly and with fewer safeguards, and our largest banks would have faced the current crisis with much smaller buffers of capital. This is not about protecting turf. This is about protecting consumers and the safety of our financial system.

Working with Congress, we need to draw on the best ideas available to plug regulatory gaps as outlined in the administration?s proposal. We may never have a better opportunity to address the root causes of this crisis ? and prevent it from ever happening again.


Sheila C. Bair is the chairman of the Federal Deposit Insurance Corporation.

 

[Snowy Owl]

Re: Super-Regulator

Time to Rein In State Support?

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Assessing the Global Recovery at the G-20 Summit

By Mark Scott
Sunday, September 6 2009



G-20 finance ministers and central bankers are meeting in London ahead of the upcoming Pittsburgh summit.


One of the main issues on the agenda is figuring out when to pull back on stimulus funding and implement financial reforms.

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Global policymakers have seen a lot of each other lately. In mid-August, many of the world's central bankers gathered in Jackson Hole, Wyoming, to talk shop. On Sept. 4-5, finance ministers and central bankers from the Group of 20 developed and emerging countries will meet in London to gauge the global economy's tentative recovery. That comes ahead of the next G-20 summit in Pittsburgh at the end of September.




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For Tim Geithner, Ben Bernanke, and the other officials flying to London on Sept. 4, there is room for optimism. An unprecedented volley of monetary and fiscal programs -- ranging from slashing interest rates to buying up corporate debt -- has pulled the world's economy back from the edge. A rise in leading economic indicators, such as manufacturing confidence and stock market activity, also suggests the worst of the recession may now be behind us.

With economic green shoots beginning to sprout, the London meeting is expected to focus on what policymakers plan to do next.

On deck is a further round of financial regulatory reform, including a French-backed proposal to curb bank bonuses, which will feature prominently at the upcoming G-20 meeting in Pittsburgh.



And after countries forked out billions of dollars to prop up struggling domestic industries, politicians are starting to wonder when the financial support should be reined in.



Economists worry, though, that pulling back before a worldwide recovery has firmly taken hold could wipe out much of the last 12 months' hard work.



"We've come a very long way, but I think we have to be realistic," US Treasury Secretary Geithner told reporters on Sept. 2. "We've still got a long way to go."



Exit Strategy

Policymakers' desire to shift from economic triage to an exit strategy for their financial intervention is understandable. Since its March 2009 lows, the S&P 500 index has jumped almost 50 percent, while European stock markets have risen roughly 30 percent over the same period. US declines in gross domestic product have bottomed out, France and Germany -- the largest economies in the 16-country bloc that uses the euro -- reported a slight quarterly GDP gain between April and June 2009, and Chinese officials recently confirmed the country is on track for an 8 percent growth rate this year.



But before policymakers break out the champagne, many analysts urge caution as the global economy stumbles through the worst downturn in living memory. Jonathan Loynes, chief European economist at London consultancy Capital Economics, says public spending, like the successful cash-for-clunkers schemes, has predominantly driven recent gains.

In contrast, the private sector across the Western world is still struggling from the dwindling availability of credit. That's not expected to recover until well into 2010. "It'll be a long time before we get back to where things were before the recession," he says.




Organizing a unified pullback in global stimulus spending also could be like herding cats: difficult at the best of times, almost impossible in the current climate.



The recession has hit individual countries in various ways. In response, policymakers have adopted different measures to fit specific circumstances.



In the US and Britain, for instance, the financial-services industry's problems have forced politicians to nationalize, or at least reinforce with public funds, struggling institutions.



France and Germany -- whose banks were less affected -- have focused on state aid for failing domestic industries.



And in cash-rich China, the government is spending $586 billion (?406.5 billion) to upgrade local infrastructure. "It's not a one-size-fits-all problem," says Gareth Claase, European economist at the Royal Bank of Scotland (RBS) in Edinburgh.



More Stringent Rules

One area where policymakers agree on is financial regulatory reform.

The excesses of the pre-credit crunch era -- opaque trading practices, short-term bonus incentives, and a reliance on credit markets -- have drawn criticism from US President Barack Obama to his French counterpart, Nicolas Sarkozy.
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Already, American and European politicians have pushed through changes. Based on proposals outlined at the London G-20 summit in April 2009, ratings agencies, complex derivatives trading, and alternative investments such as hedge funds and private equity have all come under a more stringent regulatory umbrella. That includes adding independent board members to scrutinize business activity and allowing officials to monitor companies' trading activity.

Now, European politicians want cutbacks on bank bonuses.
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On Aug. 25, France's Sarkozy announced new restrictions on bonus payments for French traders whose investments go belly-up. Angela Merkel, the German Chancellor, soon backed the move, which will be discussed at both the upcoming London summit and the larger G-20 meeting planned for later this month.



And while banks based in New York and London may balk at proposed limits to multimillion-dollar remuneration packages, Graham Bishop, a British regulatory expert, says the winds are firmly behind Sarkozy and Co. "Wall Street isn't the flavor of the month, and there's a lot of political impetus already out there for [bonus caps]," he says.

For sure, US policymakers may be unwilling to go as far as the French. On Sept. 2, Geithner said he was looking forward to "hearing more about their ideas," but declined to voice his opinion on limiting bonuses.
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With so much to discuss during the two-day London summit, that's not surprising. Until the global economy finally recovers, Geithner and other global policymakers will have many more summits to flesh out the details.



Scott is a reporter in BusinessWeek's London bureau.