What About Forum Shopping?

For those who haven't seen it, Sheila Bair, chair of the FDIC, has an op-ed in today's New York Times. In a piece entitled The Case Against a Super-Regulator, she argues that creating one regulator with authority over all our financial institutions would be a mistake. She supports Obama's plan for a consumer financial protection agency that would be regulate the consumer side of banking, but opposes consolidation of the other regulatory functions. Her main argument is that a centralized, necessarily federal regulator would neglect the smaller banks, which currently tend to be regulated by the states (with backup from the FDIC). She is also concerned that we would be putting all our eggs in one regulatory basket. I agree with most of her points. Small, state-chartered banks did do a better job than the larger, federally-chartered institutions of not overextending themselves during the housing bubble and tend to be in better shape now. I also share her concerns about the potential for a single regulator to ignore the next budding financial crisis until it was too late.

But she fails to address the most powerful argument for consolidation: forum shopping. Right now, financial institutions basically get to choose their regulator. It's the company's charter that determines whether it's a bank or a thrift, whether it's a state entity or a national one -- and institutions can change their charters. In fact, the notorious Countrywide Financial did just that in 2007. On a mission for weaker regulation, Countrywide changed its status from a bank to a thrift, thereby changing its regulator from the OCC to the OTS. Given that the OCC and OTS derive large portions of their budgets from fees assessed on the institutions they supervise, it's no surprise then that both agencies not only failed to enact enough of their own regulations during the subprime boom, but also aggressively fought off the regulatory attempts of other governmental entities, such as New York and California. If we maintain our current system of fractured financial supervision, we must find some way of dividing authority so that the regulators can monitor the banks rather than the other way around.

Comments

[John Pottow]

Fair enough, but what about market symmetry? Shouldn't we federalize this all at the national level given the current state of the consumer banking market? (That's a genuine question, I don't know if there are really lots of Ma & Pa banks operating at a truly local level.) I get the eggs-in-one-basket argument, but you could say that about anything federal, like the FAA, but I still want one regulator for airplanes.

[beezer]

I agree with Bair's observations, but not her conclusion. A systemic oriented regulator doesn't exist right now. Our recent experience has brought a new, and different, regulatory focus that didn't exist before.

This focus logically would need a different structure where someone has a well defined, overarching, focus on systemic risk. It does not follow that having this regulator means wholesale consolidation of the existing regulators. Some may be combined, and probably should be, to avoid the "shopping" we witnessed recently.

[Jennifer]

I understand the argument, however, from the consumer standpoint it is very confusing to figure out where to get help for an issue. The confusion, and lack of consumer knowledge of who regulates what type of lending, is what led to the economic crisis.

Many lenders count on consumers not hitting the right agency to "blow the whistle", becoming frustrated, and going away. I saw first hand working inside the financial industry for more than 20 years the meetings where it was debated how far they could push the limits of the law to generate profit.

By simplifying the process, I beleive you eliminate the consumer confusion and prevent the usury from spiraling out of control.

[Shawn Mosch]

I agree with the above comment of

"from the consumer standpoint it is very confusing to figure out where to get help for an issue. The confusion, and lack of consumer knowledge of who regulates what type of lending, is what led to the economic crisis."

Another thing that is confusing to the average customer . . . the wording that many of the banks use. I have talked about this a lot in relation to counterfeit cashier's checks. My question is this . . . would creating one regulator with authority over all our financial institutions allow them to more easily "talk" to each other and actually verify that a cashier's check is legit before the money is released to the customer.

As of now, with all of the computers and programs we have, one bank cannot verify a check within 24 hours, but with one phone call to the issuing bank the customer can verify that the check is drawn on a valid account and has enough money to cover the check in that account. Seems to me that there could be a computer program created that would do this same thing, if all of the banks would allow or be required to provide this information to one regulator.

Shawn Mosch
Co-Founder of Scam Victims United

[Michelle Color Me Shocked]

How about looking at what other countries do? In most other countries, there is only one regulator of deposit-takers. Many have the same regulator also regulating insurance companies. Name one example of better results from having multiple regulators of essentially similar institutions. You won't find one.

If you are worried about making sure small banks get the right attention, organise the regulator INTERNALLY to have a Complex Group division and a Simple Deposit-Taker division. But the important point is, the regulator (not the bank) chooses which bucket the bank goes in, and gets the fee either way.

America will never break free of its tendency to trash its financial system every decade or so until it learns that most other industrialised countries have set things up better than America has, and that America should learn from those other countries.

The foreigners are sitting back not knowing whether to laugh or cry at the stupid Yanks who keep screwing up the financial system.