If you're a Wall Street bank, chance are you have a holding company that houses your national bank and broker-dealer or investment operations.
That means the Federal Reserve examines your holding company, and the Office of the Comptroller of the Currency, Federal Deposit Insurance Corp. (as your insurer) and the Consumer Financial Protection Bureau inspect your national bank. Meanwhile, the Securities and Exchange Commission looks after your broker dealer.
Arguably, all of these regulators are needed to keep an eye on the unwieldy, complex operations of today's big banks. But a new study from the Bipartisan Policy Center suggests that there are too many cooks in the regulatory kitchen.
In their role as prudential supervisors, these agencies are out to ensure that banks have enough capital to lend, are not doing things that are too risky and are generally not endangering the entire financial system. It's not like they don't work together toward that end, but the study argues that each agency has a specific mission that leads regulators to pursue different objectives. As a result, there is duplication of expertise, human resources, operations, planning and management.
The solution? Consolidation.
"Our objective is not to create a structure from a blank slate; let's create clearer lines of accountability and responsibility," said Richard H. Neiman, a former New York State superintendent of banks, who co-authored the report with former Fed governor Mark Olson.
Neiman and Olson envision folding the supervisory and examination authority of the OCC, FDIC and Fed into a new Prudential Regulatory Authority (one prudential regulator to rule them all!). That super regulator would reign over all banks, thrifts and their holding companies and would set capital, liquidity and risk management standards.
This wouldn't kick the Fed and FDIC out of the regulatory picture. The central bank would become the point agency on "macro-prudential" supervision, meaning it would be responsible for overseeing financial market trends, activities, products and practices that could rattle the entire system. The FDIC would hold onto its gig as an insurer and resolution agency, while serving as a backup supervisor for all the institutions whose deposits it insurer.
If Neiman and Olson had their way, there would no longer be a separate SEC and Commodities Futures Trading Commission, but one capital markets regulator to watch over futures and securities trading. That singular agency wouldn't be at the mercy of Congress for money like the CFTC but would fund itself though the SEC's existing fee and assessment model.
Streamlining the regulatory apparatus was a goal of financial reform after the 2008 crisis. There were at least three proposals with that aim in circulation, including ones from former Treasury secretaries Hank Paulson and Tim Geithner. Even the architect of the landmark Dodd-Frank Act, Sen. Christopher Dodd (D-Conn.), floated a plan to create a single bank regulator.
But the consolidation push had limited success. The disgraced Office of Thrift Supervision, which regulated the felled Washington Mutual, Countrywide and IndyMac, was disbanded. But three new agencies were created -- CFPB, the Office of Financial Research and the Financial Stability Oversight Council.
Neiman said the new agencies serve an important purpose of rooting out systemic risk and protecting Americans from abusive financial actors. But he questions the limited power given to the Financial Services Oversight Council, an inter-agency body that can recommend policy to its members but not require them to take action or set standards. Neiman and Olson would like to empower the council to override member agencies in times of deadlock on rulemaking. Good luck with that.
There are some solid roadblocks to bringing these recommendations to fruition.
Any major consolidation would take an act of Congress, a Sisyphean task in this current political environment. And to merge the SEC and CFTC would mean running up against turf battles between the agriculture, financial service and banking committees in Congress that oversee the agencies. That fight has tabled merger proposals in the past. But most of all, why would any of the banking regulators want to give up power? None of them would even comment on the proposal for this article.
Neiman and Olson are well aware of the challenges of change, which is why they are proposing a pilot program to at least test the feasibility of a consolidated examination force. The pair recommends that the Federal Financial Institutions Examination Council -- the inter-agency board where all the money regulators hang out -- oversee the program.
"There is a lack of a comprehensive, systematic approach to supervision and examination," Neiman said. "The pilot would demonstrate an approach where the examination force from each of the federal regulators, in combination with state regulators, would coordinate a consolidated examination of a financial institution. One set of data requests. One examination report."
It's unclear whether the FFIEC will entertain this proposal. The current chair of the six-member council, OCC Comptroller Thomas Curry, declined to discuss the study. Stay tuned.