Bank Group Opposes Regulators' Merger
Dodd Would Roll Four Offices Into Super-Agency

By Brady Dennis and Neil Irwin
Washington Post Staff Writers
Tuesday, September 22, 2009

Financial industry lobbyists on Monday denounced a proposal that would eliminate the four federal agencies now overseeing banks and instead create one super-regulator, calling the plan unwieldy, harmful to the banking system and a possible a roadblock to wider financial reform.

Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee, is preparing legislation that would merge the bank supervisory powers of the Federal Reserve, the Office of Thrift Supervision, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.

"It's the wrong way to go," said Steve Verdier, senior vice president for the Independent Community Bankers of America. "We don't think that as far as regulation of banks is concerned, that solves any problems we had. The checks and balances under the current system are pretty good."

Banking industry representatives said they fear that a single regulator would focus on the nation's largest banks to the detriment of thousands of community bankers.

The proposal is a departure from the Obama administration's recommendations and represents another potential conflict in the congressional struggle over financial reform set to unfold this fall. The administration's ambitious proposals include a new consumer financial protection agency, the creation of a systemic-risk regulator, and requests for more government authority to take over and wind down certain troubled financial firms.

"Industry will argue anything we do that they don't like is going to threaten the success of the overall effort, and that's an excellent PR strategy on their part," said Kirstin Brost, spokeswoman for the Senate Banking Committee. "But the fact of the matter is, this is how you get a bill. You debate, you compromise, you get a final product. We haven't drawn a lot of lines in the sand."

Brost said that Dodd planned to work closely with members of the committee, particularly ranking Republican Sen. Richard C. Shelby (R-Ala.), to put together a comprehensive regulatory reform bill.

Earlier this year, the White House had considered a proposal to consolidate banking regulators, similar to what Dodd is recommending, but opted instead for a less sweeping measure to merge only the OTS and the OCC. Senior administration officials have said they decided not to pursue the plan to merge all four regulators, so they could focus on changes that directly addressed the causes of the crisis.

Dodd's preference for a single super-regulator faces opposition from more than just the nation's bankers. Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said in an interview that the plan for a single regulator has "its own set of problems." He said he wants to end the practice of financial firms shopping for the most lenient regulator -- known as "regulatory arbitrage" -- but warned that establishing a single regulator could disrupt the country's long-standing dual banking system of state- and federally chartered banks.

Dodd told reporters Monday that it was essential to prevent firms from regulator-shopping.

"The idea is one that is embraced by a lot of people," he said, adding that consolidation would "give us a greater degree of accountability, instead of having literally this alphabet soup of agencies that come before us."

Dodd's approach would seek to end a system of overlapping federal regulators. The Federal Reserve oversees bank holding companies, which include the largest banks, such as Citigroup and J.P. Morgan Chase, along with many state-chartered banks. The Office of the Comptroller of the Currency supervises all nationally chartered banks. The Office of Thrift Supervision oversees nationally chartered savings and loans. And the Federal Deposit Insurance Corp., besides overseeing the fund that insures depositors against losses, oversees state-chartered banks that are not part of the Federal Reserve system.

Regulators who stand to lose authority under Dodd's proposal have already signaled their opposition.

"We do not see merit or wisdom in consolidating federal supervision of national and state banking charters into a single regulator for the simple reason that the ability to choose between federal and state regulatory regimes played no significant role in the current crisis," FDIC Chairman Sheila C. Bair said in recent Senate testimony.

The Federal Reserve stands to lose if Dodd's approach becomes law. Fed Chairman Ben S. Bernanke has argued that the Fed's bank supervisory powers are important complements to its responsibility for the economy as a whole.

Some other nations have a single bank regulator. Banks in Britain, for example, are overseen by the Financial Services Authority, which is distinct from the Bank of England -- the central bank -- and the chancellor of the exchequer, the equivalent of the Treasury secretary. But the crisis has been as severe for British banks as for American ones, and by some measures worse. For example, in 2007, when British bank Northern Rock was in financial peril, there was a run on the bank, with customers lining up to try to withdraw their money; it was eventually nationalized.

Dodd's proposal to create an all-encompassing bank regulator could help establish his credibility as being tough on banks, given that the financial industry is generally opposed to it. He faces a potentially tough 2010 reelection battle, in part because of the perception that he is too close to financial interests.

Staff writers Binyamin Appelbaum and David Cho contributed to this report.

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