Dodd embarks on an age-old quest
Current patchwork has supporters, critics

By Brady Dennis and Binyamin Appelbaum
Washington Post Staff Writer
Thursday, November 12, 2009

Sen. Christopher J. Dodd (D-Conn.) this week joined the generations of dreamers who have advocated for eliminating the nation's muddle of bank regulators, arguing that a single agency would be more efficient and would end the ability of banks to choose the most lenient supervisor.

"The financial crisis," Dodd said Tuesday, "exposed a financial regulatory structure that was the product of historic accidents, one after another, over the past 80 years, created piece by piece over decades, with little thought given to how it would function as a whole and unable to prevent threats to our economic security."

But Dodd confronts a broad range of critics including bankers, regulators and fellow legislators who warn that his plan overlooks the strengths of the current patchwork and ignores the potential downsides of consolidation.

They argue that community banks and international behemoths need different kinds of oversight. They also note that the various agencies possess meaningfully different perspectives. The Federal Deposit Insurance Corp., for example, tends to look out for the interests of smaller banks, while the Office of the Comptroller of the Currency traditionally has been mindful of the concerns of larger institutions.

Bob Pasley, a banking consultant who has studied the history of proposals to consolidate the banking agencies, said that the Federal Reserve pressed Congress as early as 1921 -- less than a decade after the central bank's creation -- to streamline banking regulation by eliminating the OCC. The Fed renewed its push in the late 1930s.

"The development of the mechanism of supervision has been piecemeal in character," the Fed wrote in its annual report for 1938. "From this process the banking picture emerges as a crazy quilt of conflicting powers and jurisdictions, of overlapping authorities and gaps in authority."

By Pasley's count, members of Congress have since introduced at least 16 separate pieces of legislation proposing the consolidation of regulators into a single agency.

Under the current structure, four separate federal agencies oversee the country's more than 8,000 banks. Some banks also are subject to state supervision.

Dodd's plan would combine the functions of the OCC and the Office of Thrift Supervision, eliminating the thrift charter. It also would strip the Fed and the FDIC of their direct supervisory powers, leaving the Fed to handle monetary policy and the FDIC to clean up failed banks.

Over the years, the argument for consolidation has remained constant. A single agency would be less expensive. It could impose the same rules in the same way on all banks. It could be held accountable for its mistakes.

Dodd also said Tuesday that the current system had allowed some banks to shop for lax regulation. The Post reported in January that at least 30 banks since 2000 have escaped regulatory action by switching agencies.

But those arguments have always fallen short in the halls of Congress.

Currently, the four banking agencies are required by law to coordinate their policies, and regulators and some bankers alike say that diversity of opinion can yield stronger regulations. The FDIC's opposition, for example, forestalled the implementation of rules supported by other regulators that would have allowed banks to hold smaller reserves of capital against unexpected losses.

Both the FDIC and the Fed also have expressed concerns that their role as regulators provides them with important information to meet their other responsibilities. The FDIC, which oversees about 5,000 community banks, has made adjustments to its insurance premiums to discourage banks from engaging in risky activities, such as relying on deposits raised by advertising high interest rates.

The Fed uses data gathered from banks to inform its decisions about interest rates.

The idea of a single regulator has attracted particularly fierce opposition from community banks, which fear that such an agency would inevitably focus on larger firms. But even larger banks are divided on the issue. Jamie Dimon, the chief executive of J.P. Morgan Chase, has called the creation of a single banking regulator "long overdue." But John Stumpf, the chief executive of Wells Fargo, said in a September interview with Bloomberg Television that he preferred the existing system.

"You have all different flavors and sizes of financial institutions," Stumpf said. "To have one place domiciled with all that, I think you've missed differing points of view."

Dodd has sought to address the concerns about the impact on community banks, which have tremendous political power because they reside in nearly every congressional district, by proposing that they be regulated by a special division within the new agency.

"Most developed nations have gone to some variant of the single regulator," said William K. Black, a former regulator who now is a law professor at the University of Missouri at Kansas City. He cited Britain, France and Germany, among others.

"The bad news is that they went to this before the [current] crisis. And to state the obvious, it didn't stop the crisis," he said. "So there is universal failure of the single regulator."

Black said the burden is on Dodd to convince his colleagues and the Obama administration that overhauling the current patchwork system is worth the time and effort.

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