Archive for June 17th, 2009

Financial Oversight Overhaul

Wednesday, June 17th, 2009

President Obama today unveiled a new financial regulatory structure aimed at preventing future economic meltdowns. Below, Smeal’s Jean Helwege explains the impetus for the new oversight rules and explores the regulatory strengths and weaknesses of the Fed and the FDIC:

A prominent element of President Obama’s plan is to create a systemic risk regulator. The idea is that one agency will be charged with regulating financial entities that pose a risk threat to the economy as a whole. This agency will ensure that firms that fit into the “too big to fail” category will be more prudent and thus taxpayers in the future will not be asked again to pony up billions to bail out reckless financial firms.  

The idea of a systemic risk regulatory really embodies two major reforms: consolidation of depository regulators and creation of a new body to focus on systemic risk. Our current system allows financial firms that offer deposits to choose one of several regulators: The Federal Reserve is the regulator for bank holding companies, such as Citigroup; the Office of the Comptroller of the Currency (OCC) is the regulator for nationally chartered banks;  and the Office of Thrift Supervision (OTS) is the regulator for savings and loans, which surprisingly is the charter chosen by AIG, American Express, and several other behemoths that are not typically thought of as depository institutions.

While AIG is mainly an insurance company and its insurance subsidiaries are regulated by state insurance commissioners, AIG finds it convenient to offer checking accounts to its customers, and therefore has a thrift charter. All of these deposits are insured by the Federal Deposit Insurance Corporation (FDIC), which became the single regulator for deposit insurance in the 1990s for most checking and savings accounts (except those offered by credit unions). If you open a checking or savings account in this country, the firm offering you the account could be operating under the regulatory authority of the Fed, the OCC, the OTS, or it could be an account at a state-chartered bank that has no federal oversight. Moreover, the regulator of your bank is not assigned randomly—firms choose the charter they want, which means they effectively can shop for the regulator they view as most appealing. Frequently, they choose the regulator they believe is the most incompetent and therefore the least likely to exercise any authority. Since its inception in the late 1980s, that regulator has consistently been the OTS. Among the many sweeping changes in the proposed plan of reform is the intent to eliminate the OTS.  If no other part of the plan is passed, this part should be.

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Tags: Economic Crisis, Finance, Helwege, Politics
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