The New York Times has an article in today's paper about the fight over how to protect consumers while keeping banks from failing. Sadly, the whole argument seems to be in a vacuum of ignorance. Does it really matter if the regulators are in one agency or two?
States already have models of how it can be done and how effective different organizational plans can work in their insurance and banking regulatory programs. No one in Washington seems to be paying attention.
We already have the Fed, the Comptroller of Currency (OCC) or Office of Thrift Supervision (OTS) and the FDIC regulating banks. It appears that they were already tripping over each other in not finding problems that they were responsible for finding. Adding a new agency would do what? According to the Times Senator Richard Shelby said 'he will not support a bill that puts consumer protection above bank regulation. He said his constituents were more concerned about bank failures than consumer protection.' Really? Sorry, Senator, but you don't know what you are talking about. You either don't have a clue about what your constituents want or you don't count 90% of the people in your state as constituents. Consumer protection matters to far more people than whether a bank fails, is taken over by the FDIC and reopens with a new name on Monday.
I have no idea why the few consumer protection regulations we have today are primarily the responsibility of the Fed, our central bank. It makes no sense to me. If we were to do some reorganizing of function, I would merge the OCC and OTS into an OBS. I would limit the job of the Fed to lending to banks and controlling the monetary supply. They would be responsible for keeping banks from becoming 'too big to fail'. The FDIC would be responsible for monitoring the financial position of the banks and keeping them qualified to be insured by the FDIC so they either do not fail or their failure is not catastrophic. The new Office of Banking Supervision (OBS) would be responsible for all of the rest, including the enforcement of all federal consumer protection rules.
Financial supervision cannot work well if the financial supervisor doesn't know whether the numbers are a result of breaking the rules. Tracking the conduct of the banks toward their customers is a critical predictor for understanding expected financial results. We cannot say that treating customers badly always leads to financial failure, but we can say that negative changes in the way they treat customers can be an early warning.
It is true that we need to make sure that the OBS doesn't think that its job is to keep banks in business, no matter what. Its job is to keep the banks following the rules, all of them. If the bank cannot do so, the FDIC will take over the bank.
Also at Insurance Matters