Consolidating Bank Supervisors: Is This Time Different?
The Trump administration may soon propose consolidating federal bank regulatory and supervisory activities, and this includes merging agencies. The president’s recent executive order requiring that all regulatory proposals be cleared through the White House is a significant step in that direction. The idea of consolidating the bank regulatory function into a single agency has been discussed for decades, but given this administration’s momentum for changing the regulatory landscape, it has become a real possibility.
The regulation and supervision of U.S. commercial banks, like the banking industry itself, is highly complex with multiple agencies sharing oversight. To begin, each state supervises the banks it charters. In addition, at the federal level three different agencies supervise both state and federal chartered banks. The Office of the Comptroller of the Currency (OCC) charters and supervises banks with federal charters. The Federal Reserve System (FRS) and the Federal Deposit Insurance Corporation (FDIC) supervise state banks—the FRS supervises state banks that choose to be members of the Federal Reserve System, and the FDIC supervises the remaining insured state-chartered banks. The FRS also supervises bank holding companies (BHC) that own state or federal chartered banks. Finally, the Dodd-Frank Act established the Consumer Financial Protection Bureau (CFPB) to regulate and supervise all banks for compliance with consumer laws and regulations. Each agency has its own protocols, staffs, and rules. Thus, the supervision of the banking industry is shrouded in overlapping responsibilities and redundancies.
For decades different presidential administrations have sought to simplify this framework, but the regulatory agencies, industry, and Congress have appeared to prefer the current framework. Additionally, no systemic studies have been conducted to show the possible cost-benefit trade-offs of consolidation, leaving unanswered the question of whether the overlap is beneficial.[1] The agencies argue, for example, that during a financial crisis, each requires immediate and direct information about the condition of a bank under stress, and this information is best provided by the agency’s own professional staff. The Department of the Treasury (Treasury) relies on the OCC examiners’ experience to understand and define solutions to major banks under stress and assess how the banks’ actions may impact the economy. Similarly, the FRS and FDIC are expected to provide liquidity to banks in a financial crisis, and, in the case of the FDIC, take control of and resolve banks that fail. Each agency insists it must have experienced staff to fulfill its responsibilities, and that experience is best developed through its ongoing role as a bank supervisor.
Most recently it has been suggested that Congress consolidate the bank supervisory activities of the FDIC and the FRS into the Treasury, where the OCC already resides, leaving only the insurance function with the FDIC and the monetary policy function with the FRS. While such consolidation can be realized, it introduces its own brand of inefficiency. The Treasury is already a huge bureaucracy, and adding new missions and hundreds of new staff would likely create its own set of silos and expanding costs. Also, while major portions of FRS’s and FDIC’s regulatory and supervisory work might be shuttled off to the Treasury, responsibilities for related core functions would continue to require significant daily personnel interaction with financial institutions, especially during periods of extreme economic and financial stress. In such instances experienced staff play key roles that enable agency leadership to manage liquidity demands and address the unexpected shocks to the industry and economy.
From the banking industry’s perspective there also is notable hesitancy about consolidating bank supervisors. Bankers historically have supported a framework that divides supervisory work among the three agencies, as they fear a single, monolithic bureaucracy more than an inefficient framework. Should an agency be perceived as unreasonable or capricious in its supervision, a bank can change regulators.[2] Banks often indicate that their ability to switch supervisors when necessary to avoid overreach is essential to their operating not only responsibly but innovatively. Banks are convinced that their power to avoid an overly zealous regulator provides a net benefit and is worth the marginal cost of having multiple regulators. Historically, this flexibility has been seen as an advantage within the industry. Given these forces, Congress has so far left the framework mostly untouched.[3]
While there has yet to be an actual proposal to consolidate bank regulation and supervision into a single agency, it is inevitable. The recent executive order serves to exert greater control over the regulatory process, and it is likely there will be further moves to consolidate responsibility. How this will play out is unknown, but it has started, and depending on what Congress decides, the agencies will be hard pressed to avoid it.
[1] The Johnson, Nixon, Reagan, Clinton, and Bush II administration each attempted to consolidate bank regulation into a single agency. The Dodd-Frank Act did eliminate the Office of Thrift Supervision but replaced it with a new agency, the Consumer Financial Protection Bureau (CFPB).
[2] There are rules limiting the ability of a poorly performing bank from switching supervisors while corrective action is in process, but banks are otherwise free to change supervisors.
[3] Congress has acted to increase coordination among the agencies. For example, following the banking crisis of 1980, it established the interagency Federal Financial Institutions Examination Council (FFIEC), and following the great financial crisis of 2008, it established the Financial Supervisory Oversight Committee (FSOC) composed of the heads of the different agencies overseeing financial institutions, to enhance coordination and assure increased financial stability.
