Bill Misses Opportunity To Overhaul AgenciesRichard Carnell in American Banker, May 24, 2010
By Cheyenne Hopkins
WASHINGTON - Though House and Senate lawmakers still have plenty of issues
to work out in the final regulatory reform bill, one thing is already
clear: The legislation will do little to streamline the fractured financial
In the aftermath of the financial crisis, many observers said reform was
the best opportunity in decades to rework the supervisory structure, which
includes four banking regulators and 50 states with overlapping
But in the end, the final bill is likely to get rid of only one agency -
the Office of Thrift Supervision - and leave most of the rest of the
existing system intact.
"It's a huge missed opportunity to restructure our regulatory system in a
manner that makes sense," said Kevin Jacques, the Boynton D. Murch Chair in
Finance at Baldwin-Wallace College and a former Treasury official.
"Politically, I completely understand why the administration did what it
did, but economically, this is a terrible crisis to have wasted."
Every president in recent memory has tried to revamp the regulatory
structure, with many - including proposals from Presidents George H.W.
Bush, Bill Clinton and George W. Bush - recommending some form of
The Obama administration initially appeared ready to do the same,
considering combining the banking regulators into one agency and merging
the Securities and Exchange Commission with the Commodity Futures Trading
Commission. But by the time it released its white paper last June, the
administration had dropped those plans, instead suggesting a merger of OTS
into the Office of the Comptroller of the Currency.
Michael Barr, the Treasury assistant secretary for financial institutions,
said that the administration ultimately had other priorities it wanted to
"When we were going through the process with the White House, with the
[National Economic Council], to think through what the key issues were, we
looked at a range of proposals, including regulatory consolidation," he
said in an interview Friday. "Our basic view was we'd spend enormous
amounts of political energy and tremendous time with Congress and others on
something that wasn't core to reform."
Though House Financial Services Committee Chairman Barney Frank appeared
content with that approach, Senate Banking Committee Chairman Chris Dodd
initially had a much more ambitious plan. He talked repeatedly in hearings
about the "alphabet soup" of regulators, suggesting that it was partly to
blame for the financial crisis.
In his initial bill, introduced last fall, Dodd proposed combining the
banking regulators into one agency. By this spring, he had amended it to
eliminate only the OTS but also to strip the Federal Reserve Board of most
of its oversight of banking companies. By the time the bill passed last
week, however, the Fed's supervisory power had been restored.
Even a Senate provision to eliminate the thrift charter is likely to be
struck from the final bill during negotiations with the House.
"We changed virtually nothing in terms of the regulatory structure," said
Bill Isaac, chairman of LECG Global Financial Services and a former
chairman of the Federal Deposit Insurance Corp. "We got rid of the OTS, but
that's something everyone assumed would happen."
Isaac supported Dodd's original consolidation idea but conceded that such a
move would have required a huge political battle. Indeed, the Federal
Reserve Bank presidents and a phalanx of community banks protested the
proposed reduction in the Fed's power, helping Sen. Kay Bailey Hutchison,
R-Texas, to win passage, 90 to 9, of an amendment to keep the central
bank's authority intact. "It's hard for the government to really eliminate
agencies," said Alex Pollock, a resident fellow at the American Enterprise
Institute. "A very interesting element of this is the Federal Reserve,
which started off in Dodd's original bill as having its authority
restricted, and now it's a major winner. There is a lot going on, but it
isn't consolidation and streamlining."
Ultimately, with the exception of the OTS, the regulatory agencies are
almost certain to gain power. Under both bills, the Fed would be the
systemic risk regulator, and the FDIC gained resolution authority over
systemically important bank holding companies. The OCC, meanwhile, will now
"This is not a consolidation bill," said Donald Ogilvie, the chairman of
the Deloitte Center for Banking Solutions. "It was an expansion of
Although eliminating the OTS is significant, its demise had been all but
assured for some time. Within a few months of its creation in 1989,
American Banker ran an article speculating how long the agency would last.
With a steady decline in the number of thrifts and failures and charter
conversions at most of the largest savings and loans, few fought to save
the agency. "It's clear they failed, but also they've ceased to have
critical mass to be effective," said William Longbrake, an executive in
residence at the University of Maryland and a former vice chairman at
Washington Mutual Inc. Another "reason they don't need to exist is, the
difference between the charters is pretty minimal."
By contrast, every other agency had a constituency ready to fight for it.
Community bankers complained to Congress at the very suggestion that the
FDIC - the regulator of most small institutions - would lose its oversight
role, and they defended the Fed as well. "Everyone is very comfortable with
the status quo, ... and the lobbying was very, very significant," Longbrake
Still, others said the administration should have at least tried for more
"The financial reform agenda as framed by Treasury last year, and as likely
to continue in conference, reflects monumental lost opportunity," said Rick
Carnell, an associate professor at Fordham University School of Law and a
former Clinton Treasury official. "There was a huge opportunity here for
real reform, and it was squandered. I think it was fair to say it was
But Barr defended the administration's strategy. "The key thing is, the
rules of the game are fixed," he said. "Would it have been neater or
tidier? There are certainly neater and tidier ways of setting up the
structure, but that doesn't necessarily mean it will be better."
Brian Gardner, a political analyst at KBW Inc.'s Keefe, Bruyette & Woods
Inc., said the administration made the right political judgment. "You wind
up having to spend political capital on things less important than other
issues," he said. "At the end of the day, how many regulators there are is
less important than what the powers are."