The sweeping bank regulatory reform bills introduced in the House and Senate focus too much on who does what -- reorganizing who regulates what banks and which activities.
Those bills would regulate banks badly by imposing too many costly requirements instead of improving the principles of good banking practice and risk management.
For example, having a council of regulators on systemic risk and oversight is a terrible mistake -- either it will be management by committee (an interagency group that reaches consensus slowly and badly in crises) or it will be dominated by its chairperson, who will be engaged in tugs of war with the Fed chairman at times when decisive, surgical and dramatic action is required.
Ultimately, the Fed must provide the resources for resolution of failing entities having systemic consequences -- disasters the size of Lehman or AIG (AIG) -- because no fund envisioned by taxing big firms will be big enough.The FDIC already collects such a tax from banks (FDIC insurance premiums), and that fund has proven to be too small for the failures of regional banks. In the end, the Fed must provide the money. Will this new systemic risk panel force the Fed to print it? It is a terrible idea to put those powers into the hands of a more political body. The consolidation of Controller of the Currency and the Office of Thrift Supervision is smart, but consumer protection belongs in the new agency, too. If consumer protection is put in a separate agency, then the health of the banks in the regulation of things such as community lending mandates will be ignored --congressional mandates were among the principal causes of the Fannie Mae (FNM) failure. A political appointee will make banks do reckless things and create all kinds of problems.
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