Today, FDIC Chairman, Sheila Bair presented on Systemic Regulation, Prudential Measures, Resolution Authority and Securitization before the Financial Services Committee and U.S. House of Representatives. It’s a must read for those of us who favor the philosophy that no institution should be ‘too big to fail’ or allowed to act in ways that can threaten the financial stability of our country and the global economy.
She stated, quite eloquently, the need for a system that makes our regulators accountable both for their actions and their inactions. She proposes that a Council be established that would effectively ‘regulate the regulators’.
Primary regulators would be charged with enforcing the requirements set by the Council. However, if the primary regulators fail to act, the Council should have the authority to do so.
As always, with grace under pressure, Ms. Bair has publicly acknowledged the need for our regulators to practice their authority outside the sphere of political influence. As we await implementation of this proposal that will surely strengthen the future economic stability of our nation, it would help if our current regulators would stop “asking” the financial institutions to comply with their directives and instead, use their powers of enforcement to make them comply.
In designing the role of the Council, it will be important to preserve the longstanding principle that bank regulation and supervision are best conducted by independent agencies. Careful attention should be given to the establishment of appropriate safeguards to preserve the independence of financial regulation from political influence.
On one major issue, I do beg to disagree. Whether Ms. Bair likes it or not, our Regulators - the FDIC, the OCC, the FRB and the OTS, DID, in fact, identify the systemic risks of sub-prime and non-conventional real estate lending and they knew it was wide-spread. Our regulators addressed this issue with ALL banks in 2005 through an interagency regulation that was put out by the FDIC, FRB, OTS and OCC , the regulating authorities of all banking institutions and which came about through Regulation H. Our regulators recognized the extreme risks of the sub-prime and non-traditional mortgage products and they failed to exercise their authority and curtail the banking industry’s careless lending practices. Instead, the Regulators chose to merely issue guidance letters to the banking institutions in 2005 and then again in 2006. The links I have provided in this paragraph are essential to understanding exactly how badly our Regulators failed us. It proves that they knew the extreme consequences of the banks continued participation in sub-prime and non-conventional mortgages products and moreso, that the banks lax lending standards represented a systemic risk. For Ms. Bair to publicly state that the regulatory supervisors failed to identify the systemic nature of the risks is simply not true. I’d prefer if she would simply acknowledged that our regulators did a piss-poor job of stopping the banks from doing what they knew they shouldn’t be doing, instead of saying:
Supervisors across the financial system failed to identify the systemic nature of the risks before they were realized as widespread industry losses. The performance of the regulatory system in the current crisis underscores the weakness of monitoring systemic risk through the lens of individual financial institutions and argues for the need to assess emerging risks using a system-wide perspective. The current proposal addresses the need for broader-based identification of systemic risks across the economy and improved interagency cooperation through the establishment of a new Financial Services Oversight Council.
If you believe what Ms. Bair said, then our regulators were ill-prepared to recognize the systemic risks of unsafe and unsound real estate lending practices. In my book, that is called incompetent. However, if you subscribe to my position: the regulators knew it and failed to act, then that makes them complacent.
Either way, our nation cannot afford to have incompetence or complacency in our regulatory system. While I agree with the need for the Council that Ms. Bair describes, I have to wonder who will be regulating the new regulators of our old regulators and will they be armed to act swifter and surer the next time around.