The Bank Regulation Tower Of Babel

FDIC chair Sheila Bair, who would seem to be one of the less important members of the government’s financial team, yesterday strongly suggested  that secured creditors at the largest banks bear losses of as much as 20% to cover the costs of a systemically significant bank failure. That would make the business of providing capital to banks extremely risky.

The confusion about how the financial services industry should be regulated has at its base dozens of disparate opinions about how to prevent another credit crisis. Many important member of Congress  such as Chris Dodd and Ron Paul have proposals that will probably be rejected. There has been some thought to making the Federal Reserve an uber regulator of the sector. Others suggest the Fed’s influence should be sharply curtailed.

The Administration does not have to allow its senior staff to keep throwing mud at a wall hoping that one of their proposals sticks and is the basis of the legislation that makes it through Congress. There is nothing wrong with asking people to be circumspect about their opinions when they clash with those of their peers, or their betters.

Congress is another matter because no one can tell a Congressman what to do until he is voted out of office. Dodd’s plan to combine four major financial regulatory bodies into one is particularly strange because it assumes that four dysfunctional agencies will work better if they are run by a single person.

The restlessness about the economy is growing among members of Congress. Ben Bernanke is no longer a lock to be re-appointed as Fed chair. Geithner may be sacrificed at the Treasury so the it can be said that new blood will bring better results.

Many of the plans that Congress and regulators have proposed would violate current laws causing significant revision of  how the industry’s relationship with the government works and upset the way that banks and other financial firms do business. The way that business is done is any industry that has been around for centuries is generally well-designed, even if it has to be tweaked from time-to-time. A number of people in Washington want to tweak it to death.

Douglas A. McIntyre