Wanted: A Super-Regulator For The Banking Industry

Stocks highlighted here include Citigroup (C), Bank of America (BAC) and JP Morgan Chase (JPM).

Yesterday, in his testimony before the Senate Banking Committee, former Fed chief and currently the head of the President’s Economic Recovery Advisory Board, Paul Volcker, called for “particularly close regulation and supervision, meeting high and common international standards for banks and other firms that are large enough to shake the entire financial system if they fail.”

Among the ideas discussed was the creation of a super regulatory agency, perhaps within the Federal Reserve, which would be responsible for coordinating among the various agencies regulating/overseeing the financial companies.

The House Financial Services Committee had also been considering setting up an entity to oversee systemic risks of the financial system.

While we totally agree that the regulation of the financial system needs to be urgently strengthened to avoid any crisis of the current magnitude and dimensions in future, the question arises whether the present crisis resulted due (in part) to lack of supervisory powers or the failure to use them.

Did the regulators not have the authority to crack down on the lending practices at the banks and the enormous amount of risk that was being assumed by the financial institutions, without putting in place a comprehensive risk management, or, was it the result of lack of coordination between the several agencies and institutions entrusted with the task of regulating the various sectors of the U.S. financial markets?

In addition to the lack of exercise of regulatory powers (for whatever reasons), one of the main contributors to the current crisis was the complex and uneven regulatory system, which gave way to gaps and differences in degrees of oversight. As a result, the financial institutions were able to shift risky products to less regulated entities or entities having favorable accounting treatment. This calls for consolidated supervision of parents and all related entities.

Also required is stronger coordination with regulators of other countries so as to effectively regulate the financial behemoths like Citigroup (C), Bank of America (BAC) and JP Morgan Chase (JPM), which have operations all over the world.

Subscribe by RSS Subscribe by Email