The consolidation of financial regulation: pros, cons, and implications for the United States.
Pellerin, Sabrina R. ; Walter, John R. ; Wescott, Patricia E. 等
During the summer of 2008, the House Financial Services Committee
held hearings to consider proposals for restructuring financial
regulation in the United States (U.S. Congress 2008). A Treasury
Department proposal, released in March 2008, played a prominent role in
the hearings. The Treasury proposal would consolidate by shrinking the
number of financial regulators from the current six (plus banking and
insurance regulators in most of the 50 states) to three: a prudential
supervisor, responsible for assessing the riskiness of all financial
institutions that have government backing; a consumer protection
supervisor; and a market stability supervisor. Many other countries have
either adopted consolidated financial regulation or are considering
doing so.
Four goals appear most frequently in the financial regulation
consolidation literature: (1) take advantage of economies of scale made
possible by the consolidation of regulatory agencies; (2) eliminate the
apparent overlaps and duplication that are found in a decentralized
regulatory structure; (3) improve accountability and transparency of
financial regulation; and (4) better adapt the regulatory structure to
the increased prevalence of conglomerates in the financial industry. (1)
These goals are difficult to achieve in a decentralized regulatory
structure because of regulator incentives, contracting, and
communication obstacles inherent in such a structure. Beyond the four
goals found in the consolidation literature, an added motivation for
modifying the U.S. regulatory structure arose during the period of
severe market instability that began in 2007. That motivation is the
desire to create a regulator that focuses heavily on market stability
and systemic risk.
While a consolidated regulator seems better able to achieve these
four goals, countries that have consolidated their regulatory apparatus
have spread decision-making authority among several agencies, thus
undermining, to some degree, the potential benefits of consolidation.
The desire to vest authority with more than one agency appears to be
motivated by an interest in ensuring that an array of viewpoints temper
regulatory decisionmaking so that financial regulation decisions, given
their far-reaching consequences, are not mistakenly applied or abused.
Further, regulatory consolidation, as frequently practiced in those
countries that have consolidated, presents a conflict between, on the
one hand, achieving the goals of consolidation, and, on the other hand,
the effective execution of the lender of last resort function
(LOLR--whereby a government entity, normally the central bank, stands
ready to make loans to solvent but illiquid financial institutions).
Under the consolidated model, the central bank is often outside of the
consolidated regulatory and supervisory entity so does not have the
thorough, day-to-day financial information that is beneficial when
deciding whether to provide loans to troubled institutions in its LOLR
role. This central bank outsider role is a potential weakness of the
typical consolidated regulatory structure. One solution is to make the
central bank the consolidated regulator; however, this poses
difficulties of its own.
There are several questions to consider before consolidating
regulatory agencies in the United States. What drives financial
regulation and how is it currently practiced in the United States? The
Treasury proposal is the latest in a long history of consolidation
proposals. What did some of these earlier proposals advocate and how
does the Treasury proposal differ? What are the typical arguments for
and against consolidation, what role do regulator incentives play in
these arguments, and how have other countries proceeded? What are the
features of the conflict between consolidation and effective execution
of the LOLR function?
1. WHY THE GOVERNMENT REGULATES FINANCIAL FIRMS
Government agencies regulate (establish rules by which firms
operate) and supervise (review the actions of firms to ensure rules are
followed) financial firms to prevent such firms from abusing the
taxpayer-provided safety net. The safety net consists primarily of bank
access to deposit insurance and loans to banks from the central bank
(i.e., the Federal Reserve in the United States). In periods of
financial turmoil, the Federal Reserve or the Treasury can expand the
safety net. For example, in March 2008 the Federal Reserve began lending
to securities dealers and in September 2008 the Treasury guaranteed the
repayment of investments made in money market mutual funds. As a result
of the safety net, financial firms have a tendency to undertake riskier
actions than they would without the net, leaving taxpayers vulnerable.
Three justifications are often provided for the safety net: to protect
against bank runs, to minimize systemic risk, and to allow small-dollar
savers to avoid costly efforts spent evaluating financial institution
health.
To protect taxpayers from losses, legislators require certain
government agencies to regulate and supervise financial firm
risk-taking--so-called safety and soundness regulation. These agencies
are called on to compel financial firms to take certain risk-reducing
actions when their perceived riskiness rises above prescribed levels.
Additionally, legislators require agencies to assume a consumer and
investor protection role, ensuring that consumers are protected against
unscrupulous behavior by financial firms and that firms reveal
trustworthy accounting information so that investors can make informed
decisions.
Safety and Soundness Regulation
Banks and the safety net
Because banks can offer their customers government-insured deposits
and can borrow from the Federal Reserve, they have access to funds
regardless of their level of risk. While other creditors would deny
funds to a highly risky bank, an insured depositor cares little about
the level of riskiness of his bank since he is protected from loss.
Absent active supervision, loans from the Federal Reserve might also
provide funds to highly risky banks.
In certain circumstances, banks have a strongly perverse incentive
to take excessive risk with taxpayer-guaranteed funds. This incentive
results from the oft-discussed moral hazard problem related to deposit
insurance. Depositors are protected from loss by government-provided
insurance. As a result they ignore bank riskiness when deciding in which
banks to hold deposits. Banks, in turn, undertake riskier investments
than they would if there were no deposit insurance because they know
there is no depositor-imposed penalty for doing so.
For banks with high levels of owners' equity, the danger of
excessive risk-taking is limited because shareholders monitor and
prevent undue risk-taking by bank management to protect their equity
investment in the bank. However, for a troubled bank that has suffered
losses depleting its capital, possibly to the point that the bank is
likely to fail, owners and bank management both have a perverse appetite
for risk. They will wish to undertake highly risky investments;
investments with a large payoff if successful--so-called gambles on
redemption. If the investment is successful, the bank can be saved from
failure, and if it fails, shareholders and management are no worse off
given that the bank was likely to fail anyway. Insured depositors are
happy to provide funding for these risky endeavors, but by doing so they
are exposing taxpayers to greater risk of loss.
Because these incentives are misaligned, regulators must monitor
banks closely and take swift action when they determine that a
bank's capital is falling toward zero. Such measures typically
include limitations on activities or investments that are unusually
risky--gambles on redemption. In addition, because measuring bank
capital is notoriously difficult, regulators impose risk-limiting
restrictions on all banks. Regulators never know with certainty whether
a bank's capital is strong or weak; consequently, as preemptive
measures, they prohibit all banks from undertakings that are known to be
unusually risky. By doing so, they hope to remove access to gambles on
redemption for those banks in which capital has fallen unbeknownst to
regulators. Examples of such preemptive measures include limits on the
size of loans made to a single borrower and restrictions on banks'
ability to invest in stock, which is typically riskier than loans and
bonds.
Ultimately, supervisors close a bank once capital falls to zero in
order to limit the strong incentive bank owners and managers have to
undertake risky investments when they no longer have equity to lose. In
the United States the prompt-corrective action requirements laid out in
the Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA) necessitate that banks with no capital be closed and that
limitations be imposed on the actions of banks with declining capital.
FDICIA also places strict limits on Federal Reserve loans when a
bank's capital is weak. The danger here is that Fed loans might
substitute for uninsured deposits, thus increasing taxpayer losses.
Specifically, uninsured depositors might become aware of a bank's
troubles and begin to withdraw funds. Assuming that it is unable to
quickly raise new insured deposits to replace withdrawals, the bank
would likely come to the Federal Reserve asking for loans to prevent the
bank from having to rapidly sell assets at a loss. If the Fed grants a
loan and the borrowing bank ultimately fails, then uninsured depositors
have escaped losses, imposing losses on the FDIC and possibly taxpayers.
The Fed is protected from loss since it lends against collateral.
Because of the danger Fed lending can pose, the Fed must ensure
that banks to which it makes loans have strong capital. As noted
earlier, determining the level of a bank's capital is complex and
its capital level can change. For these reasons the Fed must closely
supervise the borrowing bank both before making the loan and throughout
the duration of the loan.
Nonbanks and the safety net
Access to deposit insurance and Fed loans provides a clear reason
for supervising banks. Yet, nonbanks do not routinely have such access,
so other factors must explain the safety and soundness supervision
nonbanks often receive. Two such factors seem most important. First,
nonbank financial firms are frequently affiliated (part of the same
holding company) with banks, and losses suffered by a nonbank can
transfer from one affiliate to others, including bank affiliates.
Second, nonbanks, and especially nonbank financial firms, have, at
times, been granted safety net access, specifically in the form of the
opportunity to borrow from the Federal Reserve. As a result of nonbank
safety net access, the moral hazard problem discussed earlier for banks
can distort non-bank incentives as well, explaining the desire to
supervise nonbank riskiness.
Nonbank financial firms are often owned by holding companies that
include banks. For example, the major U.S. securities firms are in
holding companies that include banks. Likewise, major insurance
companies are also part of holding companies with banking subsidiaries.
Such affiliation between a bank and a nonbank provides two dangers as
discussed in Walter (1996, 29-36). First, assets of the bank are likely
to be called on to cover losses suffered by the nonbank affiliate. A
holding company may find this a valuable strategy if the reputation of
the overall firm can be damaged by the failure of a nonbank subsidiary,
and the reputation cost can exceed the cost of shifting bank assets to
the nonbank. In such a case, the chance of a bank's failure will
increase and thus put the deposit insurance fund at risk, which
justifies efforts to control risk in nonbank affiliates of banks.
There is an additional danger of bank affiliation with a nonbank
not driven by the holding company's avoidance of reputational
damage but instead by a desire of a holding company to minimize its loss
by passing it off to taxpayers. If a nonbank suffers a loss that is
smaller than the equity of the nonbank but larger than the equity of a
bank affiliate, the holding company might gain by shifting the loss to
the bank. The shift will result in the failure of the bank, so that the
holding company loses the value of the bank's equity, but this is
smaller than the total loss that would have been incurred if it had been
left in the larger nonbank. The amount of the loss that exceeds the
bank's equity is suffered by the bank's creditors and the
FDIC.
Legislators have designed laws that are meant to prevent asset and
loss shifts. Examples include rules found in Sections 23A and 23B of the
Federal Reserve Act that limit the size of transactions between banks
and their nonbank affiliates. Yet supervisors do not expect these rules
to be perfect, so nonbank supervision is a valuable supplement to the
rules.
In some cases, nonbanks have also been granted access to loans from
the Fed. For instance, beginning in March 2008 certain large securities
dealers were allowed to borrow from the Fed. To protect itself from
lending to a weak borrower, the Fed reviewed the financial health of the
securities dealers to determine their soundness, in effect acting as a
supervisor for these borrowers. (2)
Why the government provides a safety net
Given the difficulties of supervising entities protected by the
government safety net, one must wonder why the safety net exists.
Observers provide three explanations.
* Bank runs--One such explanation is offered by Diamond and Dybvig
(1983), who argue that the provision of deposit insurance offers an
efficient solution to a problem that arises when banks offer demand
deposits. Individuals and businesses find great value in the ability to
withdraw deposits on demand because they cannot predict when they might
face a sudden need for funds. Banks offer deposits that can be withdrawn
on demand, meeting this desire for demand deposits, while holding
assets, i.e., loans, with longer maturities. By providing demand
deposits, banks can make loans at lower interest rates than firms that
do not offer demand deposits. But, the provision of demand deposits
leaves banks subject to runs, when all depositors suddenly decide to
withdraw them at once. The danger of runs undercuts the benefit gained
by offering demand deposits. A financially sound bank may suffer a bank
run based simply on fear that a large number of customers will withdraw
deposits rapidly, depleting the bank's liquid assets. One solution
is for the government to provide deposit insurance, eliminating the
danger of runs. Diamond and Dybvig (1983) view the government provision
of deposit insurance as a low-cost means of protecting against runs
while still allowing banks to provide the benefits of demand deposits.
The availability of LOLR loans may also stem runs.
* Systemic risk--Alternatively, observers argue that if the
government failed to intervene to protect the liability holders of a
large, troubled institution, including a nonbank institution, the
financial difficulties of that institution might spread more widely (see
Bernanke 2008, 2). This is often referred to as the systemic risk
justification for the safety net (i.e., an individual institution's
problems lead to a financial-systemwide problem, thus the name
systemic). Intervention is more likely to flow to financial than to
nonfinancial firms because of the interconnectedness of financial firms.
For example, the list of creditors of a large financial institution
typically includes other large financial institutions. Therefore, the
failure of one financial institution may well lead to problems at
others, or at least a reduction in lending by the institutions that are
exposed to the failed institution. An instance of this occurred when
Lehman Brothers' September 2008 bankruptcy led to large withdrawals
from mutual funds, especially from those with significant holdings of
Lehman commercial paper.
Reduced lending by firms directly exposed to a failed firm can
produce problems for other financial firms. Financial firms'
balance sheets often contain significant maturity mismatches--long-term
assets funded by short-term liabilities. As a result, firms that
normally borrow from an institution that reduced lending because of its
exposure to a failed firm will be forced to seek other sources of
funding to continue to finance its long-term assets. If many firms are
exposed to the failed firm, then the supply of funds will decline,
interest rates will rise, and sales of assets at fire-sale prices may
result. Reduced lending by other institutions will tend to exacerbate
weak economic conditions that often accompany the failure of a large
financial institution. In such circumstances, policymakers are highly
likely to provide financial aid to a large troubled institution. Because
of this tendency, supervisors have reason to monitor the risk-taking of
large financial institutions.
* Small savers--Third, without deposit insurance, all investors and
savers would find it necessary to review the financial health of any
bank with which they hold deposits (Dewatripont and Tirole 1994, 29-45).
Given that retail customers of small banks number in the thousands and
in the tens of millions for the largest banks, if each individual retail
customer were to evaluate the health of his or her bank, the effort
would be exceedingly costly and duplicative. Further, most customers are
unlikely to possess the skills needed to perform such analyses.
Rather than performing their own evaluations, individuals might
instead rely on credit rating services. Unfortunately, such services are
likely to produce a less-than-optimal amount of information. Because
services will be unable to strictly limit access to their ratings
information to individuals who have paid for access, few firms will find
it profitable to generate such information (i.e., a free rider problem
will lead to too little information being produced). Alternatively,
financial institutions that receive the credit ratings could be charged
fees by the ratings company, but this creates a conflict of interest.
Specifically, a financial institution would have a strong incentive to
illicitly influence the ratings company to inflate its score. Deposit
insurance, coupled with a government agency monitoring bank risk, offers
a solution to the small savers' costly evaluation problem.
Consumer and Investor Protection Regulation
Financial firm regulators often provide another type of supervision
and regulation intended to ensure that (1) products offered to consumers
are beneficial and that (2) financial firms provide their investors with
truthful and complete accounting information about the firm's
financial strength or about the characteristics of investments.
The Truth in Lending and Truth in Savings Acts are examples of
legislation meant to protect consumers when dealing with financial
institutions. Both require financial institutions to offer consumers
clear disclosures of the terms of transactions. The regulation that
implements the Truth in Lending Act, for example, provides that
financial institutions must disclose interest rates that are being
charged, ensures that borrowers have the right to cancel the loan for
several days after initially agreeing to it, and prohibits certain
lender actions that are considered likely to be harmful to the consumer.
Similarly, the Truth in Savings Act's implementing regulation
requires that deposit interest rates be disclosed in a set manner,
allowing consumers to more easily compare rates among various
institutions.
The Securities and Exchange Act of 1934, among other things,
established the Securities and Exchange Commission (SEC) to require that
financial firms provide accurate and complete information. The SEC has
the authority to bring civil actions against firms, especially financial
firms, that offer false or misleading information about investments,
engage in insider trading, or commit accounting fraud (U.S. Securities
and Exchange Commission 2008). Broadly, the SEC is meant to ensure that
investors are provided with a fair picture of the risks and returns
offered by investments they might be considering. The SEC does not, in
general, attempt to limit the risk-taking behavior of firms; instead, it
focuses its efforts toward requiring that investors are aware of the
risks.
2. REGULATORY OVERSIGHT
The Current U.S. Regulatory System: A Variety of Players
The United States' regulatory structure for financial
institutions has remained largely unchanged since the 1930s even though
the financial environment has undergone many fundamental changes.
Specifically, banks, investment banks, and insurance companies have been
supervised by the same players. (3) One prominent feature of financial
services regulation in the United States is the large number of agencies
involved.
Regulatory oversight in the United States is complex, especially
compared to that of other countries (as explored in Section 5). In the
United States, depending on charter type, four federal agencies, as well
as state agencies, oversee banking and thrift institutions (Table 1
lists regulators and their functions). Credit unions are regulated by
one federal agency, the National Credit Union Administration, and state
agencies. Securities firms are also regulated at the federal and state
level in addition to oversight by self-regulatory organizations (SROs).
The Commodity Futures Trading Commission (CFTC) regulates futures and
options activities. Meanwhile, the insurance industry is regulated
mainly at the state level.
Table 1 U.S. Financial Regulators
Regulator Date Function
Established
Securities and 1934 Regulates securities
Exchange Commission markets
Federal Reserve 1913 Regulates bank holding
System companies and Fed member
state-chartered banks.
Federal Deposit 1933 Regulates state-chartered
Insurance banks that are not members
Corporation of the Federal Reserve.
FDIC is also the back-up
supervisor for all insured
depository institutions.
Office of the 1863 Regulates national banks
Comptroller of the
Currency
Office of Thrift 1989 Regulates federally
Supervision chartered and
state-chartered saving
institutions and their
holding companies
National Credit Union 1970 Regulates federally,
Administration chartered credit unions
Commodity Futures 1974 Regulates commodity
Trading Commission futures and option
markets
Federal Housing 2008 Regulates Fannie Mae,
Finance Agency Freddie Mae, and the
Federal Home Loan Banks
States -- Regulate insurance
companies, savings
institution banks,
securities firms, and
credit unions
States typically maintain depository and insurance commissions that
examine depositories, along with federal agencies, and supervise and
regulate insurance companies. This sharing of supervisory responsibility
for depositories varies by institution type, but, for example, in the
case of state member banks, the Federal Reserve and state agencies
typically either alternate or conduct joint examinations. The states and
the Federal Reserve share their findings with one another so that
duplication is limited, at least to some degree. The FDIC and states are
responsible for the supervision of state-chartered non-member banks. All
of these agencies communicate by sharing examination documents and
through other means. Common training and communication is encouraged for
all federal banking agencies and representative bodies for state
supervisory agencies in the Federal Financial Institutions Examination
Council (FFIEC). The FFIEC develops uniform supervisory practices and
promotes these practices through shared training programs. (4)
The complexity of the U.S. regulatory apparatus has caused
observers to question its efficiency, and is one of the primary reasons
that the Treasury Department proposed reforms. One example of an
apparent inefficiency lies in the difficulty of maintaining strong
communication links among the different supervisors responsible for the
various entities in one holding company. (Communication is important
because, as discussed earlier, losses in one subsidiary can endanger
others.) For instance, consider Bank Holding Company (BHC) X, which has
two subsidiary institutions, Bank A and Securities Company B. Four
different regulators could be present in such a scenario. BHC X is
regulated by the Federal Reserve, while its bank subsidiary, Bank A (a
state, nonmember bank), is regulated by the FDIC as well as by the state
banking agency. Although the FDIC and the state would both regulate Bank
A, the Federal Reserve still maintains holding company oversight,
meaning that direct and open communication between the FDIC, the state,
and the Fed must be present to ensure the safety and soundness of the
banking institution as well as that of the BHC. In addition. Securities
Company B, another subsidiary of BHC X, is regulated by the SEC. (See
Figure 1 for an illustrative depiction of a bank holding company, which
includes an even broader scope of activities and regulators.)
[FIGURE 1 OMITTED]
Communication is especially vital for information exchange among
supervisors when dealing with a troubled bank. Some observers argue that
problems arose in 1999 when communication gaps between the OCC and FDIC
hindered a coordinated supervisory approach in a bank failure. The OCC
originally denied the FDIC's request to participate in an OCC
examination of a bank that later failed. However, the OCC reversed its
decision in time for the FDIC to participate in the examination. Had the
OCC not reversed course, the FDIC might have been unable to collect
information and offer input. (5) John Hawke, Jr., Comptroller of the
Currency, in February 2000 testimony before the U.S. House Committee on
Banking and Financial Services regarding the bank failure, noted
[the] importance of keeping the FDIC fully informed about serious
concerns that we [the OCC] may have about any national bank and of
maintaining mutually supportive working relationships between our
[OCC and the FDIC] two agencies at all levels. We [the OCC's staff]
have just reiterated to our supervisory staff the desirability of
inviting FDIC participation in our examinations when deterioration in
a bank's condition gives rise to concerns about the potential impact
of that particular institution on the deposit insurance fund, even if
the FDIC has made no request for participation (Hawke 2000).
Integration of U.S. Financial Firms
Starting in the 1980s, the financial services industry began moving
toward an integration that had not been present before. Specifically,
banking firms began to include securities subsidiaries following a 1987
order by the Board of Governors of the Federal Reserve System allowing
bank holding companies to offer securities services to a limited extent
(Walter 1996, 25-8). As discussed later, the growth of financial
conglomerates--in this case, conglomerates that combine a bank and a
securities company in one holding company--is a motivation for
consolidating regulators.
The Gramm-Leach-Bliley Act (GLBA) of 1999 authorized combinations
of securities and banking firms within one holding company, thus
removing the limitation set on such combinations by the 1987 Board of
Governors rule. The Act also allowed the affiliation of insurance firms
and banks. The GLBA designated the Federal Reserve the umbrella
supervisor of those banking companies that exercise expanded powers.
Umbrella oversight means responsibility for monitoring the soundness of
the holding company and for ensuring that nonbank losses are not shifted
to bank affiliates. Under GLBA rules the Fed does not typically
supervise the nonbanking affiliates. Securities subsidiaries are
typically supervised by the SEC and insurance subsidiaries are
supervised by state insurance commissioners. These supervisors share
information with the Federal Reserve so that it can perform its umbrella
responsibilities. In the GLBA, legislators chose to follow a functional
regulation model, whereby supervisors are assigned based on function.
For example, the function of securities dealing is overseen by a
supervisor that specializes in securities dealing, the SEC.
Beyond the evolution toward consolidation, driven by the 1987 Board
of Governors ruling and the GLBA, events related to the mortgage
market-related financial turmoil that began in 2007 produced additional
movement, if perhaps temporary, toward regulatory consolidation.
Specifically, during 2008 a group of securities dealers came under
Federal Reserve supervisory scrutiny for the first time in recent
history.
In March 2008, the Federal Reserve began lending to primary
dealers, that is, securities dealers with which the Federal Reserve
regularly conducts securities transactions. While normally the Fed lends
only to depository institutions, it has the authority to broaden its
lending to entities outside of depositories during times of severe
financial stress. The Fed determined that such stress existed in March
2008 and therefore began lending to securities firms under a program the
Fed called its Primary Dealer Credit Facility, To ensure that such
lending did not subject the Federal Reserve to unacceptable risk, the
Federal Reserve began reviewing the financial health of some of these
borrowers. Primary dealers that were affiliated with commercial banking
organizations were already subject to some supervision by a banking
regulator, so they did not receive new scrutiny from the Federal
Reserve. In contrast, several primary dealers were not affiliated with
banks and became subject to on-site visits from Federal Reserve staff
(Bernanke 2008). Therefore, perhaps for the short-term, some additional
supervisory authority was concentrated in one supervisory agency--the
Federal Reserve--beyond its traditional supervisory focus on banks and
bank holding companies.
3. PROPOSALS TO CONSOLIDATE U.S. REGULATION
Over the last 35 years, several proposals have been advanced to
consolidate the U.S. financial regulatory system. In most cases the
proposals' objectives are to increase efficiency and reduce
duplication in the nation's financial regulatory system, lowering
the cost and burden of regulation. To date, the proposals have not led
to the enactment of legislation. In March 2008, the Treasury Department
offered a consolidation proposal that builds on the work of the earlier
proposals.
Early Consolidation Proposals
Hunt Commission Report
One of the earliest regulatory consolidation plans is found in the
Report of the President's Commission on Financial Structure and
Regulation, popularly known as the Hunt Commission Report after the
commission's chair Reed O. Hunt (Heifer 1996, Appendix A). The Hunt
Commission Report, released in 1971, was intended, in part, to examine a
decline in lending by depository institutions in the 1960s. This decline
was precipitated by caps on interest rates that depositories were
allowed to pay on deposits, commonly referred to as Regulation Q
interest rate ceilings. When rising inflation pushed up market interest
rates in the late 1960s, depositories were unable to gather new deposits
because their deposit interest rates were capped below market rates. As
a result, they were forced to limit lending.
While much of the commission's work was focused in other
directions, it also proposed changes to the regulatory structure for
banks. It recommended that depository institution regulation and
supervision be vested in two federal agencies.
The commission proposed that one agency, the Office of the
Administrator of State Banks (OASB), regulate and supervise all
state-chartered depositories, including banks and thrifts (i.e., savings
banks and savings and loans), taking away responsibility from three
agencies--the FDIC, the Fed, and the Federal Home Loan Bank Board. The
change would mean that the FDIC and the Federal Reserve would lose
oversight for state-chartered banks, while the Federal Home Loan Bank
Board, at that time the regulator of most thrifts, would lose oversight
responsibility for state-chartered thrifts. The commission plan would,
however, allow banking agencies created by states to continue their
traditional regulatory and supervisory roles, supplementing oversight by
the OASB.
The commission also would rename the Office of the Comptroller of
the Currency (supervisor and regulator of federally chartered banks,
i.e., national banks) and move the agency outside of the Treasury
Department. The new regulator would become the Office of the National
Bank Administrator (ONBA). Beyond responsibility for national banks, the
ONBA would have responsibility for federally chartered thrifts.
The goal of these changes was two-fold. First, it was intended to
produce a more efficient and uniform regulatory apparatus. Second, it
was intended to more completely focus the Federal Reserve on monetary
policy, bank holding company supervision, and international finance
responsibilities (U.S. Treasury Department 2008, 197-8).
The 1984 Task Group Blueprint
The Task Group on Regulation of Financial Services was created by
President Reagan in 1982. Its goal was to recommend regulatory changes
that would improve the efficiency of financial services regulation and
lower regulatory costs (U.S. Treasury Department 2008, 199-201). In
1984, the group produced a report entitled Blueprint for Reform: Report
of the Task Group on Regulation of Financial Services.
The task group's blueprint called for several consolidating
changes. First, it planned to end the FDIC's regulatory and
supervisory authority. Also, the OCC's oversight of nationally
chartered banks would be assumed by a new agency, the Federal Banking
Agency (Heifer 1996, Appendix A). State-chartered banks would be
overseen by either the Federal Reserve or a state supervisory agency
passing a certification test. Last, bank holding company supervision
would generally be performed by the regulator responsible for the
primary bank in the holding company. The Federal Reserve would retain
its regulatory power over only the largest holding companies, those
containing significant international operations, and foreign-owned
banking entities. This change was meant to reduce overlapping
supervisory responsibilities. Because the Federal Reserve supervises
bank holding companies, it may inspect (examine) their subsidiaries that
are already overseen by other regulators. However, the effective extent
of the overlap is currently limited because examination of a holding
company's bank subsidiaries is largely left to other supervisory
agencies (unless the bank happens to be a state member bank, which the
Fed is responsible for supervising).
1991 Treasury proposal
Based on a study requirement in the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989, the Treasury produced a report
meant to suggest changes that could strengthen federal deposit insurance
(U.S. Treasury Department 2008, 202-4). The Treasury named the study
Modernizing the Financial System: Recommendations for Safer, More
Competitive Banks. In addition to recommendations concerning the deposit
insurance system, the study proposed consolidating the financial
regulatory system to enhance efficiency by reducing
"duplicative" and "fragmented" supervision. This
proposal, building on the 1984 blueprint, called for only two banking
supervisors, the new Federal Banking Agency (FBA) and the Federal
Reserve. The Federal Reserve would be responsible for state-chartered
banks and associated holding companies, and the FBA would be responsible
for all other bank, bank holding company, and thrift supervision. Under
this proposal the FDIC would be responsible only for deposit insurance.
March 2008 Treasury Blueprint
Concerned that a fragmented financial regulatory structure placed
U.S. financial institutions at a disadvantage relative to foreign
counterparts, the Treasury Department produced a proposal to reform the
U.S. regulatory system. The proposal was entitled Blueprint for a
Modernized Financial Regulatory Structure and was released in March
2008. The proposal was meant to create more uniform supervision of
similar activities across different providers (i.e., regardless of
whether a similar product is provided by a bank, a thrift, or an
insurance company, its production is supervised similarly), reducing
duplication of effort and trimming costs of regulation and supervision
for government agencies as well as for regulated institutions.
Additionally, the proposal was influenced by serious financial market
difficulties emanating from troubles that began in the subprime mortgage
market in 2007.
The authors of the 2008 Blueprint proposed what they viewed as
"optimal" recommendations for regulatory restructuring, along
with short-term and intermediate-term changes. The optimal
recommendations called for replacing all financial regulators with three
entities: a prudential regulator, a business conduct regulator, and a
market stability regulator.
In broad terms, the prudential regulator would be responsible for
supervising all financial firms having government-provided insurance
protection. This group includes depository institutions--because of
their access to federal deposit insurance--and insurance
companies--because of state-government-provided guarantee funds. The
goal of the prudential regulator is to ensure that these financial firms
do not take excessive risks. Currently, this role is performed by a
number of banking agencies including the FDIC, the OCC, the Office of
Thrift Supervision, the Federal Reserve, state banking supervisory
agencies, and state insurance supervisors. The Blueprint would have only
one agency performing this prudential supervisory role for all banks and
insurance companies.
The business conduct regulator envisioned by the authors of the
Blueprint is largely focused on consumer protection. It is charged with
ensuring that consumers are provided adequate disclosures and that
products are neither deceptive nor offered in a discriminatory manner.
While the 2008 Blueprint does not specify particular agencies as
the prudential or business conduct regulators, it does name the Federal
Reserve as the market stability regulator. The role of this regulator is
to "limit spillover effects" from troubles in one firm or one
sector, i.e., to reduce systemic risk (U.S. Treasury Department 2008,
146). Presumably, the authors of the proposal view the Federal Reserve
as suited to this role because of the Fed's ability to make loans
to illiquid institutions via its role as the lender of last resort. In
addition to lending to institutions facing financial difficulties, the
market stability regulator is to take regulatory actions to limit or
prohibit market developments that might contribute to market turmoil.
The market stability regulator, in general, is not focused on problems
at individual institutions unless they might spill over more widely.
4. THE PROS AND CONS OF CONSOLIDATING
If the United States were to adopt the consolidated regulatory
structure proposed in the Treasury Blueprint, it would be joining a
widespread trend toward consolidation. While the specific reasons
countries consolidate vary, several key arguments emerge in discussions:
adapting to the increasing emergence of financial conglomerates, taking
advantage of economies of scale, reducing or eliminating regulatory
overlap and duplication, improving accountability of supervisors, and
enhancing regulator and rulemaking transparency.
Unfortunately, discussions of motivations provide little analysis
of regulatory incentives. Nevertheless, these incentives seem
fundamental to questions about whether consolidation is likely to be
beneficial. Organizational economics has identified conditions--related
to organizational incentives--under which a centralized (consolidated)
organizational structure can be expected to produce superior outcomes to
a decentralized structure, and vice versa. Some discussion of these
incentives is included in the following paragraphs.
Pro: Consolidated Structure is Better Suited to Financial
Conglomerate Regulation
Financial industry trends have led to large, complex firms offering
a wide range of financial products regulated by multiple supervisory
institutions. This complexity manifests itself in the United States and
the rest of the world through the increased emergence of financial
conglomerates, defined as companies providing services in at least two
of the primary financial products--banking, securities, and insurance
(see Table 2). The desire to adapt regulatory structures to a
marketplace containing a growing number of consolidated financial
institutions is the leading reason for the move to consolidated
supervision. For example, in 2003 the World Bank surveyed 15 countries
choosing to integrate their financial regulatory structures and found
that the number one motivation was the need to more effectively
supervise a financial system that was shifting toward conglomerates.
(6), (7)
Table 2 The Market Share (%) of Financial Conglomerates in 1990 and
2001 in Each Sector, Across the 15 World Bank-Surveyed Countries
1990 2001
Banking 53 71
Securities 54 63
Insurance 41 70
Notes: See footnote 6.
Source: De Luna-Martinez and Rose (2003).
As discussed in Section 1, because financial conglomerates may
combine bank, securities, and insurance subsidiaries in one holding
company, losses in one entity type (say, the subsidiary securities firm)
can endanger another entity (say, the subsidiary bank). For instance, if
BHC X has subsidiaries that include Bank A and Securities Company B, it
is possible that risky behavior that results in losses on the part of
Securities Company B may result in spillover losses to Bank A (in the
absence of perfectly effective firewalls), or reputational damage,
leading to the potential lack of confidence in Bank A. Bank A's
regulator may not have foreseen such risks, and thus may not have taken
adequate measures to prevent the loss.
In addition, separate specialized supervisors may not have a strong
incentive to concern themselves with the danger that losses in
subsidiaries they supervise might lead to problems in other
subsidiaries. Their incentive will be weak because they face limited
repercussions for difficulties that might arise in affiliates that they
do not supervise even when brought on by problems that spread from an
entity that they do supervise. (This is a typical externality problem,
whereby the actions--or lack of actions--of one party can harm another
party.) Hence, separate supervisors may invest too few resources in
protecting against losses that might spread. Therefore, effective
financial supervision should address whether "there are risks
arising within the group as a whole that are not adequately addressed by
any of the specialist prudential supervisory agencies that undertake
their work on a solo basis" (Goodhart et al. 1998, 148).
Similarly, with separate supervisors, there may even be
disincentives to share information. Turf wars between the supervisors
may cause supervisory employees to be reticent to share. By sharing
information, a bank supervisor, for example, may help a securities
supervisor discover a problem. However, if the bank supervisor withholds
information and allows the problem to remain undiscovered until it
grows, the securities supervisor is likely to be severely embarrassed by
its failure to discover the problem earlier. If the bank supervisor can
benefit from the securities supervisor's embarrassment, perhaps by
being granted, by legislators, an enlarged supervisory domain, it is
likely that the information will not be shared. (8)
By consolidating supervisory agencies, these incentive problems can
be overcome. A single supervisory agency, which is held responsible for
losses throughout the financial conglomerate, will have the incentive to
invest sufficient resources in guarding against losses that might spread
across entities within the conglomerate.
Even assuming that no incentive problems were present,
communications between supervisors is likely to be simpler within one
consolidated entity than across different supervisory organizations.
Separate organizations will have differing cultures and policies so that
communication between them can more easily become confused than can
communication within one organization.
Pro: Economies of Scale
Another benefit of regulatory consolidation is that it can lead to
economies of scale. Economies of scale result when fewer resources are
employed per unit of output as firm (or agency) size grows. For
instance, a subject matter expert, such as one specializing in credit
default swaps, may be underutilized if working for a specialized
regulatory institution. Whereas, under a consolidated structure, a
single regulatory institution could use one subject matter expert for
all sectors, banking, securities, and insurance. Given that banks,
securities firms, and insurance companies all have at least some similar
products today, they all need some of the same types of specialist
examiners (e.g., experts on credit default swaps). A consolidated
supervisor can share costs of indivisible resources. Decentralized
supervisors are unlikely to share resources across institutional lines
because it is costly to establish labor contracts between separate
agencies. Such contracts, which must specify agency employee actions
across a wide range of circumstances, are prohibitively expensive to
develop. Outsourcing is another option but may be infeasible for
financial supervisors because supervision generates a great deal of
confidential information that is difficult to protect when not held
internally. The prospect of maximizing economies of scale and scope in
regulation was considered to be the second most significant rationale
for those countries surveyed by the World Bank in 2003 that chose to
consolidate.
Pro: Reduced Overlap and Duplication
The complex institutional structure of decentralized regulatory
systems, where by supervision is organized around specialized agencies,
has arguably led 10 a significant amount of overlap and duplication in
regulatory efforts, thus reducing efficiency and effectiveness, as well
as increasing costs. For instance, in the United States, securities
subsidiaries of financial holding companies are primarily supervised by
the SEC; however, the Federal Reserve has some supervisory
responsibility as umbrella supervisor. Under GLBA, the Federal Reserve
generally must rely on SEC findings regarding activities of a securities
subsidiary. However, to be well-informed about the financial condition
of the holding company, the Federal Reserve must have staff who are very
familiar with securities operations in order to interpret SEC findings.
In the absence of highly effective (and therefore, costly) coordination
between overlapping regulatory authorities, the potential for
inconsistent actions and procedures may result in inefficiencies by
delaying issue resolution or arriving at conflicting rulings. Moreover,
financial institutions may be visited by different regulators and
therefore need to dedicate time to educating multiple supervisors about
the same activity within the firm. Duplication could be avoided, in a
decentralized supervisory environment, by clearly dividing up
responsibilities among the various supervisors. However, doing so
requires not only careful coordination, but also the ability of
supervisors to convince one another that they will watch for risks that
will flow into other entities. Developing this level of trust between
institutions is difficult, for instance, because of the incentives
discussed in the previous section, making consolidation an attractive
alternative. Thus, placing a single entity in charge of supervision and
regulation for all financial institutions may offer the least cost
regulatory structure.
Pro: Accountability and Transparency
In a decentralized supervisory system with multiple agencies
reviewing the financial condition of one entity, legislators may have
difficulty determining which agency is at fault when a financial
institution fails. As a result, agencies may have a reduced incentive to
guard against risk, knowing that blame will be dispersed. Consolidation
allows the government to overcome this difficulty by making one agency
accountable for all problems--giving this agency correct incentives.
Additionally, with a single regulator rather than multiple
regulators, the regulatory environment can be more transparent and, as a
result, learning and disseminating rules may be less costly. With one
regulator, financial institutions will spend less time determining
whether a new product being considered will be acceptable to the
regulator, therefore lowering the cost of financial products. Reports
will have a consistent structure, simplifying investor comparisons
between multiple institutions. Further, consumers can more easily locate
information about an institution with which they conduct business, or
more broadly about the set of rules that apply to various financial
institutions. All of these benefits from greater transparency that a
single supervisor offers lower the cost of providing financial services
and, thus, enhance public welfare.
Con: Lack of Regulatory Competition
In order to fully achieve the benefits discussed above, supervisory
consolidation would need to be complete--meaning the creation of one
supervisor with authority for all supervisory and regulatory decisions
across all types of financial institutions. However, there are costs
associated with creating a single regulator since it would lack
competitors--other regulatory agencies--and therefore have greater
opportunity to engage in self-serving behavior to the detriment of
efficiency.
For example, this single entity might have an incentive to be
excessively strict. Regulators often face significant criticism when
institutions that they regulate fail. Yet they receive few benefits when
institutions undertake beneficial, but risky, innovation aimed at
offering superior products or becoming more efficient. As a result,
regulators have a strong incentive to err on the side of excessive
strictness and will be likely to restrict risky innovations. This
incentive is contained to some extent in a decentralized structure in
which some competition may exist between regulators. (9)
Beyond restrictions on innovative, but risky, products, one might
expect a single regulator to charge higher fees to enhance regulatory
income. Additionally, a single dominating regulator would be likely to
adopt a narrow, one-size-fits-all regulatory approach, since such an
approach would likely be simpler to enforce but will be unsuitable in a
diverse financial marketplace.
If self-serving regulatory incentives are to be prevented,
legislators will almost certainly establish checks on regulatory
practice that will tend to undercut the advantages--discussed
earlier--of consolidation. Typically, such checks have included various
means of sharing regulatory or supervisory decision making authority. In
the United States the multiple regulatory agencies, such as the
Treasury, the Federal Reserve, and the FDIC, often are required by law
to make regulatory decisions jointly. In a consolidated environment,
with only one regulatory agency, that agency is likely to share
authority with the Treasury and the central bank, a common practice in
those countries that have adopted a consolidated model (discussed
below).
Con: Fewer New Ideas
The multiple regulatory agencies in a decentralized system are
likely to produce a range of considered opinions on the most important
regulatory questions the system faces, perhaps as many opinions as there
are regulators. Competition among regulatory agencies for legislator or
financial institution support (often viewed negatively as a power
struggle between regulators) will drive idea generation. In contrast, a
single regulator, because of its need to speak with one voice, will tend
to identify and adopt one view.
The dual banking system in the United States, whereby bank founders
can choose between a federal or state charter and thereby choose between
various regulators, is often thought to create an environment that
fosters experimentation with new financial products and delivery systems
that, if successful, might be more widely adopted (Ferguson 1998). An
important example of this type of state experimentation leading to later
nationwide adoption occurred in the early 1970s when regulators in New
England allowed thrifts in that region to pay interest on checking
accounts. This innovation ultimately was an important contributor to the
elimination of the nationwide prohibition of the payment of interest on
checking accounts and was later followed by the removal of restrictions
on bank deposit interest rates by the Depository Institutions
Deregulation and Monetary Control Act of 1980 (Varvel and Walter 1982,
5). Without the opportunity provided by some states to experiment with
the payment of interest on checking accounts, it seems likely that
wide-ranging restrictions on interest rates might have survived longer.
Thoroughgoing consolidation, for example as envisioned in the Treasury
Blueprint, would likely do away with this level of choice and
experimentation with only one charter and one prudential supervisor for
all insured financial institutions.
In a stable financial environment, the generation of competing
ideas is unnecessary. In such a situation, a centralized regulator may
be preferable. Yet in a dynamic financial environment the
idea-generation component of a decentralized regulatory scheme will be
important and valuable (Garicano and Posner 2005, 153-9).
Con: Lack of Specialization
The combination of all regulatory functions within a single
institution may result in a lack of sector-specific regulatory skills,
whereby agency staff possess intimate knowledge tailored to a certain
sector. Despite the increasing emergence of financial conglomerates
worldwide, with many conglomerates sharing a similar set of products, it
is not necessarily the case that all institutions have converged on a
common financial conglomerate model. For instance, an insurance company
that has started to expand services to include areas of banking and
securities is likely to remain focused predominantly on its core
insurance business, and thus may benefit more from a regulator that has
specialized knowledge in insurance (Goodhart et al. 1998). If the single
regulator were set up with divisions that address sector-specific
issues, it is not obvious that supervisors within the same organization
with sector-specific responsibilities would effectively communicate and
coordinate efforts more efficiently than they would in a decentralized
setting.
Con: Loss of Scope Economies Between Consumer and Safety
Supervision
The Treasury Blueprint as well as the consolidated supervisory
system adopted by Australia separate consumer protection supervision
from safety and soundness supervision. But separating these two
functions may mean a loss of scope economies. (10) Scope economies are
present when the production of one product, within the same entity,
lowers the cost of producing another product. In the United States at
least, consumer protection law enforcement in depository institutions is
conducted via regular on-site examinations in which examiners review
depositories for violations of consumer laws.
Consumer protection examinations have their origin in, and are
modeled after, bank safety and soundness examinations. As discussed
earlier, in a safety and soundness examination, examiners from a federal
banking agency investigate a bank's riskiness and financial health.
The agencies examine every bank periodically. The examinations include
an on-site analysis of the bank's management, its policies and
procedures, and its key financial factors. Additionally, examiners
verify that a bank is complying with banking laws and regulations.
Because of this responsibility, examiners gained the task of verifying
compliance with the consumer protection laws when these were passed in
the United States in the 1960s and 1970s. Between 1976 and 1980, the
depository institution regulatory agencies established "consumer
compliance" examinations separate from safety and soundness
examinations because performing both consumer law compliance and safety
and soundness tasks within the same examination was too burdensome
(Walter 1995, 69-70).
While separate staffs typically perform consumer examinations
during separate exams these individuals are typically part of the same
departments and are often trained together so that they each have some
familiarity with the other's responsibilities. Safety and soundness
examiners can discover consumer compliance-related information during
their examinations, and consumer examiners will at times uncover
safety-related information. As a result, it seems likely that economies
of scope exist when these two types of compliance are produced together.
By remaining closely tied to one another in the same departments, this
information is more likely to be shared.
Con: Adjustment and Organizational Costs
While economies of scale can be utilized once all enabling
legislation is in place and the regulatory agency has become fully
consolidated, this process of achieving complete integration can be
lengthy and costly. For instance, Japan's consolidated regulator,
the Financial Services Authority (FSA), underwent several reforms
between 1998 and 2000 before assuming its current responsibilities as an
integrated financial services regulator. Observers discuss numerous
adjustment costs likely to arise when shifting regulatory and
supervisory activities from multiple agencies to one agency. A few of
the more significant costs include: developing a uniform compensation
scheme; restructuring IT systems and compliance manuals; training staff
for new responsibilities; reorganizing management structures; and costs
borne by financial institutions as they adapt to the new regulatory
regime (HM Treasury 1997). As demonstrated by Japan, the transition
period during which the new regulatory framework is constructed is long.
During this time, multiple surpervisory institutions continue to
operate, resulting in increased regulatory costs. Even in the United
Kingdom, where integration took place relatively quickly--in a so-called
"big bang"--the transition was fairly lengthy. For example,
the FSA reported to two separate boards for approximately two years
(Taylor and Fleming 1999).
One possible means of lowering transition costs is to simply grant
all regulatory responsibility to one existing financial regulator rather
than creating a whole new entity. Since, in many countries, central
banks are the primary bank regulator and typically also act as the LOLR,
they are an obvious choice (see the table in Section 6). However,
central banks have traditionally not been involved in the insurance and
securities sectors and thus lack expertise in these areas. Additionally,
there are potential conflicts of interest that should be considered when
vesting all regulatory power with the central bank, as will be discussed
in Section 6.
Perhaps because of the lack of insurance and securities expertise
among central bank staffs and because of potential conflicts of
interest, many countries, such as those discussed in the next section,
have chosen to create a new regulatory institution to conduct financial
services regulation. However, a single regulator must be structured such
that it is free of political influence. Otherwise, legislators can be
expected to influence the regulatory agency to achieve short-term
political goals. For example, the regulator might be encouraged to
provide forbearance for troubled institutions when legislators face
pressure from their constituents who represent the troubled entities or
the regions in which those entities operate. Observers note that such
forbearance was widespread during the U.S. savings and loan crisis of
the 1980s.
One means of reining in this potential to inappropriately respond
to political pressure is to enact legislation that ties the hands of the
regulatory agency. Following the savings and loan crisis, legislation
was enacted that was meant to limit the choices of depository
institution regulators when dealing with a troubled institution. The
legislation established rules that required regulators to take specified
actions, most importantly to close a troubled institution in the most
serious cases as its financial health declined.
Nevertheless, rules are difficult to write to cover all situations
in which regulators might have an incentive to inappropriately respond
to political pressures. Instead broader measures must be established to
separate a financial supervisor from political influence.
One important measure intended to insulate a regulator from the
dangers of political pressure is to provide the regulator with a source
of income outside of the very politically charged legislative budget
process. For instance, the Federal Reserve generates operating income
from asset holdings. Additionally, during the debate surrounding
legislative consideration of reforms aimed at strengthening the housing
GSEs (Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System),
there was ample discussion of possible means of providing an adequate
source of income, separate from the political process (Lockhart 2006,
3). Ultimately, income for the new regulator created by the 2008
legislation is derived from fees paid by the entities it regulates and
is not subject to the legislative appropriation process. Beyond an
independent source of income, other structural arrangements, such as a
managing board comprised of a majority of nongovernmental members, are
meant to ensure freedom from political influence.
If the newly formed regulatory entity is created such that it is
free of political influence, additional structural arrangements must be
put in place that ensure the institution is accountable for its actions.
Some accountability mechanisms include: transparency (clarity of
entities' mandates, objectives, rules, responsibilities, and
procedures), appointment procedures of senior staff, integrity of board
staff and procedures to monitor this function, effective communication
and consultation procedures, as well as intervention and disciplinary
procedures in place to address misconduct or poor decisions made by the
regulatory institution (Llewellyn 2006).
Without effective accountability mechanisms, a purely independent
institution may have the incentive to act in its own self-interest and,
without competitors, make regulatory choices that are overly strict or
narrow. These tendencies can be constrained by dispersing power through
a system of checks and balances, but doing so undermines some of the
previously discussed benefits of consolidation. Ensuring the
accountability of an independent regulatory agency while also
structuring it so that it is free of political influence requires a
complex balancing act. Thus, establishing a single independent regulator
with the correct incentives to carry out regulation efficiently can be a
complicated and costly feat.
As will be discussed in the next section, many countries that are
typically thought of as having adopted a single regulator model have
formed multipart structures geared toward ensuring the single regulator
has ample oversight to prevent the abuse of wide supervisory authority
and to have more than a single entity involved in maintaining financial
stability. Thus, many of the countries that will be discussed in the
following section (and included in the single supervisor column in Table
3) have dispersed regulatory power between entities, such as between a
supervisory agency and a central bank, and therefore are less
consolidated than the term "single supervisor" implies.
Table 3. Countries with a Single Supervisor, Semi-Integrated
Supervisory Agencies, and Multiple Supervisors in 2002
Single Supervisor for Agency Supervising Two Types of Fin.
the Financial System Intermediaries
Banks and securities Banks and insures
firms
1. Austria 23. Dominican 29. Australia
Republic
2. Bahrain 24. Finland 30. Belgium
3. Bermada 25. Luxembourg 31. Canada
4. Cayman 26. Mexico 32. Colombia
5. Denmark 27. Switzerland 33. Ecuador
6. Estonia 28. Uruguay 34. El Salvador
7. Germany 35 Guatemala
8. Gibraltar 36. Kazakhstan
9. Hungary 37. Malaysia
10. Iceland 38. Peru
11. Ireland 39. Venezuela
12. Japan
13. Latvia
14. Maldives
15. Malta
16. Nicaragua
17. Norway
18. Singapore
19. South
20. Sweden
21. UAE
22. U.K
As Percent of All Countries in the Sample
29% 8% 13%
Agency Supervising Multiple Supervisors (at least one
Two Types of Fin for banks, one for securities firms,
Intermediaries and one for insures)
Securities firms and
insures
40. Bolivia 47. Argentina
41. Chile 48. Bahamas
42. Egypt 49. Barbados
43. Mauritius 50. Botswana
44. Slovakia 51. Brazil
45. South Africa 52. Bulgaria
46. Ukraine 53. China
54. Cyprus
55. Egypt
56. France
57. Greece
58. Hong Kong
59. India
60. Indonesia
61. Israel
62. Italy
63. Jordan
64. Lithuania
65. Netherlands
66. New Zealand
67. Panama
68. Philippines
69. Poland
70. Portugal
71. Russia
72. Slovenia
73. Sri Lanka
74. Spain
75. Thailand
76. Turkey
77. USA
As Percent of All Countries in the Sample
9% 38%
Notes: Sample includes only countries that supervise all three types of
intermediaries (banks, securities firms, and insurers).
Source: De Luna-Martinez and Rose (2003).
5. CONSOLIDATION IN OTHER COUNTRIES
Traditionally, countries have conducted financial regulation and
supervision through the central bank, the ministry of finance or
Treasury and various other specialized supervisory agencies, including
self-regulatory organizations (SROs) (Martinez and Rose 2003, 3).
However, many countries have carried out major financial regulatory
reform by consolidating the roles of these institutions into a
centralized regulatory regime and reducing the role of the central bank
in prudential oversight of financial institutions. Norway was the first
nation to adopt a single regulator, but many others followed. According
to a 2003 World Bank Study, approximately 29 percent of countries
worldwide have established a single regulator for financial services and
approximately 30 percent more have significantly consolidated but have
not gone as far as a single regulator to supervise the bank, securities,
and insurance sectors (see Table 3). (11)
The U.S. Treasury's proposal to modernize the U.S. regulatory
structure through consolidation has increased interest in the rationales
and processes of countries that have consolidated, such as the United
Kingdom, Germany, Japan, and Australia. While many countries have
followed this trend, these four countries are especially important
because of the size of their financial systems and their significance in
the global financial market. The United Kingdom, Japan, and Germany have
all adopted single-regulator models, while Australia has adopted a model
with two primary regulators. However, the notion of a single regulator
can be misleading. Although a significant amount of consolidation has
taken place in these countries, the newly formed single-regulatory
entity does not act alone in its efforts to supervise and regulate
financial institutions. Each of these countries, with the exception of
Japan, fashioned a variety of forms of checks and balances. Significant
coordination occurs between the newly established integrated regulator,
the central bank, and other branches of government. In addition, these
single-regulator institutions contain various divisions that have
complexities of their own.
While this section reviews the structural transformations occurring
in these countries' financial regulatory systems, it will not
assess the success or failure of newly implemented systems because they
have been in place for a relatively short period and assessing causes of
problems or successes in dynamic financial systems is complicated.
While, for example, some observers have blamed depositor turmoil
associated with the demise of Northern Rock in England on failures of
the consolidated supervisory system and especially on the fact that the
central bank was largely left out of supervision, the report from the
House of Commons Treasury Committee spread blame more widely. That
report maintained that an amalgamation of contributing factors were
present, such as the lack of a deposit insurance system as well as a
failure of communication between the supervisory agency, the central
bank, and the Treasury (House of Commons Treasury Committee 2008, 3-4).
Countries that adopted consolidated structures did so under varying
financial conditions and structures, and all operate in various legal
and political environments. Thus, to compare outcomes across countries
would require an exceedingly detailed analysis, which is beyond the
scope of this article.
The United Kingdom's Financial Services Authority
The United Kingdom serves as a useful example when considering the
possibility of consolidation in the United States because the United
States and the United Kingdom share similar economic and financial
systems (both contain top international financial markets, for example).
During the 1990s, both countries were interested in reforming their
complicated regulatory structures, yet the United States maintained a
decentralized regulatory structure while the United Kingdom changed
significantly. Specifically, the United Kingdom eliminated nine
independent regulatory agencies and replaced them with a single
regulatory entity. Prior to regulatory consolidation, regulatory and
supervisory authority for the United Kingdom's banking sector was
long held by the Bank of England, the United Kingdom's central
bank.
The first step in a series of reforms was to transfer all direct
regulation and supervision responsibilities from the Bank of England
(BOE) to the Securities Investment Board (SIB) in 1997. Next, plans were
developed to establish the Financial Services Authority (FSA), a single
regulatory entity to oversee supervision and regulation for all
financial activity in the United Kingdom. The FSA did not assume full
power until 2001 under the Financial Services Markets Act of 2000. At
this point, all regulatory and supervisory responsibilities, previously
conducted by the SIB and nine SROs, became the responsibility of the
FSA. Thereafter, the FSA's new role combined prudential and
consumer protection regulation for banking, securities, investment
management, and insurance services in one regulatory body. Although the
FSA was created as a single agency to accomplish the goals of
regulation, the agency itself is comprised of three directorates
responsible for (1) consumer and investment protection, (2) prudential
standards, and (3) enforcement and risk assessment. The FSA alone is
responsible for all the regulatory and supervisory functions that are
performed in the United States by federal and state banking agencies,
the SEC, SROs, the Commodity Futures Trading Commission, and insurance
commissions.
The United Kingdom created the Tripartite Authority as an oversight
entity with representatives from the Treasury, the BOE, and the FSA to
act as a coordinating body and to balance the power of the FSA. The
Tripartite Authority is responsible for ensuring clear accountability,
transparency, minimizing duplication of efforts, and exchanging
information between entities. Each entity's respective obligations
are outlined in a memorandum of understanding (MOU). (12)
In the U.S. Treasury's Blueprint, consumer protection and
prudential regulation would be conducted by two newly formed agencies,
leaving the central bank solely with financial stability responsibility.
The BOE performs a similar role in the United Kingdom. The BOE's
role in ensuring financial stability, as laid out in the MOU, includes
acting to address liquidity problems (i.e., making loans to illiquid
institutions), overseeing payment systems, and utilizing information
uncovered through its role in the payments system and in monetary policy
to act as advisor to the FSA on issues concerning overall financial
stability. As part of its financial stability role, the BOE is the LOLR.
However, if taxpayer funds are at risk, the BOE must consult with the
Treasury prior to lending.
Japan's Financial Services Authority
Japan's transition to a single regulator was more dramatic
than in many other countries because the Ministry of Finance (MOF) held
significant regulatory power prior to reform but lost a large portion.
While some supervisory functions were held by the Bank of Japan (BOJ),
the Ministry of International Trade and Industry, and various SROs, the
Minister of Finance was responsible for the majority of financial
regulation including banking supervision and regulation. (13)
In 1998 Japan established the Financial Supervisory Agency
(FSA-old) under the Financial Reconstruction Commission (formed the same
year) as the principle enforcement regulator of the financial services
industry. This agency, created to improve supervisory functions and
rehabilitate the financial sector, removed banking and securities
regulation functions from the MOF. In 2000, the FSA-old was further
refined, replacing the MOF as the entity responsible for writing
financial market regulation, and was renamed the Financial Service
Authority (FSA). The newly formed "single regulator," the FSA
is structurally under Japan's Cabinet Office and is independent
from the MOF. The primary responsibilities of the FSA are to ensure the
stability of the financial system; protect depositors, securities
investors, and insurance policyholders; inspect and supervise private
sector financial institutions; and conduct surveillance of securities
transactions.
While the FSA is typically considered a single regulator for
financial services, its authority is not as comprehensive as that of
other unified regulators, such as the FSA in the United Kingdom. For
instance, the BOJ retains supervisory responsibility for banks, while
the responsibility for oversight of the securities sector lies with the
Securities and Exchange Surveillance Commission (SESC), similar to the
SEC in the United States. (14) In addition, according to an IMF study,
the MOF continues to be an influence in financial regulation, preventing
the FSA from exercising independent regulatory authority (International
Monetary Fund 2003). Unlike the single regulators in other countries,
the FSA does not have a board overseeing its operations and thus lacks
the layer of separation from political influence such a board offers.
The IMF study also notes an absence of formal communications between the
FSA and the BOJ, preventing information exchange between the parties
that could potentially enhance supervisory efficiency. Even in the
highly decentralized regulatory environment of the United States, there
are formal communication structures between regulatory agencies through,
for example, the FFIEC.
Germany's BaFin
In the years leading up to reform, banking supervision in Germany
was carried out by an autonomous federal agency, BaKred (Federal Bank
Supervisory Office), which shared responsibilities with Germany's
central bank, the Bundesbank. This contrasts with many other countries
such as the United Kingdom, which concentrated bank supervisory power in
the central bank prior to reform. The Bundesbank conducted bank
examinations, whereas the BaKred was responsible for determining
regulatory policy. In March of 2002 legislation was enacted that
consolidated Germany's regulatory agencies for banking, securities
(regulated by BaWe, the Federal Supervisory Office for Securities
Trading), and insurance (BaV, the Federal Supervisory Office for
Insurance Enterprises) into a single federal regulatory entity, BaFin
(Schuler 2004). BaFin is an independent federal administrative agency
under the MOF's supervision. The authority over decisions with
respect to the supervision of credit institutions, investment firms, and
other financial organizations, previously conducted by the BaKred, were
now a part of BaFin's new responsibilities.
BaFin's organizational structure consists of regulatory bodies
responsible for both sector-specific and cross-sectoral supervision. The
sector-specific structural aspect differs from the United Kingdom and
Japan, which are functionally organized. Rather, BaFin consists of three
directorates that deal with sector-specific regulation and thus perform
the roles of the former three independent supervisory offices: BaKred,
BaV, and BaWe. In addition to these specialized directorates, BaFin also
consists of three cross-sectoral departments that handle matters that
are not sector-specific and may affect all directorates, including
issues involving financial conglomerates, money laundering, prosecution
of illegal financial transactions, and consumer protection. With
effective coordination and cooperation between the directorates,
sector-specific and cross-sectoral issues could be addressed by one
institutional body. BaFin also encompasses an administrative council and
advisory board. (15) These groups oversee BaFin's management and
advise BaFin on matters concerning supervisory practices, laying the
groundwork for a more accountable and transparent regulatory system.
Germany's central bank, the Bundesbank, expressed interest in
becoming the sole bank supervisor when consolidation legislation was
debated. Despite the Bundesbank's efforts, it lacked the support
from the Lander (state governments of Germany) and lost bank supervisory
authority in the consolidation. However, because of the
Bundesbank's experienced staff and insights into the financial
system, the Parliament established an agreement between BaFin and the
Bundesbank under which the Bundesbank would retain an important, but
reduced, supervisory role in the financial system. In order to prevent
duplication of work and keep costs minimized, the Bundesbank and BaFin
have divided tasks between themselves: BaFin writes regulations and the
Bundesbank, which is independent from BaFin, carries out day-to-day
supervision (evaluating documents, reports, annual accounts, and
auditors' reports submitted by the institutions, as well as banking
operations audits, i.e., examinations). Cooperation between them is
required by the Banking Act and is outlined in a memorandum of
understanding signed by each party.(16) Germany's Bundesbank stands
out from the majority of central banks in other single-regulatory models
because it has greater involvement in bank supervision. These retained
examination responsibilities may be useful to the Bundesbank when
deciding whether to grant aid to troubled banks.
Australia's "Twin Peaks" Model
The U.S. Treasury's proposed "objectives-based"
optimal regulatory structure, including a market stability regulator, a
prudential financial regulator, and a consumer protection regulator, is
very similar in structure to Australia's "twin peaks"
model of financial regulation. As Australian financial markets became
more globally integrated, financial deregulation occurred throughout the
1980s and 1990s, and the number of financial conglomerates grew, so the
idea of reconstructing the financial regulatory system became an issue
of interest. In 1996 the Wallis Committee, chaired by Australian
businessman Stan Wallis. was created to prepare a comprehensive review
of the financial system and make recommendations for modifying the
regulatory apparatus.
Later known as the Wallis Inquiry, the committee concluded that
given the changed financial environment, establishing two independent
regulators--each responsible for one primary regulatory objective--would
result in the most efficient and effective regulatory system. Australia
adopted the Wallis Plan producing the "Twin Peaks" model of
regulation, comprised of two separate regulatory agencies: one
specializing in prudential supervision, the Australian Prudential
Regulation Authority (APRA), and the other focusing on consumer and
investor protection, the Australian Securities and Investments
Commission (ASIC). The APRA is responsible for prudential supervision of
deposit-taking institutions (banks, building societies, and credit
unions), insurance, and pension funds (called superannuation funds in
Australia). (17), (18) In addition to supervising these institutions,
the APRA is also responsible for developing administrative practices and
procedures to achieve goals of financial strength and efficiency. Unlike
the structure of single regulators of the other countries discussed,
Australia's regulatory structure is designed with two independent
regulators that operate along functional rather than sectoral lines.
However, like the single-regulatory models, the APRA and ASIC coordinate
their regulatory efforts with the central bank and the Treasury.
The Reserve Bank of Australia (RBA) lost direct supervisory
authority over individual banking institutions to the APRA but retained
responsibility for maintaining financial stability, including providing
liquidity support. In addition, the RBA has a regulatory role in the
payments system and continues its role in conducting monetary policy
(Reserve Bank of Australia 1998). The three regulatory agencies (APRA,
ASIC, and RBA) are all members, along with the Treasury, of the Council
of Financial Regulators, which is a coordinating body comprised of
members from each agency and chaired by the RBA. The Council's role
is to provide a high level forum for the coordination and cooperation of
the members. It holds no specific regulatory function separate from
those of the individual members. (19) This system resembles that of the
FFIEC in the United States, functioning as a coordinating unit between
financial supervisory actors.
6. CENTRAL BANKS AND REGULATORY CONSOLIDATION
Traditionally, central banks have played a major role in bank
supervision, as shown in the previous section. Government agencies that
are separate from the central bank typically supervise securities and
insurance sectors. As banking firms began to offer securities and to
some extent insurance products, as securities and insurance companies
started to offer banking products, and as financial conglomerates
developed, countries reassessed their financial regulatory systems.
Included in this reassessment was a review of the central banks'
role in regulation and supervision. Ultimately, in many nations, the
regulatory role of central banks was reduced or eliminated (see Table
4). The Treasury Blueprint's proposal to remove supervisory
functions from the Federal Reserve is therefore not unique. But why
might one wish to consolidate regulation outside of the central bank?
And what are the downsides to removing regulation from the central bank?
Table 4 Location of Bank Supervision Function
Region Central Bank Only (69 Countries)
Africa Botswana Burundi Guinea Lesotho Libya South Africa
Gambia Ghana Namibia Rwanda Sudan Egypt
Swaziland
Tunisia
Zimbabwe
Americas Argentina Guyana Suriname Trinidad and
Brazil Tobago Uruguay
Asia/ Pacific Bhutan Cambodia Kyrgyzstan Malaysia Samoa Saudi
Fiji Hong Kong. New Zealand Pakistan Arabia
China India Papua New Guinea Singapore Sri
Israel Jordan Philippines Qatar Lanka
Kuwait Russia Tajikistan
Tonga
Turkmenistan
United Arab
Emirates
Europe Armenia Ireland Italy Romania Serbia
Azerbaijan Lithuania Moldova and Montenegro
Belarus Bulgaria Netherlands Portugal Slovenia Spain
Croatia Greece Ukraine
Offshore Aruba Bahrain Macau, China Oman
Financial Belize Mauritius Seychelles
Centers
Region Central Bank Central Bank is
Among Multiple Not a Supervisory
Supervisors (21 Authority (61
Countries) Countries)
Africa Morocco Nigeria Algeria Benin Equatorial Guinea
Burkina Faso Gabon Guinea
Cameroon Central Bissau Kenya
African Republic Madagascar Mali
Chad Congo Cote Niger Senegal
d"lvoire Togo
Americas United States Bolivia Canada Guatemala
Chile Colombia Honduras Mexico
Costa Rica Nicaragua
Ecuador El Paraguay Peru
Salvador Venezuela
Asia/ Pacific People's Rep. of Australia Japan
China Taipei, Rep. of Korea
China Thailand Lebanon
Europe Albania Czech Austria Belgium Hungary Iceland
Republic Germany Bosnia and Latvia Luxembourg
Macedonia Herzegovina Norway Poland
Slovakia Denmark Estonia Sweden
Finland France Switzerland
United Kingdom Turkey
Offshore Anguilla Antigua British Virgin Jersey
Financial and Barbuda Islands Gibralter Liechtenstein
Centers Commonwealth of Guernsey Isle of Malta Panama
Dominica Cyprus Man Puerto Rico
Grenada
Montserrat Saint
Kitts and Nevis
Saint Lucia Saint
Vincent and The
Grenadines
Vanuatu
Source: Milo 2007, 15
Reasons to Move Regulation Outside of the Central Bank
Observers note three predominant reasons for preferring to have
regulation outside of the central bank (see, for example, Calomiris and
Litan [2000, 303-8]). Two of these reasons involve a conflict of
interest between central banks' macroeconomic responsibilities and
supervisory responsibilities. The third involves the possibility of
damage to the central bank's reputation, and therefore
independence, resulting from problems at its supervised institutions.
First, a central bank with regulatory and supervisory authority
will, at times, have an incentive to loosen monetary policy--meaning
reduce market interest rates since monetary policy is normally conducted
through interest rate changes--to protect troubled institutions it
supervises from failure. Observers maintain that this conflict can lead
the central bank to allow higher inflation rates than may be optimal.
Often average maturities of assets are longer than maturities of
liabilities on bank balance sheets. As a result, bank earnings will tend
to increase when interest rates decline. If a central bank is answerable
for problems at its supervised banks, it may view a small or short-lived
reduction in interest rates as an acceptable means of avoiding the
criticism it might face if its supervised banks begin to fail.
Di Noia and Di Giorgio (1999) performed empirical analysis on the
link between the inflation performance of Organization for Economic
Co-operation and Development countries and whether the central bank is
also a bank regulator. While the results are not overwhelming, they find
that the inflation rate is higher and more volatile in countries in
which the responsibility for banking supervision is entirely with the
central bank.
Second, a central bank that is also a bank supervisor may choose to
loosen its supervisory reins when doing so might avoid macroeconomic
troubles. Calomiris and Litan (2000) argue that an example of this
behavior occurred in the 1980s when banks were not required to write
down their developing country debt because they feared that doing so
would weaken banks, which in turn would have wide macroeconomic
consequences. Presumably, the consequences would occur when these banks
reduced lending in response to their write-downs.
Third, when one of its supervised institutions fails, a central
bank may suffer reputational damage. In turn, legislators may lose
confidence in the central bank and begin to attempt to intervene in its
monetary policy decisions, undercutting independence and perhaps
introducing an inflation bias.
Keep Regulation in the Central Bank?
In contrast, there is one oft-stated reason to keep the central
bank as a bank regulator: Without day-to-day examination responsibility,
the central bank will have difficulty making prudent LOLR lending
decisions. Central banks typically allow certain institutions to borrow
funds, usually on a short-term basis, to cover liquidity shortages. For
example, a bank facing deposit withdrawals that exceed the bank's
easily marketable (liquid) assets will be forced to sell other assets.
Since bank assets are often difficult for outsiders to value, rapid
sales of these assets are likely to generate losses for the bank. To
allow banks to overcome this "fire sale" problem, central
banks provide access to LOLR loans.
LOLR loans are frequently made to institutions with uncertain
futures. The decision is likely to be controversial and subject the
decisionmaker to close political and public scrutiny. If the central
bank incorrectly decides not to lend to an institution that is healthy
but has a short-term liquidity problem, that bank may fail. Such a
decision may mean that valuable resources will be wasted reorganizing
the failed bank. Alternatively, if the central bank incorrectly decides
to lend to an institution that is unhealthy and the bank ultimately
fails, then uninsured depositors have escaped losses, leaving these
losses to instead be borne by the deposit insurer or taxpayers. Further,
if the central bank frequently lends to unhealthy banks, banks will be
more willing to make risky investments knowing that the LOLR is likely
to come to their aid.
Given the dangers of incorrect LOLR decisions, the decisionmaker
will require careful counsel from a knowledgeable staff. This kind of
knowledge is likely to be gained only by individuals who are involved in
day-to-day examination of institutions. Further, the decisionmaker is
likely to get the best input from staff that report directly to the
decisionmaker so that poor decisions are punished and good decisions are
rewarded. Consequently, the combination of the need for day-to-day
knowledge and for proper incentives for providing good information
argues in favor of keeping regulatory responsibility with the entity
that provides LOLR loans, typically the central bank.
Still, there are alternatives to vesting the central bank with
supervisory powers. First, if the LOLR lending decision is left with a
supervisor outside of the central bank and all consequences for wrong
decisions rest with that supervisor, then the best decision possible is
likely to transpire. For example, if the separate supervisory agency
were required to determine whether a loan is to be made by the central
bank, the central bank is required to abide by this decision, and the
supervisor is held solely responsible to legislators for bad decisions,
then the central bank could be safely left out of supervision.
Likewise, if the LOLR's authority to lend rested with an
entity outside of the central bank, there would be no reason for vesting
supervisory powers with the central bank. In this case, concerns with
conflicts of interest would then argue for separating supervision from
the central bank. In the United States, for example, the FDIC has the
authority to make LOLR loans, but given the FDIC's fairly small
reserves ($45 billion as of June 2008, Federal Deposit Insurance
Corporation 2008, 15) the FDIC would likely be unable to act as a strong
LOLR. Therefore, the only entity currently capable of replacing the Fed
as LOLR is the Treasury, unless another agency were granted the
authority to issue large amounts of government-backed debt or to borrow
directly from the Treasury. If supervisory authority and LOLR authority
were combined at the Treasury, the funds would be available to make LOLR
loans, and the incentives would be properly situated to ensure that the
LOLR decisions were appropriate.
7. CONCLUSION
The growth of financial conglomerates around the world has led a
number of countries to consolidate their financial regulatory agencies.
The United States is facing this same situation, leading some
policymakers to propose regulatory consolidation for the United States.
While the exact regulatory structure adopted varies greatly from country
to country, the move from multiple regulatory agencies to one or two
agencies seems motivated by the desire to achieve a fairly consistent
list of efficiencies. Regulator incentives make achieving these
efficiencies difficult without shrinking the number of regulatory
agencies.
One question U.S. policymakers will confront as they investigate
the possibility of consolidating regulation is to what degree should
regulators be consolidated? Moving to one entity with the authority to
make all regulatory decisions may well achieve the communication
efficiency goals of consolidation. But vesting one agency with all
regulatory authority may also raise concerns that the single regulator
will adopt strategies that raise the regulatory costs imposed on
financial firms. Most countries have dispersed regulatory authority
among several agencies.
A second question likely to be important if the United States
considers consolidation is how the LOLR function is to be performed.
Prominent countries that have moved to a more consolidated regulatory
structure have typically left the central bank with LOLR authority but
without regulatory and supervisory responsibilities. While some
observers have noted dangers from combining supervisory and central bank
responsibilities in one entity, there are strong disadvantages from
doing otherwise. The information gathered by performing day-to-day
supervisory activities is vital to the decisionmakers who are
responsible for LOLR lending. This information is vital because LOLR
loans frequently are made to firms for which creditworthiness is
difficult to measure. While a supervisor that is separate from the LOLR
could ideally transfer this information to decisionmakers at the central
bank, in reality such information transfers are likely to be
problematic.
Therefore, there are strong tensions between achieving the benefits
of consolidation and preventing the costs that might arise from a lack
of competition when there is only one regulator. Further, the question
of how to ensure that appropriate LOLR decisions are made in a
consolidated environment seems especially thorny. It is no wonder that
the United States has approached consolidation so many times over the
last 40 years without ever moving forward.
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The authors would like to thank Brian R. Gaines, Borys Grochulski,
Sam E. Henly, Edward S. Prescott, and Juan M. Sanchez for helpful
comments. The views expressed in this article are those of the authors
and do not necessarily reflect those of the Federal Reserve Bank of
Richmond or the Federal Reserve System. E-mails:
[email protected],
[email protected],
[email protected]
(1) Economies of scale result when fewer resources are employed per
unit of output as firm (or agency) size grows.
(2) The Fed had likewise extended a large number of loans to
nonbanks during the 1930s and 1940s (Schwartz 1992, 61).
(3) Since the 1930s, there have been changes to the agencies
responsible for regulating and supervising credit unions and thrifts.
The current regulator and supervisor of credit unions, the National
Credit Union Administration, was created in 1970 when credit unions
gained federal deposit insurance. The Office of Thrift Supervision,
which supervises and regulates state-chartered savings institutions, was
created in 1989.
(4) See http://www.ffiec.gov/ for a description of. the
FFIEC's role in the U.S. financial regulatory system.
(5) The examination was of First National Bank of Keystone,
Keystone, West Virginia, a bank that failed in 1999.
(6) Surveyed countries were Australia, Canada, Denmark, Estonia,
Hungary. Iceland, Korea, Latvia, Luxembourg, Malta, Mexico, Norway,
Singapore, Sweden, and the United Kingdom.
(7) Goodhart et al. (1998). Briault (1999). and Calomiris and Litan
(2000) argue that a consolidated financial regulatory system is more
efficient than a decentralized one when faced with the emergence of
financial conglomerates.
(8) See Garicano and Posner (2005, 161-3) for a discussion of the
turf-war driven disincentive for information sharing among separate
agencies.
(9) Llewellyn (2005) argues that competition between regulators can
result in a race to the bottom in which an institution devises a
business model that allows it to come under the regulators auspices of
the most liberal regulator. Resources spent on this restructuring
process, from society's point of view, are wasted. Similarly, when
regulators compete with one another to attract or keep regulated
entities, they will have an incentive to give in to demands made for
liberal treatment, i.e., they are likely to be "captured" by
the institutions they regulate. Regulations that might have large net
benefits but are costly for the regulated industry will not be
implemented.
(10) Economies of scope may be generated when regulatory entities
are consolidated if doing so simplifies the transfer of information
gleaned in an examination of one line to another.
(11) Among the 29 percent of countries that adopted a single
regulator model, many have dispersed regulatory power among several
agencies.
(12) See http://www.hm-treasury.gov.UK/Documents/Financial_Services/Regulating_Financial_Services/fin-rfs_mou.cfm to access a copy of the
MOU.
(13) Japanese SROs included Japanese Securities Dealers
Association, Commodity Futures Association, Investment Trust
Association, and Japanese Securities Investment Advisors Association.
(14) While SESC is structurally under the FSA, it still operates as
a legally independent enforcement agency.
(15) Members from the government and Parliament, representatives of
financial institutions, and academics are among those representing these
groups.
(16) See http://www.bafin.de/cln_109/nn_721606/SharedDocs/Veroeffentlichungen/EN/BaFin/Internationales/GemeinsameStandpunkte/mou_021031_en.html
(17) Building societies are financial institutions owned by members
that offer banking and other financial services but specialize in
mortgage lending (similar to mutual savings banks in the United States).
(18) Employers in Australia are required by law to pay a proportion
of employee earnings into superannuation funds, which are then held in
trust until the employee retires.
(19) See http://www.rba.gov.au/FinancialSystemStabilily/AusiralianRegulatoryFramework/efr.html for a detailed description of the council
and a list of its members.
