Systemic Regulator Talks Get Bankers Talking

As the discussions around toxic loans held on banks’ balance sheets and their appropriate buyers escalates this week, another hot button issue — the regulation of the banks themselves — prompted at least one industry group to speak up on behalf of banks. The official proposal of a single banking system regulator — sort of a bank czar — might be as near as weeks away, unnamed sources told the Wall Street Journal. The regulating agency is expected as part of a proposal by Treasury Department secretary Timothy Geithner and White House officials to come in a matter of weeks. In response, a major banking group issued a statement supporting a systemic regulator–within certain limits. In a letter Thursday to Geithner, the American Bankers Association (ABA) CEO Edward Yingling urged the creation of a council of regulators chaired by the Federal Reserve chairman to act as the systemic regulator. The extent of the council’s authority should be limited, he said, to identifying systemic issues and recommending solutions, without going so far as to actually regulate institutions. The letter supported regulation of institutions and financial products that pose significant harm to the economy, consumers and businesses but that are not currently subject to effective regulation. The ABA, Yingling wrote, also supports the creation of a mechanism to address the failures of systemically important institutions, but opposes suggestions to grant the Federal Deposit Insurance Corp. (FDIC) any systemic resolution authority. “The FDIC is seen by the public as the insurer of bank deposits,” he wrote. “Consumer confidence in this insurance system for bank deposits has prevented bank runs for many decades. This consumer confidence in the FDIC should not be undermined by having the FDIC directly involved in the failures of all types of institutions, an involvement that would clearly confuse consumers.” The Administration may consider a separate consumer financial products protection agency, which Yingling said would need to be large enough to deal with all financial products, including those regulated at the federal, state and foreign levels and those that aren’t regulated at all, to ensure all financial products compete fairly. Such a scenario, according to his comments, might establish an agency that ends up too large in the end. In the mortgage lending space, for example, a consumer financial product protection agency would have to focus on all mortgage originators and investors, Yingling wrote. The same breadth of jurisdiction would therefore be required for all savings, investment, lending, transaction and other financial products, he noted. “Legislation including the creation of an agency with such wide authority would engender broad opposition,” he wrote. The Administration is also reported to be considering a single prudential regulatory agency for banks, effectively merging the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the bank regulatory functions of the FDIC and Federal Reserve Board. “The ABA is adamantly opposed to this concept because we believe it would, as a practical matter, be the end of a true dual banking system,” Yingling wrote. “Such a federal regulatory agency would undoubtedly have a strong bias toward federally regulated institutions. Therefore, state regulated banks would be at a disadvantage.” Write to Diana Golobay.