1、March 10, 2003 Financial Services Regulatory Policy for the 21st Century: Applying a Statement of Principles to Specific Regulatory Issues by Bert Ely Executive Summary The debate over the organization and structure of financial services regulation in the United States stretches back over decades as
2、 numerous studies and commissions have examined this complex issue. Despite these efforts, there have been few significant changes in the federal regulatory structure in recent decades. However, regulatory power has continually ebbed and flowed among the federal bank regulatory agencies while bank r
3、egulatory authority has gradually shifted from the states to the federal government. On the other hand, with nearly 70 percent of banks operating under state charters, including almost half of the 100 largest institutions, the state charter appears to be the current charter of choice, particularly f
4、or community banks. In debating the evolving regulatory system under which U.S. financial services providers operate, policy makers should first agree on a set of sound principles to govern their actions. Four principles should reign supreme: The U.S. financial system should function efficiently. Th
5、e financial system and individual financial institutions should operate in a safe-and-sound manner. Consumers of financial services must be treated fairly and equitably. The state banking system should be preserved as a laboratory for innovation, experimentation, and evolution. Without this framewor
6、k, the debate over reform proposals can too easily get caught up in organizational minutia, leading to fundamentally flawed reforms. Regulatory efficiency should promote the efficient production and delivery of financial services. A monolithic financial services regulator focused on minimizing regul
7、atory costs will not deliver that efficiency because regulated firms will not benefit from regulatory choice, the ability to choose which jurisdiction will regulate the firm, for choice provides a crucial check on an overreaching regulator. An efficient government does not necessarily create an effi
8、cient marketplace. Key to providing regulatory choice is preserving a vibrant role for state banking regulators as the states continue to serve as valuable laboratories for addressing regulatory challenges. Additionally, financial services firms must be given maximum flexibility in how they organize
9、 themselves. Coordinating the rulemaking and regulatory activities of multiple regulators, with overlapping jurisdictions, is desirable as long as the coordination process does not stifle innovation by imposing excessive uniformity on regulated firms. The Federal Financial Institutions Examination C
10、ouncil (FFIEC) is the principal financial regulatory coordinator in the United States, yet state banking regulators have no official representation on the FFIEC. Congress should correct this oversight. At the same time, all regulatory coordination should not come from the federal level. The states,
11、working through the Conference of State Bank Supervisors (CSBS), have coordinated numerous state-level regulatory issues, including innovations such as the Nationwide Cooperative 2Agreement, the Nationwide State-Federal Supervisory Agreement, the State Foreign Bank Office Agreement, and the Nationwi
12、de Cooperative Agreement for Multi-State Trust Institutions. These agreements have facilitated the ability of state-chartered institutions to operate efficiently on a multi-state basis through nationwide standards that state bank regulators have developed and agreed to. Congress should encourage and
13、 empower state-level coordination efforts while treading carefully in preempting state laws in the guise of providing national marketplace uniformity. Precipitous imposition of national standards undercuts the states role as laboratories. 3Introduction The debate over organizing and structuring fina
14、ncial services regulation in the United States stretches back over decades as numerous studies and commissions have examined this complex issue. Despite these efforts, there has been no significant change in the regulatory structure since the Federal Deposit Insurance Corporation (FDIC) was created
15、70 years ago, with one exception - the abolition of the Federal Home Loan Bank Board in 1989 and the creation of the Office of Thrift Supervision within the Treasury Department. Over the years regulatory powers have continually ebbed and flowed among the federal bank regulatory agencies while bank r
16、egulatory authority has gradually shifted from the states to the federal government. Treasury Under Secretary Peter Fisher and FDIC Chairman Donald Powell separately have recently renewed the debate over the structure of the federal bank regulatory agencies, and by implication the role of the states
17、 in the regulatory process. Absent a proper framework, the debate over reform proposals can too easily get caught up in organizational minutia. Failing to comprehend the forest by focusing on twigs and knotholes can easily lead to fundamentally flawed reform proposals. The first section of this pape
18、r will present a comprehensive philosophical statement of four principles to apply to U.S. financial services regulation in the 21st Century. The main body of the paper will apply those principles to four specific regulatory issues that transcend regulatory principles - regulatory efficiency, struct
19、ural issues within the financial services industry, coordinating regulatory activities, and federal preemption of state laws. The paper will close with some concluding remarks. A Statement of Philosophy: Principles to Apply to Financial Services Regulation in the 21st Century While seemingly obvious
20、, the basic principle of financial services regulation simply states: The U.S. financial system should function efficiently in terms of its cost of operation and in the allocation of credit to other sectors of the economy. This statement implies that individual institutions within the financial syst
21、em will operate with a minimum of regulatory burden and restriction. Principle number two: The U.S. financial system, and individual financial institutions, should operate in a safe-and-sound manner that engenders public confidence while minimizing taxpayer risk. At the same time, banks and thrifts
22、must take calculated risks in order to supply sufficient credit to a growing, entrepreneurial economy. Principle number three: Consumers must be treated in a fair and equitable manner by financial services providers, given that the trust of customers is essential to the smooth, efficient operation o
23、f a sophisticated financial system. Principle number four: The state banking system should be preserved as a laboratory for innovation, experimentation, and evolution. This principle reflects the well-known fact that one size does not fit all in financial services regulation. The financial instituti
24、ons serving a dynamic, growing economy, with a population exceeding 285 million and a Gross Domestic Product (GDP) 4approaching $11 trillion, must have the regulatory flexibility to properly serve many different markets and types of customers. The fifty states not only provide regulatory laboratorie
25、s within the United States, but they also permit the tailoring of regulatory needs to local markets, the creation of valuable new financial products and services, and the constant stimulation of competition. Applying the Principles of Financial Services Regulation to Specific Regulatory Issues These
26、 four principles are applicable to many regulatory issues. The following discussion addresses four key issues. The issue of regulatory efficiency Public officials often speak of trying to make the bank regulatory system more efficient, which they would achieve by consolidating regulatory agencies wh
27、ile shifting regulatory authority to the federal government from the states. A long line of federal regulators and others have advocated structural reforms to increase regulatory efficiency. The pursuit of regulatory efficiency, though, raises a fundamental question - efficiency for whom? For financ
28、ial services firms? For consumers, businesses, and other users of financial services? For regulators and government in general? The financial services industry faces the same challenges as other industries - delivering products and services in a safe, fair, and efficient manner. Key to good banking
29、is providing credit that promotes sound economic development. Therefore, efficiency must be judged from the perspective of what best serves the consumer, the person who receives the services and pays the bill. A regulatory structure that looks complicated and messy, with agencies competing over regu
30、latory turf, may, and probably does, create the best environment for a more efficient financial services industry, from a consumers perspective, than would a monolithic and not-easily-challenged regulatory monopoly, such as the United Kingdoms Financial Services Authority. Banking is nearly unique a
31、mong American industries in governments interest in protecting a key class of bank creditors - depositors - from any loss should an individual institution stumble into insolvency. Only the insurance industry, and to a very limited extent, the securities industry, present a similar public policy chal
32、lenge. Long before the advent of federal deposit insurance, bank chartering agencies worked proactively to minimize bank insolvencies through examinations and supervision. The taxpayer bailout of the Federal Savings and Loan Insurance Corporation (FSLIC) strengthened Congresss desire to bolster safe
33、ty-and-soundness regulation to prevent another deposit insurance bailout. Those congressional initiatives, in FIRREA and FDICIA, threatened regulatory flexibility although FIRREA had the virtue of depoliticizing the regulation of thrift institutions. Complex formulae in the proposed Basel risk-based
34、 capital standards present a similar threat to regulatory flexibility. Consequently, great tension exists between giving banks sufficient regulatory flexibility to serve their widely varied customers while ensuring the soundness of the banking system. That tension will not fade. Hence, the never-end
35、ing challenge facing policy makers is striking the proper balance between efficiency and economic growth on the one hand and prudent banking on the other. 5The desire for a sound banking system, or at least one which does not require another taxpayer bailout, tilts legislators towards creating a reg
36、ulatory monopoly that will ensure sound banking practices. But is a regulatory monopoly more efficient, from a public policy perspective, than permitting regulatory choice, i.e., the ability of a financial institution to choose its charter and therefore the legal authority under which it will be reg
37、ulated? Choice, the ability to choose among several independent alternatives, is the essence of democracy as well as the commercial marketplace. Choice provides the crucial check-and-balance on a potential monopolist, whether that monopolist is a business corporation or a government regulator. Choic
38、e also is key to establishing regulatory accountability. A regulator cannot get away with being highhanded or arbitrary and capricious if those it regulates can easily switch to another regulatory agency. A regulator who acts in an arbitrary or capricious manner or who puts its interests ahead of th
39、e public good almost certainly impairs the efficiency and responsiveness of those it regulates. Therefore, regulatory choice helps greatly to promote economic efficiency. Regulatory choice also is consistent with the notion of federalism, which is a basic premise of the U.S. Constitution. The Foundi
40、ng Fathers intended for the states to play a vital role in governing the United States of America. Hence, the notion of regulatory choice extends beyond choice within the federal government, to choice between a federal regulator and a state regulator. Federalism is impaired to the extent that Congre
41、ss limits the ability of the states to offer regulatory alternatives to the federal government. Although many fear that regulatory choice promotes a “race to the bottom,“ or regulatory laxity, that does not occur if legislators hold regulators accountable for their failings. Regulatory choice does n
42、ot automatically create a chaotic regulatory environment. Actually measuring regulatory efficiency lies beyond the scope of this paper. The ultimate purpose of regulation, though, is to produce the optimal outcome. That is, economic output has been maximized in a manner consistent with other public
43、policy objectives - a sound financial system and fair and equitable treatment of the consumers of financial services. Structural issues within the financial services industry Two major structural issues arise when discussing regulatory policy in the financial services industry - (1) fitting financia
44、l services regulation into the overall scheme of government; and (2) organizational options and limitations imposed on financial services firms. Accidents of history often govern how regulatory agencies fit into the structure of federal and state government today. Organizational placements and divis
45、ions of regulatory responsibility that made sense initially may seem less logical today because of changes in agency functions and the structure and permitted powers of financial services firms. For example, the Office of the Comptroller of the Currency (OCC) was created as an office within the Trea
46、sury Department in 1863 to issue national bank notes that were used to finance the Civil War. Currency issuance was shifted to the Federal Reserve fifty years later, and now the OCC is exclusively a bank regulator, yet it remains within the Treasury Department. Some still debate whether the FDIC sho
47、uld be a banking supervisor or strictly a deposit insurer. 6Compared to the parliamentary form of government, the structure of government in the United States, and particularly at the federal level, changes slowly. Organizational boxes do not get moved around easily or dramatically. Therefore, the r
48、egulatory system must adapt in other ways to accommodate that organizational rigidity. That in fact has happened to a great extent, albeit in a sometimes messy fashion. Achieving regulatory efficiency, while preserving regulatory choice, is not dependent upon reorganizing and consolidating governmen
49、t agencies. Compared to governments, business firms have great flexibility in how they organize and how quickly they can react in restructuring themselves to reflect a changing marketplace. However, financial firms have been limited in terms of the types of businesses in which they engage as well as how they organize themselves. While many of these strictures have been rationalized on safety-and-soundness grounds, often they reflect regulatory and business turf protection. Fortunately, the Gramm-Leach-Bliley Act (GLB), enacted in 1999, went a long way towards eliminat
