United States: The Regulation Of Depository Institutions: Seismic Change Coming?

Last Updated: August 10 2009
Article by Paul M. Aguggia and Joseph P. Daly

Except for the elimination of the Federal Home Loan Bank Board and Federal Savings and Loan Insurance Corp., and the creation of the Office of Thrift Supervision (OTS) in 1989, the basic structure of the U.S. banking regulatory system, developed through a patchwork of legislation dating back to the Civil War, has remained unchanged since the 1930s. This observation is true despite numerous reorganization proposals from government, academic and business sources through the years including, most recently, one from then President George W. Bush's Department of the Treasury.

Notwithstanding widespread recognition that the existing system has flaws, a comprehensive restructuring plan never saw the light of day for numerous reasons. Those reasons include a sense of "if it ain't broke, don't fix it" and concern that any restructuring effort would be hampered by infighting among regulatory agencies seeking to preserve or increase their roles.

With the existing economic crisis, a significant regulatory restructuring may finally occur, as many have concluded that the system is broken and no longer works. President Obama has said that updating the financial regulatory system is a top legislative priority. Sen. Christopher Dodd, Chairman of the Senate Banking Committee, and House Financial Services Committee Chairman Barney Frank have indicated an intent to pursue restructuring of financial services regulation and commenced hearings. So it appears that the regulatory system that bankers have become accustomed to, if not entirely satisfied by, is in for a substantial overhaul.

The concept of a "systemic risk regulator" has been widely mentioned. Such a regulator would be responsible for overseeing the soundness of the entire financial system. Presumably such a regulator would have authority across all financial services sectors, including banking, capital markets and insurance. The issue of "too big to fail" is an integral component of systemic risk. A related concept is the designation of an agency that would resolve, outside of bankruptcy, failed systemically important financial companies (SIFCs), similar to the way in which the Federal Deposit Insurance Corp. (FDIC) resolves failed banks and savings associations.

Both the Federal Reserve Board (FRB) and the FDIC have been mentioned as possibilities for a systemic risk role. Recently the concept of a "systemic risk council," consisting of multiple regulatory agencies, has been advanced. Such a council would identify and monitor SIFCs.

Then there is the issue of day-to-day regulation of depository institutions. The clamor to modernize the financial services regulatory system has grown, based on concerns as to safety and soundness and global competitiveness of U.S. financial companies. The existing economic turmoil has created an urgency that is likely to trump the typical arguments for the status quo and make irrelevant the regulatory turf battles that have arisen in the past. The current framework of multiple federal regulators with overlapping jurisdiction appears unlikely to survive.

The Senate Banking Committee has held hearings to solicit the views on restructuring of the current depository institution regulators. As may be expected, disparate opinions were presented.

Comptroller of the Currency John Dugan noted that making the FRB the systemic risk regulator made sense given that agency's current role, but questioned whether that assignment would place too much responsibility in one agency. He argued for preserving the FRB as bank holding company regulator, to facilitate its "window" into banking in view of its monetary policy role, and for retaining a separate prudential bank regulator at the federal level. Comptroller Dugan was opposed to giving the FDIC authority to resolve failed SIFCs, citing its bank-centric mission.

FDIC Chairman Sheila Bair noted the difficulties caused by the FDIC's having receivership authority only over failed institutions, but not the institutions' holding companies and affiliates. She also advocated a bank-like resolution process for SIFCs and suggested that forming a new agency to perform that function may not be efficient. Further, she urged Congress to examine the "fundamental question" of whether there should be limits on the size and complexity of SIFCs. In subsequent testimony, Chairman Bair proposed the systemic risk council idea.

FRB Governor Daniel Tarullo stressed the need for a comprehensive supervisory framework, similar to the Bank Holding Company Act, for SIFCs. He also called for a resolution regime outside bankruptcy for SIFCs, including bank holding companies. He expressed the belief, as FRB Chairman Ben Bernanke has before, that the FRB, as central bank, would need to be involved in identifying and addressing systemic risk, if not itself the systemic risk regulator.

North Carolina Banking Commissioner Joseph Smith, representing the Conference of State Bank Supervisors, argued against consolidating financial regulation at the federal level, suggesting instead a coordinated system of state and federal supervision. Commissioner Smith called for a bifurcated regulatory system whereby systemically important institutions would be more stringently regulated than less complex regional and community banks. He also urged eliminating federal preemption of state consumer protection laws as to federally chartered banks and savings associations.

Then Acting OTS Director Scott Polakoff advocated establishing two federal depository institution regulatory agencies. One would charter and supervise depository institutions that primarily engage in providing products to consumers and communities, and one would charter and regulate institutions that primarily provide services to commercial enterprises. The two agencies would also be the primary federal regulators for statechartered depository institutions that focus on the business lines within their jurisdictions, and holding companies of their regulated institutions, and would regulate non-depositories that engage in similar activities. He also argued that the mutual form of organization should continue to exist.

Subsequently, before the House Financial Services Committee, Treasury Secretary Geithner advocated a systemic risk regulator, without specifying its identity. He also proposed a structure under which the FDIC would be given authority, under certain circumstances, to resolve SIFCs. The Treasury Secretary has not, at this writing, advanced a comprehensive proposal for restructuring day-to-day depository institution regulation.

The restructuring process raises numerous questions for bankers who have been acclimated to the existing regulatory system:

  • Will the FRB's role as regulator of bank holding companies be eliminated in favor of becoming the systemic risk regulator?
  • Will depository institutions continue to be regulated by charter or, instead, based on their sizes or lines of businesses?
  • Will the roles of the states in banking regulation be materially altered?
  • Will the OTS and the Office of the Comptroller of the Currency be consolidated?
  • Exactly which federal agency will be responsible for day-to-day depository institution regulation?
  • Will there continue to be multiple federal depository institution charters or will there be a single uniform charter?
  • Will the FDIC continue as a regulator, become solely a deposit insurer, or take on a broader role of resolving failed SIFCs in addition to depository institutions?
  • Will there be, as some have suggested, a separate regulatory and examination authority for consumer compliance laws?
  • Will credit unions continue to be insured and regulated at the federal level by a separate agency, or will they be brought into an overall streamlining effort?
  • How will nondepository lenders be regulated?
  • Will legislators be sensitive to the unique concerns of mutual organizations?

Indeed, those issues relate only to the topic of depository institution regulation without even considering changes that may occur in the regulation of other financial services, such as investment banking, capital and commodities markets and insurance.

Depository institutions of all types, sizes and characteristics have reason to be attentive to ongoing legislative developments concerning financial services regulatory restructuring. Today's bankers have never experienced changes in regulatory structure such as those that are likely to arise from this process.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions