However, the proposal is running into opposition from FDIC Chairman Sheila Bair, who wrote in the New York Times yesterday that creating a single bank regulator “would endanger a thriving, 150-year-old banking system that has separate charters for federal and state banks.” “We can’t put all our eggs in one basket,” she added. And Bair has been joined in her opposition by Wells Fargo chief executive John Stumpf, who told Bloomberg News today that the idea is “a mistake”:
I think that’s a mistake…The dual banking system has served this country exceedingly well for 150 years or more…You have all different flavors and sizes of financial institutions. To have one place domiciled with all that, I think you’ve missed differing points of view.
Bair is protecting her agency’s turf and is rightly concerned with the big banks’ ability to capture a large regulator, to the detriment of smaller institutions. But Wells Fargo’s concern for smaller banks is more suspect, considering that it is the fourth largest bank in the country. Instead, Wells seems to be trying to preserve the current patchwork of regulatory agencies, which allows financial institutions to essentially “shop” for their regulator. As Felix Salmon put it:
The most corrosive aspect of the US regulatory infrastructure to date has been the ability of financial institutions to go regulator-shopping: that must be stopped. And the only way to stop it, in a world where AIG can end up being regulated by the Office of Thrift Supervision, is to have just the one regulator.
As Angie Litwin pointed out at Credit Slips, given that bank regulators “derive large portions of their budgets from fees assessed on the institutions they supervise, it’s no surprise” that they failed to step in and prevent the subprime boom. Indeed, regulators now have to entice banks to come under their supervision (in order to collect these fees), giving the regulators a perverse incentive to provide the best “deal” in terms of regulation — and institutions can always find a way to move to a new agency, taking their fee payments with them.
This is exactly what Countrywide Financial did in 2007, and under the lax oversight of the Office of Thrift Supervision it blew itself up with subprime mortgages. As the Washington Post reported, Countrywide saw ample reason to switch regulators:
[T]he Office of Thrift Supervision, promised more flexible oversight of issues related to the bank’s mortgage lending. For OTS, which depends on fees paid by banks it regulates and competes with other regulators to land the largest financial firms, Countrywide was a lucrative catch.
This is not how regulation should operate, and having one regulator would prevent it from happening. Bair may have her heart in the right place, but her position is aligning her with the big banks looking to mitigate the effect of the regulatory reform effort.