Bank Lobby Pans Dodd’s Plan For A Super-Regulator: The Current System Is ‘Pretty Good’

doddISen. Chris Dodd (D-CT) has surprised a lot of people by proposing to consolidate all of the banking regulators into one new super-regulator, which is an idea that goes much further than any of the Obama administration’s proposed regulatory reforms. And it has the banks concerned:

“It’s the wrong way to go,” said Steve Verdier, senior vice president for the Independent Community Bankers of America [ICBA]. “We don’t think that as far as regulation of banks is concerned, that solves any problems we had. The checks and balances under the current system are pretty good.”

Edward Yingling, president of the American Bankers Association, added that complete consolidation “hasn’t worked in other countries that have tried it and it faces plenty of opposition in Congress.” But it’s an idea worth exploring, as it would definitely cut down on one of the bigger problems with the current regulatory system — regulator shopping.

Far from having a system of “checks and balances,” as the ICBA described it, the current system pits regulators against each other, in an attempt to woo banks (and the lucrative fees that they pay to their regulators). This leads to a race to the bottom, which was most apparent in the Office of Thrift Supervision (OTS), which regulated the likes of AIG, Countrywide, Washington Mutual and IndyMac, all of which suffered from what Treasury Secretary Tim Geithner called a lack of “adult supervision.”

As Lucas Puentes put it, “with their future growth (or shrinkage) more or less tied to the number of banks they regulate, today’s regulators have an unmistakable incentive to provide a permissive regulatory environment that favors the banks. Under this perverse system, it’s simply not in their best interest to crack down on the banks they regulate.” With one super-regulator, this problem would effectively be done away with.

As Tim Fernholz pointed out, Dodd may just be “starting off with his maximal demands, intending to negotiate from there, rather than presenting a prepackaged compromise, the latter of which has become a White House standby in the past year and hasn’t seemed like the most effective legislative strategy.” And it’s not like a single regulator would be devoid of its own set of problems. The UK, for instance, has one single bank regulator, and it didn’t weather the economic crisis much better than the U.S. But the proposal should not be dismissed out of hand, and if nothing else, seriously considering the idea would send a message to the banks that serious reform is on the table.