Friday, February 20, 2009

Keynote Speech by John Dearie of Financial Services Forum

Over at University of Memphis' Symposium on Financial Services Reform, John Dearie of the Financial Services Forum gave the keynote speech. Mr. Dearie agreed with earlier presenters that we must first decide what is to be regulated and, second, determine what is the point of regulation. That is, what are the objectives to be obtained.

Mr. Dearie discussed the changes in financial products that have altered our marketplace and urged that a number of factors require consideration in establishing a new supervisory framework. Among those:
  • Global financial systems. The global nature of our marketplace requires consideration due to the interconnectedness of markets.
  • Innovation. Mr. Dearie also cautioned against putting financial institutions in a "regulatory box." As such, the supervisory function can only be successful if innovation is not discouraged or impacted in a way that impairs competitiveness.
  • Risk. The supervisory objective to help identify and manage risk and be responsive to changes in the marketplace to ensure safety and soundness.
  • Cost. Moreover, the cost of the supervisory system must be considered. Mr. Dearie argued that the American supervisory system costs many times over that of other countries, such as the U.K.

How to accomplish this? Rather than scrapping the current structure, Dearie's plan is dubbed GLBA plus (named after the 1999 Gramm-Leach-Bliley Financial Services Modernization Act, Pub.L. 106-102) Federal, state and local supervision would continue under this model. This plan would preserve the specialization of current regulatory agencies. Regarding federal bank examinations, bank examination powers should be consolidated into one agency, the Office of the Comptroller of the Currency (with the Office of Thrift Supervision folded into the OCC). To the extent that non-traditional entities do not have an existing designated regulator, like hedge funds, such entities would only have intervention in an emergency. The Federal Reserve would remain as an overseer of the financial system as a whole as an umbrella supervisor. This will result in: lower costs; focus on a single regulator for the financial system as a whole; comprehensive supervision; preservation of regulatory specialization; more consistency; increased principles based supervision; and more likelihood of political success.

So, will this work? The mood at the Symposium was mixed. There is a lot to like about having the Federal Reserve keeping an eye on the financial system as a whole. After that, though, it gets a bit murky on how state and federal agencies might coordinate particular challenges. This is not intended to be overly critical of Mr. Dearie's position, as he is just thinking this through himself and how financial products will develop is uncertain to all. The GLBA plus proposal might be a modest regulatory fix with big results or merely perpetuate a system of limited oversight without substantial changes. For the time, it is good to have the discussion take place to ensure that attempts are made not only toward the current, but also any future crisis.



Jason Kilborn said...

If I were to identify the absolute WORST agency to be in charge, it would be--hands down--the OCC. At least as that office has been administered over the past decade, it's an abysmal failure, at least if consumer protection is a part of one's goals. I obviously didn't hear the rest of the speech and proposal, but this one suggestion makes me very disinclined to favor whatever comes along with it.

Jennifer Martin said...

John Dearie is from the Financial Services Forum, so I keep in mind the group that he represents when considering his comments. Mr. Dearie clearly wanted the Fed to have more umbrella policy power, but to be out of the bank examination business. It was a good talk, whether I agree with his proposal or not. Anyone who is talking about even modest proposals should be encouraged in a time when so many seem to have no ideas at all.