The creation of a super agency to regulate banks is a beguilingly simple idea. Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, recently sent up a trial balloon, giving the idea new life.

Proponents argue that "regulatory arbitrage" (i.e., shopping for the most lenient regulator) was a significant contributor to the current crisis - a thesis not supported by the facts. The crisis emanated from unregulated non-bank financial institutions. Moreover, federal bank regulators do not allow institutions to switch charters if they have material open issues with their existing regulator.

The United Kingdom consolidated regulation of all financial services firms into the Financial Services Authority a decade ago. This did nothing to spare British financial institutions in the current financial crisis.

The most efficient and powerful financial regulatory authority the U.S. has ever seen was the Federal Home Loan Bank Board. It had the combined authorities of the Office of the Comptroller of the Currency, the Federal Reserve, and the Federal Deposit Insurance Corp. under its wing - yet it oversaw the collapse of the savings and loan industry and the Federal Savings and Loan Insurance Corp., which cost taxpayers $150 billion.

We do not need more concentration of regulatory power and more centralized decision-making; we need more checks and balances and stronger watchdogs. One of the most important reforms we could make is creating an independent Systemic Risk Council to monitor the financial, regulatory and accounting systems and report publicly on developing risks.

The council would be headed by a chairman appointed by the president, subject to Senate confirmation, and would have an advisory board consisting of the Secretary of the Treasury and the chairs of the FDIC, the Securities and Exchange Commission, the Fed, and possibly others. It would have its own staff and would have access to all information about the financial system in the government's hands. The council would not be a regulator but would oversee the activities of the regulators, including the Financial Accounting Standards Board.

We also need to strengthen the FDIC. Its board should be reduced from five members to three by eliminating the seats held by the Comptroller of the Currency and the director of the Office of Thrift Supervision.

Congress recognized the importance of the FDIC's watchdog role in 1991 when it granted the FDIC increased enforcement and examination powers over all banks and thrifts. Unfortunately, in folding the defunct FSLIC into the FDIC, Congress increased the FDIC's board of directors from three to five, two of the members being the Comptroller of the Currency and the head of the OTS.

This five-person board can have a devastating effect on the FDIC when one or more vacancies exist. For example, the board had two vacancies in 1993, leaving the FDIC in the hands of acting chair Skip Hove, Comptroller of the Currency Gene Ludwig, and the acting head of the OTS, Jonathan Fiechter. The comptroller offered a motion requiring the FDIC staff to obtain approval from the primary regulator before examining a national or Fed-member bank or a thrift. The motion =a watchdog on the system was gutted.

Two other changes at the FDIC need to be considered. The first is the pro-cyclical manner in which its premiums are charged. Banks are not required to pay premiums in good times, when the FDIC fund is deemed adequate, and they are assessed heavily in troubled times, when they can least afford it.

Another change we need to consider is the limitation put into place in 1991 on the FDIC's use of its emergency authorities. The FDIC today cannot use its emergency authorities unless requested to do so by the Secretary of the Treasury, in consultation with the president, and unless the action is also approved by the Fed board. In reality,the FDIC, Fed and Treasury always work things out. But if the FDIC cannot act without approval from both the Fed and the Treasury, its negotiating hand is severely weakened.

We need real reforms to strengthen the oversight of our financial system and provide more checks and balances. A highly centralized system that takes us over the cliff with great efficiency is not the answer.

William M. Isaac is a former chairman of the FDIC, and is now chairman of global financial services for consulting firm LECG.

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