[IMGCAP(1)]The creation of a super agency to regulate banks is a beguilinglysimple idea. Sen. Christopher Dodd, D-Conn., chairman of the SenateBanking Committee, recently sent up a trial balloon, giving the ideanew life.

Proponents argue that "regulatory arbitrage"(i.e., shopping for the most lenient regulator) was a significantcontributor to the current crisis - a thesis not supported by thefacts. The crisis emanated from unregulated non-bank financialinstitutions. Moreover, federal bank regulators do not allowinstitutions to switch charters if they have material open issues withtheir existing regulator.

The United Kingdom consolidatedregulation of all financial services firms into the Financial ServicesAuthority a decade ago. This did nothing to spare British financialinstitutions in the current financial crisis.

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

We do not need more concentration of regulatorypower and more centralized decision-making; we need more checks andbalances and stronger watchdogs. One of the most important reforms wecould make is creating an independent Systemic Risk Council to monitorthe financial, regulatory and accounting systems and report publicly ondeveloping risks.

The council would be headed by a chairmanappointed by the president, subject to Senate confirmation, and wouldhave an advisory board consisting of the Secretary of the Treasury andthe chairs of the FDIC, the Securities and Exchange Commission, theFed, and possibly others. It would have its own staff and would haveaccess to all information about the financial system in thegovernment's hands. The council would not be a regulator but wouldoversee the activities of the regulators, including the FinancialAccounting Standards Board.

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

Congressrecognized the importance of the FDIC's watchdog role in 1991 when itgranted the FDIC increased enforcement and examination powers over allbanks and thrifts. Unfortunately, in folding the defunct FSLIC into theFDIC, Congress increased the FDIC's board of directors from three tofive, two of the members being the Comptroller of the Currency and thehead of the OTS.

This five-person board can have adevastating effect on the FDIC when one or more vacancies exist. Forexample, the board had two vacancies in 1993, leaving the FDIC in thehands of acting chair Skip Hove, Comptroller of the Currency GeneLudwig, and the acting head of the OTS, Jonathan Fiechter. Thecomptroller offered a motion requiring the FDIC staff to obtainapproval from the primary regulator before examining a national orFed-member bank or a thrift. The motion =a watchdog on the system wasgutted.

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 FDICfund is deemed adequate, and they are assessed heavily in troubledtimes, when they can least afford it.

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

Weneed real reforms to strengthen the oversight of our financial systemand provide more checks and balances. A highly centralized system thattakes 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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