The author does not say that banks should not be regulated, just that a different agency should do it, not the fed, which is primarily focused on monetary policy. He lists these functions:
- Monetary policy
- Protecting financial stability
- Regulation of individual banks
- Operating and regulating payment systems.
Not sure I agree. Not sure I don't. I really don't know enough either way.
- Click here for it.
An example of the Fed’s regulatory failings: Congress gave the Fed regulatory authority over subprime mortgages in 1994. Greenspan didn’t believe in this type of regulation so the Fed did nothing. Subprime mortgages managed to blow up the entire global financial system, including the megabanks (though to be fair a lot of other regulators messed up, too). When the dust settled, Congress doubled down on the Fed, giving it even greater authority under the Dodd-Frank Act (full disclosure: I helped draft that law working both for Sen. Christopher J. Dodd and Treasury Secretary Timothy Geithner).
When President Donald Trump rolled back parts of Dodd-Frank, with bipartisan support, the Fed once again gained authority, this time in the form of discretion on when to apply tougher rules and when to use a lighter touch. First Republic and Silicon Valley Bank were two banks the Fed had discretion over and we see what happened. The Fed’s SVB report says it “failed to take forceful enough action” on SVB, and correctly identifies an issue with the regulator’s “consensus-driven culture that smooths over complex issues.” In bank regulation the ability to challenge consensus is necessary, whereas the Fed’s monetary policy culture promotes consensus as a top goal.
The Fed deserves credit for a report that acknowledges its own failings and promises reform. Michael Barr, the Fed’s vice chair for bank supervision, inherited this mess and the report he oversaw is an honest assessment. The issue, though, is that the regulator can’t be fixed from within. Monetary policy will remain the telos and bank regulation will fight to be second fiddle.
There is another way. The United States has many financial regulators, too many frankly. Agencies such as the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. have bank regulation as their telos. These agencies should take the lead on this important area of policy. Aligning the responsibility to regulate banks with the mission to do so will create a more stable and resilient financial system.
Congress needs to fix this problem. Rather than debating whether to turn the regulatory ratchet back up, Congress should move bank supervision from the Fed to agencies whose top priority is regulation. Dodd’s original proposal of what ultimately became Dodd-Frank, moved regulation of banks such as SVB out of the Fed. The Federal Reserve used its power to block that shift. After another round of failures, the Fed should get less deference.
