Today President Obama announced his plans to make it harder to for companies to "shop for the regulator of their choice."

Maximilian M raises this very good question:

What was the rationale behind allowing regulator shopping in the first place?

The (sort of) simple answer is that we've added layer after layer to our regulatory system over many years. No one ever sits down and says, "This would be the absolute best system of regulation for us right now." Instead, every couple of decades (preferably in a time of crisis), we add an agency and tweak some rules, ultimately creating an incredibly complicated system.

Companies (and their regulators) have often argued that a complex system is necessary because the financial industry is increasingly complicated. There are different kinds of financial institutions (banks, savings and loans, etc) and they need regulators who understand what they do.

Lawrence Kaplan, of Paul Hastings legal, sends over this quick regulatory history:

National banks are the oldest type of financial institutions, dating back to Alexander Hamilton and the 1st Bank of the U.S. (Marbury v. Madison fame). States also started chartering banks in competition with national banks. Savings and loan societies formed over time as a way to encourage thrift (savings) and in the 1930's as part of the Great Depression the Federal Home Loan Bank system was created to help finance mortgage loans. In 1956 the Federal Reserve began to regulate companies that owned banks (bank holding companies) and bank holding companies could only engage in banking related activities. In 1999, the Office of Thrift Supervision was the successor to the Federal Home Loan Bank Board.
Some charters are specific (thrifts - 65% of assets in qualified thrift investments, e.g., home mortgage, credit cards), national banks (uniform interstate operations) -- others are more general commercial banks. Regulatory approaches differ.
The free market determined what was the appropriate charter -- a concept called "charter choice." In some ways having regulators compete with each other improved regulation -- test marketing of regulatory policies/procedures could be done without impacting the whole industry -- there was as type of check and balance among the agencies. On the other hand the competition is frequently viewed as regulatory arbitrage with the hope for less regulation.
The new administration plan eliminates arbitrage between OTS and OCC but not between the feds and state charters.

categories: Questions from You

3:40 - June 17, 2009

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