Editor’s note: This column was included in the Feb. 27 version of The Pulse, a weekly BankBeat newsletter sent to subscribers.
The Trump Administration has floated the idea of eliminating the FDIC by merging it into the Office of the Comptroller of the Currency. I am in agreement there are too many regulatory agencies focused on the banking industry, and I agree deposit insurance may be ripe for reform, but I am not convinced the FDIC should be eliminated. I harken back to thoughts shared by former FDIC Chair Sheila Bair in her 2012 book “Bull by the Horns,” where she argues that the OCC should be eliminated.
Her argument is that the OCC did a poor job regulating the nation’s largest banks in the run-up to the financial crash of 2008. She says the OCC should have required the largest banks to hire more staff to deal with the mortgage crisis that led to the crash and subsequent recession. She also points out an inherent conflict of interest whereby the OCC is dependent upon fees from the largest banks. Can you trust a regulator to come down on the institutions that are paying its freight? Bair suspects not.
While acknowledging weaknesses at the FDIC, she likes the agency’s independence. She said the FDIC should regulate all banks, and the Federal Reserve — also an independent regulator — should supervise all bank holding companies. (This presumes some form of shared supervision over state chartered banks, as exists now.)
My point is, the idea of eliminating a bank regulatory agency has been on and off the drawing boards for years. The trick has always been finding the political will to actually carry through on the idea. It seems like things might be different now, at least if the CFPB serves as an example. Of course, Congress still needs to weigh in. Any moves based solely on executive action are surely to be reversed as soon as an administration from the opposite party regains power.