Banking Law

 US Banker announces that for financial institutions, the "Age of Re-regulation is nigh." The news is unsurprising, given the regulatory failures that have been evident for some time, especially with respect to Wall Street institutions. Nevertheless, its advent has got to be met with a hearty groan by the vast majority of community banks that were not part of the excesses, yet will be subject to not only the hefty assessments levied to repair the damage inflicted by a huge passel of unregulated (or virtually unregulated) miscreants, but to a plethora of new regulatory "improvements" launched by a federal government eager to extend its tentacles into every nook and cranny so far left to unmolested .

According to the US Banker, the blueprint for regulation is likely to be that laid out by the big-think "Group of 30," led by Paul Volker and loaded with other large cerebra.

The core recommendations could stand on their own as a 'four commandments' for the global financial sector. First, repair the holes in regulation and supervision, and monitor "all systemically significant financial institutions, regardless of type," the G30 urges. Second, quality is key - provide regulators and central banks with the resources they need, and raise the bar for "national and international policy coordination." Third, toughen governance, risk, capital, and liquidity standards. These rules must "guard against procyclicial events" and help maintain "prudent business practices." The fourth recommendation could be considered the essence of any regulatory reform plan: add transparency to the markets and build an infrastructure strong enough to protect against failures "of even large institutions."

These are good first steps for writing a new body of regulations, but what about regulation itself? Now policy makers are viewed as either nagging nannies or neglectful babysitters. The regulatory structure going forward should look more like a fire department, with firehouses devoted to securities, mortgages, retail banking, etc., all reporting to a central command under a shared organizational structure and budget.

The firehouses must be well-staffed with regulators trained in the structures and hazards of the sectors they safeguard. And the regulators must be compensated at the same rate as their business-side counterparts, alleviating the revolving door problem. Make sure the budget always matches regulatory needs - how can firefighters contain the flames without the proper equipment?

So, "Go East, Young Man," only not to The Big Apple, but further south, all the way to the Potomac. "Good enough for government work" will take on a whole new meaning when a large portion of the work force will consist of federal financial institution regulators. On the other hand, you could choose to go over to the dark side, and become one of those nefarious sorts whose main purpose in life is to guide institutions through the minefields of regulatory compliance and still eke out a buck, or to fend off the not-so-gentle ministrations of the regulators when institutions stumble. It's a living, as barren and purposeless as your actual life might be.

On the other hand, the US Banker's call for simple and broad regulations might put mouthpieces like bank lawyers on the edge of the poorhouse.

As for the rules, keep them as simple and broad as possible - that makes regulation easier to enforce and harder to evade. And some rules don't require a major rewrite. "There was a failure to enforce the spirit of the rules that already existed on soundness," notes David Levy, chairman of the Jerome Levy Forecasting Center. "Yes, there are some holes, but lax enforcement has been the main culprit. The biggest danger is the propensity to try to protect ourselves from the problems of the past."

David, fighting the last war is the way of the politician, as the job of the regulator is to draft regulations so complicated and obtuse that they can only be decoded with a Cray Supercomputer operating at peak efficiency for infinity.

Inventing new ways to make money in light of the facts as they are and likely will be, is the job of the entrepreneur and those who finance them. Representing the latter may not make those of us who do it standard-bearers of the "New Age," but as I said, it's a living.