Bankruptcy

What About Forum Shopping?

By Angie Littwin

For those who haven't seen it, Sheila Bair, chair of the FDIC, has an op-ed in today's New York Times. In a piece entitled The Case Against a Super-Regulator, she argues that creating one regulator with authority over all our financial institutions would be a mistake. She supports Obama's plan for a consumer financial protection agency that would be regulate the consumer side of banking, but opposes consolidation of the other regulatory functions. Her main argument is that a centralized, necessarily federal regulator would neglect the smaller banks, which currently tend to be regulated by the states (with backup from the FDIC). She is also concerned that we would be putting all our eggs in one regulatory basket. I agree with most of her points. Small, state-chartered banks, did do a better job than the larger, federally-chartered institutions of not overextending themselves during the housing bubble and tend to be in better shape now. I also share her concerns about the potential for a single regulator to ignore the next budding financial crisis until it was too late.

But she fails to address the most powerful argument for consolidation: forum shopping. Right now, financial institutions basically get to choose their regulator. It's the company's charter that determines whether it's a bank or a thrift, whether it's a state entity or a national one -- and institutions can change their charters. In fact, the notorious Countrywide Financial did just that in 2007. On a mission for weaker regulation, Countrywide changed its status from a bank to a thrift, thereby changing its regulator from the OCC to the OTS. Given that the OCC and OTS derive large portions of their budgets from fees assessed on the institutions they supervise, it's no surprise then that both agencies not only failed to enact enough of their own regulations during the subprime boom, but also aggressively fought off the regulatory attempts of other governmental entities, such as New York and California. If we maintain our current system of fractured financial supervision, we must find some way of dividing authority so that the regulators can monitor the banks rather than the other way around.

Full post as published by Credit Slips on September 02, 2009 (boomark / email).