Bailout

The regulatory fight moves from Washington to Basel

By Felix Salmon

It’s a great day: financial regulatory reform is done, and not a day too soon. The Consumer Financial Protection Bureau is coming — Ron Lieber has a great overview of how that will change the regulatory landscape — and while banks won’t have to sell their swaps desks entirely, they will need to spin them off into separately-capitalized, small-enough-to-fail subsidiaries which deal mainly on public exchanges. That’s a big and a welcome change.

No one really knows how the bill is going to shake out in reality: the Volcker rule, in particular, remains very vague indeed, and a lot of regulatory heavy lifting is being put onto the untested shoulders of the SEC and of other institutions which have failed many times in the past. But in general the bill makes as robust an attempt as could reasonably be expected to both monitor and ring-fence the kind of things which can cause systemic meltdowns.

The big disappointments on the consumer side were on auto dealers and annuities, neither of which are going to get the regulation they very much need and deserve; it’s also worth pouring out a glass for the late lamented vanilla option. And there are still far too many bank regulators: the OTS goes away, but the OCC remains, along with the FDIC and the SEC and the NCUA and the Fed. It’s a recipe for inconsistency, confusion, regulatory arbitrage, and turf wars.

The most important thing right now, however, is that the White House not sit on its laurels, and that it tries to carry over some of the momentum from the passage of this bill into the negotiation of Basel III, which seems to be falling apart a little. It’s in Basel, not Washington, that the most important constraints on the global banking system are going to be enacted. And pushing the rest of the G20 to get tough in Basel should be at the top of Barack Obama’s to-do list this weekend.

Full post as published by Macroprudential on June 25, 2010 (boomark / email).