Banking Law

The folks at Clusterstock have been giving Sheila Bair's recent rant in The New York Times against the proposed federal "super regulator" that would concentrate federal supervision of banks under one roof, "the props" it deserves. According to John Carney and Yael Bizouati, One of her most telling arguments, to those of us who dwell in the hinterlands at least, is that such a regulator is most likely to be heavily influenced by the large banks, and certainly not the community banks. I'm not sure that you could say that any federal bank regulator is not disproportionately influenced by the largest institutions that it supervises, inasmuch as they pay the largest share of assessments that support the regulator. On the other hand, where regulators are competing, the small guys are more likely to get the chance to play one off against the other, at least to a degree sufficient to get their views considered. With only one regulator, when it's captured by the big guys, it won't be listening to the little guys with anything other than a deaf ear.

The clear advantage to Bair's approach--creating a council of federal regulators- is that it would prevent the concentration of resolution authority in the hands of a single set of regulators. That would make it harder for banks to capture and pervert this authority.

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Cynics will view Bair's argument as a bit self-serving. After all, Sheila Bair would be far more powerful under her proposed council of regulators than she would if, say, Ben Bernanke were declared the super-regulator. But that is the beauty of competition: self-serving actions produce socially good results.

That may be a bit of an overstatement, I think, but it's essentially correct. Competition is always preferable to monopoly, especially when the monopoly is a single federal government regulator.