In the wake of the US Presidential Election last month, it has become clear that financial regulation in the country is poised for a significant shift.
While it remains to be seen what exactly the next administration will do, it is evident that they will need to answer a few key questions. These include:
Many have sought to offer their perspectives on how these questions should be answered, and how the US regulatory regime can be made more efficient and effective. Here, we will review several of those perspectives.
In a recent article published in the American Banker, William M. Isaac, former Chairman of the Federal Deposit Insurance Corporation (FDIC), called for the US to abandon the Basel Capital Accords, which have governed global bank capitalization rules for decades. He criticized the Basel rules as overly complex, slow to develop, and ultimately ineffective. This is because they are "riddled with complex and dubious models" and "expensive, cumbersome and nearly impossible to understand and enforce," he contended.
Isaac highlighted that the focus on uniformity encouraged the rise of "too big to fail" banks, compromising global financial stability. Reflecting on his time as FDIC chairman in the 1980s, Isaac explained that he refused to adopt Basel I, believing the US should craft its own capital adequacy rules, tailored to its financial system. Isaac advocated for a return to the pre-Basel era, when international regulators coordinated through the Cooke Committee. He argued this approach allowed nations to establish regulations that worked best for their systems, asserting that abandoning Basel would better support US banking stability and global competitiveness.
In his opening remarks at a recent House Financial Services Committee hearing entitled "Oversight of Prudential Regulators," Committee Chairman Patrick McHenry asserted that "the era of post-financial crisis regulation is over." McHenry argued that, over the past decade, regulators have failed to address the root causes of bank failures while simultaneously stifling innovation in the financial system.
"We need new, technology-based solutions that strengthen our financial system, help consumers, and make our regulators more efficient," McHenry said. “Instead of working with Congress to identify these solutions, your agencies have proposed a regulatory onslaught amounting to a sweeping rewrite of the rules governing U.S. financial institutions.”
Thomas P. Vartanian, Executive Director of the Financial Technology and Cybersecurity Center, argued in a recent article for The Hill that the outdated regulatory system in the US is one of the greatest risks to financial stability. "The country's bank regulatory infrastructure was built in the wake of the Great Depression, largely to discourage bank runs and protect depositors," Vartanian wrote. “As a result, it relies in large part on broad ratios and rules, presuming that if every bank adheres to them, they and the system will be healthy. But as one financial disaster after another has proven, nothing could be further from the truth.”
This is exacerbated by the growth of the unregulated financial system, as banks are "subject to unparalleled cradle-to-grave oversight" while non-traditional financial services companies are "free to overleverage themselves and stockpile risk," Vartanian emphasized. "An effective system of oversight requires that any company — bank or nonbank — that invests the publics' funds and whose health may affect financial stability must be regulated."
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