In an opinion article published in the American Banker yesterday, Eugene Ludwig, CEO of Ludwig Advisors, argues that regulatory modernization requires precision and thoughtfulness, rather than a broad slashing of regulatory requirements and agencies.
"It is tempting, especially for newcomers, to think modernizing bank oversight is as simple as ripping pages from the Code of Federal Regulation," Ludwig, who served as the US Comptroller of the Currency from 1993 to 1998, writes. “The fleeting sense of euphoria such a simplification might provide to those who have operated under our supervisory system will soon fade, particularly if a financial crisis ensues. And if the missing pages are replaced only by the judgment of agency supervisors, the regulated may even long for the certainty that published regulations once provided.”
Regulatory modernization should be undertaken with the delicate touch of a scalpel, Ludwig explains, not a meat axe. And if such an effort is to be effective, he argues, it must establish a basis for determining which institutions are subject to regulation, clarify the scope of regulation, and create a process to settle disagreements between supervisors and supervised firms.
Of course, modernization efforts must also address problems with supervision. Supervisors are typically highly knowledgeable about banking and care deeply for the well-being of the banks they supervise and the system as a whole, Ludwig acknowledges. However, while supervision was once straightforward and objective, he reflects, it is now based upon the subjective judgment of the supervisors, which is frequently substituted for that of the bank management and boards themselves.
When supervisors identify deficiencies in firms, the interactions are often punitive rather than collaborative, Ludwig explains. And when banks disagree with those findings, there is no appeals process available to them. "In fact, arguing with a supervisory position can lead to being labeled as uncooperative and result in implicit or explicit repercussions," Ludwig writes.
"Modernizing bank oversight is not a 'nice to have' but a 'must have' for the well-being of our financial system," he concludes. "A failure to address these issues with care and vigor will result in a declining banking system and another financial crisis."
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