In a recent blog post, Peter Conti-Brown, a Professor of Financial Regulation at the Wharton School, discusses how a recent US Supreme Court decision may lead to many more lawsuits from banks challenging regulatory policy and action.
Historically, banks have avoided suing their regulators, opting instead for a collaborative approach to managing risk. However, banks and lobbyists now see an opportunity, Conti-Brown explains, with industry advocates encouraging more legal challenges. "[B]anks and their lobbyists smell chum in the water," he writes. “The question now for the Federal Reserve and its principals: what will you do in response to these new challenges?”
Conti-Brown goes on to criticize the Federal Reserve for yielding to industry pressure, especially regarding the "Basel III Endgame" capital proposal. Last month, Fed Vice Chair Michael Barr announced that the proposed rules, which would have substantially increased capital and equity requirements, would be softened and re-introduced following fierce industry pushback.
Conti-Brown argues that, by giving in to industry demands, the Fed undermined its independence and set a dangerous precedent. "With that concession in the face of overwhelming industry pressure, combined with the Supreme Court's invitation for more litigation on regulation, the Federal Reserve put a sign outside of its headquarters on Constitution Ave: Inoffensive Regulation Only," he writes.
Instead of backing down, he contends, the Fed should have defended its regulations in court, as it had strong legal grounds. Avoiding confrontation, Conti-Brown argues, only serves to undermine the Fed's credibility and weaken its ability to promulgate strong bank regulation, ultimately bowing to any special interest with a sufficiently loud voice.
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