So Big It Will Fail?

Senate Banking Committee Chairman Christopher Dodd (D-CT) said the proposed financial reform legislation will give the government new authority to prevent another economic collapse, protect consumers and dismantle institutions described as 'too big to fail.'

Image: Chip Somodevilla/Getty Images

Bankers booed Senator Chris Dodd’s sweeping plan for financial regulatory reform, primarily because the chairman of the Senate Banking Committee wants to consolidate regulation of banks in one agency.

The Connecticut Democrat, who unveiled a discussion draft of his long-awaited legislation Tuesday, said he wants to “replace the myriad government agencies that failed to rein in risky schemes with a single, accountable federal banking regulator.”

“For firms who play by the rules, this single prudential regulator will provide clarity, cut red tape, and make it easier to compete,” Dodd said. “But those institutions that would undermine the security of our economy will no longer be able to shop for the weakest regulator.”

The American Bankers Association quickly issued a statement criticizing this part of Dodd’s reform plan, as well as his proposal to create a Consumer Financial Protection Agency.

Dodd’s plan “would tear apart the existing regulatory structure only to create a new one that would produce conflicts among regulators, undermine the state-chartered banking system, and impose extensive new regulatory burdens on those banks that had nothing to do with creating the financial crisis,” ABA president and CEO Edward Yingling said. “ABA supports comprehensive reform, but not this reform.”

Yingling said Great Britain tried Dodd’s approach and it “failed miserably.” Community banks would suffer if they were regulated by the same agency that regulates big banks, he said.

Dodd tried to preempt this criticism by noting there would be a strong, separate division for community banks inside the new Financial Institutions Regulatory Agency. The dual banking system—which allows banks to get either a federal or state charter—would be preserved, he said.

The senator’s plan, however, would go farther than either the Obama administration or the House Financial Services Committee want to go when it comes to regulatory consolidation. Dodd’s bill would eliminate the Office of the Comptroller of the Currency and the Office of Thrift Supervision and take banking supervisory powers away from the Federal Reserve and Federal Deposit Insurance Corp.

Dodd said this would allow the Fed to get back to “what it was designed to do”—monetary policy and being the lender of last resort. When the Fed took on consumer protection and regulation of bank holding companies, it “was an abysmal failure,” Dodd said.

Ernie Patrikis, a former general counsel and first vice president of the Federal Reserve Bank of New York, said merging banking regulators “has obvious appeal, but it doesn’t by itself address the underlying problem that has been at the root of the current banking crisis: inadequate supervision.”

“Rather than focus so much effort on how the bureaucracy will be structured, Congress needs to do a better job of ensuring that banks have the right management, directors actively involved, and strong supervision in place to make sure that things are being done by the book,” said Patrikis, who is now global co-head of the bank advisory practice at White & Case, a New York law firm.

That’s a matter of execution. If banking supervisors do their job, it doesn’t really matter what agency they work for. But oversight isn’t enough for most members of Congress, especially veterans like Dodd.

Why hold regulators’ feet to the fire when you can reinvent their whole world?

It’s legacy time, folks.