Will the Trump Administration and an agreeable Congress really make sense of U.S. bank regulation? I’m not sure that what they do will indeed make sense, but there’s so little sense in the current system that I’m confident they’ll have no qualms about vaunting the institutional barricades that have thwarted due-process reformers since a Senate Banking chair proposed to create a “Federal Banking Commission” in the early 1980s. Little in the U.S. regulatory colossus is in as much need of creative disruption as banking; the tricky bit will be to ensure that tearing down the current framework doesn’t leave it in ruins.
One reason for decades of inaction is the federalist structure of U.S. bank regulation, which allows for choice among a federal, state, or hybrid (state member) charter. Whatever is done to federal bank regulation and federal charters, there is no way Congress will even try to redesign the state-based option. It might expand preemption, but that’s as far as even this group of radicals will go because Congress will not allow each Member’s state to lose much in the federal reform many of them otherwise want.
Congress will also tread softly on one political demand: that from small banks for a regulator more likely to listen to their pleas. Right now, that’s the FDIC, which owes its supervisory role over the decades to small banks despite numerous grievous FDIC mistakes along with the agency’s tunning inability to resolve banks bigger than a bread box.
New leadership may remove some of the curse now hovering over the FDIC, but I doubt it will save the agency as is. A likely alternative is two federal banking agencies governing rules and supervision for all banks and their holding companies under a threshold such as $50 billion, removing these banks from the OCC’s and Fed’s remit in concert with making many other changes to it. Resolution would stay at the FDIC, not move to Treasury, but a new governing structure omitting the OCC and CFPB along with many new standards could take hold.
One of the other barriers to banking-agency reform is the historically-strong belief that bank supervision must be politically independent to save sound banks from vengeful political enemies. Right though this is, the cloak of independence also covers the promulgation of bank regulation not because that makes sense, but because both functions have long been housed in the same agencies. I expect that bank supervision will retain its independence, but possibly be transferred to a single agency for all larger institutions and their holding companies, with the supervisory agency insulated by firewalls against at least some meddling such as fixed term limits.
Although the bank regulators stoutly defended their political independence at every turn in the last Congress, Republicans were having none of it and, indeed, Democrats often tacitly acknowledged it. In the new order, bank regulation will be directly subject to Administration and Congressional control, albeit also to the APA and other regulatory standards designed to ensure transparency and due process.
The trickiest bit in all of this is likely to be charters. If the Fed and FDIC are stripped of their regulatory powers, then there is no need for nonmember and member charters, leading to a single national charter under whatever becomes of the OCC. Simply allowing states to govern their banks without federal oversight is unlikely given state-bank access to FDIC insurance and Fed backstops, with solutions such as federal powers to review state supervisory findings or other approaches sure to come into play.
More vexing still is what to do with nonbanks now able to get bank charters and all the crypto companies demanding master accounts. This will of course be a very pro-crypto Administration and Congress, but I think any company allowed a bank charter will have to earn it under the new chartering agency (likely the new small-bank and supervisory entities, not the regulatory one). This may be wishful thinking given politics as it now stands, but the price of high-risk banks is all too well-known in the offices of at least a few key decision-makers.
Is this all that might happen? Of course not – I’ve left out or dealt only briefly with many issues, most notably who pays for all this. Will any of this happen? Not fast and maybe not at all, but consideration this time will be as different for federal bank regulation as it’s proving for everything else.