Washington, D.C., is in the midst of a regulatory reform quilting bee. Several different parties are gathering up regulatory reform ideas for potential inclusion in a reworked financial regulatory framework. The end result could be hideous, or it could be an elegant, effective, and efficient amalgamation of these disparate regulatory efforts. The key to getting the latter result is ensuring that each included contribution furthers our collective desire to see a stronger, safer financial system that serves the needs of individuals and businesses.
The Treasury has released the first of its reports on financial reform. That report, which primarily focuses on issues related to the regulation of banks and credit unions, suggests a wide array of changes. Perhaps more important than the specific reform proposals is the report’s focus on broader regulatory themes. Is it possible to trim the number of federal financial regulators—now in the double-digits—in a way that makes financial regulation cheaper and more effective? Is it possible to find ways to induce regulators to better work together on issues like Volcker Rule implementation, cybersecurity, and economic analysis? What structural changes can ensure that regulators are accountable for their decisions? Can regulations be made more flexible to ensure that small and less complex financial firms are not stifled by a web of inapt regulations?
The House of Representatives passed the Financial Choice Act, which covers a lot more territory than the initial Treasury report. The Choice Act offers potential solutions for a number of key weaknesses in the financial regulatory system. In a nod to former central banker Andrew Haldane’s important insight that “In financial regulation, less may be more,” the Choice Act posits that compliance with a simple leverage ratio may do more to avert crises than wrapping financial institutions in a complex web of regulations. In response to concerns that the bailout door remains open, the Act would eliminate the Orderly Liquidation Authority, which allows regulators to displace the bankruptcy process in favor of a regulator-run and government-funded resolution process. Also on the Choice Act deletion list is the Volcker Rule, which has consumed gobs of regulatory and industry attention and resources that could instead have been spent on pressing issues like cybersecurity. The bill would increase regulatory accountability through measures to standardize the use of robust economic analysis and uniform requirements that financial regulators be funded through congressional appropriations.
The Senate is charting its own reform course that began with soliciting suggestions from the public for regulatory changes that would spur economic growth. In response, the Senate received numerous reform proposals. Many commenters suggested discrete reforms to existing regulatory requirements, such as limiting the reach of the Volcker Rule and paring back Dodd-Frank’s regime for designating and regulating systemically important financial institutions. Proposals also included suggestions for more fundamental reform like one from securities professor Andrew Vollmer to reform “the cumbersome and costly method for registering securities with the SEC for a public offering ... so that the public registration process is as or more efficient than using an exempt offering under the current system.”
Regulators are also undertaking reforms consistent with their existing statutory authority and suggesting areas in need of congressional attention. The Securities and Exchange Commission’s new chairman is searching for better ways to ensure that our public securities markets are an efficient and safe place for investors and companies to meet their complementary goals. The head of the Commodity Futures Trading Commission has set up LabCFTC to facilitate innovation in a highly regulated environment. The Department of Labor has announced plans to rethink its fiduciary rule, a complex, disruptive, and costly maze of regulations hiding behind a disarming name. Reacting to the near absence of de novo banks in recent years, the acting Comptroller of the Currency has suggested streamlining the approval process for de novo banks by requiring that only one regulator, rather than the current two regulators, review applicants.
Today’s policymakers have many ideas to consider as they go about their regulatory quiltmaking. They will have to focus on specifics and ignore distracting rhetoric, such as a recent proclamation about God “smiling” at the creation of the CFPB and therefore opposing any attempt at regulatory change. A serious joint effort that draws on the ideas of many people could produce effective financial regulation that would generate smiles all around.