Trump’s Call for Financial Watchdog Reform
The news that President-elect Donald Trump’s team is planning to make changes to the complex web of U.S. bank regulations is a step in the right direction. However, the success of these reforms will hinge on the specifics. The ultimate goal should be to simplify financial oversight on a larger scale – not just weaken an important watchdog.
It’s no secret that our current regulatory system is convoluted. At the federal level alone – not even taking into account various state regulators – there are three agencies that oversee banks, two that supervise markets, one focused on consumer protection, and another dedicated to combating financial crimes. Many major institutions have to comply with regulations from all of these entities. Today, senior managers at an average bank spend around 42% of their time dealing with compliance tasks. This fragmentation sometimes leads to risks slipping through the cracks.
Much of this regulatory framework was put in place many years ago, in a time when things were much simpler. A prime example is the fact that the Securities and Exchange Commission and the Commodity Futures Trading Commission were established separately – the SEC to protect investors in securities like stocks and bonds 90 years ago, and the CFTC to oversee commodities markets 50 years ago.
Today, with many financial companies operating in both markets, the oversight from these two agencies can be redundant and ineffective. The lack of communication between them was evident in the aftermath of the chaotic bankruptcy of MF Global Holdings Ltd. in 2011. Both commissions failed to coordinate their responses to the company’s financial collapse and even disagreed on how to safeguard customer funds. This fragmentation is not common by global standards, and there have been talks for years about merging the two agencies. However, political interests have always taken precedence, with the House Committee on Agriculture reluctant to give up oversight of the CFTC due to financial contributions from the industry.
One constructive reform that Trump could pursue is the merger of the SEC and the CFTC. Combining these two agencies could simplify regulations, lower compliance costs, and improve coordination with international regulators. This proposal has support from former and current commissioners from both agencies.
Reforming the oversight of banks is a more complex challenge. It’s true that there are too many regulators in the U.S., including the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corp., as well as state banking authorities. However, simply merging the FDIC into the Treasury Department, as the Trump administration is considering, may create more issues than it solves.
A better solution could be the creation of a single prudential authority responsible for safeguarding the financial system. This new entity could be overseen by a board that includes members from the Fed, Treasury, and FDIC, while eliminating the OCC. Ideally, this authority would also oversee nonbank entities, like asset managers, that have a significant impact on the financial system. This type of restructuring could lead to more streamlined and effective oversight of the financial industry.
