Blog: Breakingviews – In praise of American finance’s regulatory mess –

NEW YORK, March 9 (Reuters Breakingviews) – There are many issues on which China and the United States are far apart. One is how to keep banks honest. The People’s Republic this week proposed combining financial regulatory functions into a new super watchdog to govern its financial sector more effectively. It’s as if China set out to create the opposite of the multi-headed, semi-improvised American system. There’s no question which model is better.

Like hemlines and hairdos, styles of financial regulation come in and out of fashion. The most popular since the financial crisis is the “twin peaks” model, where one “prudential” regulator is charged with making sure firms don’t blow themselves up, and another “conduct” watchdog tries to stop them blowing up customers. The blueprint came from the United Kingdom, but Australia deployed it first in 1998. The Netherlands, South Africa, Italy and France each have their own riff on the theme.

China’s proposed new National Financial Regulatory Administration is roughly in this mold. It would monitor banks, insurers and financial conglomerates; overseeing securities trading would be left to another body. Like Australia, but not Britain and France, China’s beefed-up prudential prefect will remain separate from the central bank. The result is a single entity that essentially sees all. On paper, it’s a good way to forestall a crisis.

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Over in the United States, things couldn’t be more different. The world’s biggest economy boasts dozens of regulators that have sprouted since the founding of the Office of the Comptroller of the Currency in 1863. Banks, for example, are carved up among the OCC and the Federal Reserve, the Federal Deposit Insurance Corp and a panoply of state-level regulators – each with its own rules, mission and examination style.

While banks have multiple federal guardians, some firms have none. Payments are chartered at a state level, so a giant like $85 billion PayPal (PYPL.O) needs more than 50 licenses. Insurers too have no federal overseer, courtesy of a 1945 law that delegated power to the states for reasons that would make little sense in any other country.

Adding to the melee, there’s the government itself. Congress is stocked with committees that can summon executives to time-consuming hearings and pepper them with questions. That gives power and profile to politicians like Democratic Senator Elizabeth Warren, whose recent campaign against so-called junk fees charged to consumers has now been taken up by the White House.

It’s easy to see how this fragmented system can produce suboptimal results. Seemingly identical firms can have different regulatory strictures. In early 2007, mortgage lender Countrywide Financial removed itself from Fed supervision by converting itself into a savings-and-loan company. It failed less than a year later. Banks end up inundated with examiners and investigations. “We have five or six regulators or people coming after us on every different issue,” JPMorgan (JPM.N) boss Jamie Dimon once complained. There are also omissions, like cryptocurrencies. The Securities and Exchange Commission and the Commodity Futures Trading Commission each have a claim; for now there’s no regulatory regime at all.

In the run-up to the 2008 financial crisis, it became clear no single authority had visibility over the entire financial factory floor. Yet rather than consolidate regulators after that, Congress instead created two new ones: the Consumer Financial Protection Bureau, and a pan-agency talking shop, the Financial Stability Oversight Council. Today it’s still unclear who, if anyone, should be policing current high-growth hot spots like private credit funds and asset management.


Couldn’t the United States just join the twin peakers? Politically, it’s a hard no. Congress would have to anoint a new, more streamlined regulator, and the current divided legislature struggles to agree on anything. Different agencies also answer to different Congressional committees – the CFTC to agriculture panels, for example, and the SEC to finance-related delegations. Politicians on those bodies are generally reluctant to give up influence.

There’s another reason to keep the status quo, though: It brings big advantages. Multiple bipartisan agencies ensure a marketplace for regulatory views, something China lacks. Overseers disagree, and do so publicly. Former Fed Governor Lael Brainard formally protested 12 times in 2020, mostly over proposals to relax red tape around banks. Jelena McWilliams last year resigned as head of the FDIC after she clashed with colleagues over bank mergers.

Meanwhile, there’s less opportunity for lobbyists and politicians to strong-arm a scattered system. China’s highly centralized model has made it ripe for cycles of graft followed by purges, with former bank regulators among those prosecuted for corruption. Before 2008 the British government pressured its super regulator, the Financial Services Authority, to maintain a light touch – with disastrous consequences. Diversification even extends to how Uncle Sam’s regulators are funded. The FDIC and OCC are funded by banks they oversee, the SEC by Congress, the Fed by its own interest income, and the CFPB by the Fed. No single political attack can starve the whole system.

If all of this still sounds ad hoc, that’s because it is. But ad hoc is what American regulators do best. The financial crisis was resolved partly through private deals hastily brokered by bureaucrats, like JPMorgan’s rescue of Bear Stearns. When Covid-19 struck, the Fed exploited obscure Depression-era powers to lend to the economy without needing Congress’s approval. Such overreach, enabled by institutional fuzziness, stopped bad situations from getting much worse.

To China’s planners, such freestyling may seem the equivalent of rats fighting in a sack. Since 2008, officials in Beijing have criticized the United States’ financial excesses and its “warped conception” of financial discipline. But then again, a country with relatively young financial markets couldn’t replicate the battle-scarred, politically dispersed American system even if it wanted to. That’s China’s loss.

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China’s government has proposed creating a new financial regulator that would replace the agency that currently oversees banks and insurance companies, and absorb some regulatory functions from the country’s central bank and its securities watchdog.

The new National Financial Regulatory Administration would sit directly under the State Council, which serves as China’s cabinet. It would replace the China Banking and Insurance Regulatory Commission, which was created in 2018 from the merger of the country’s banking and insurance overseers.

The China Securities Regulatory Commission and the People’s Bank of China would still exist, though would hand over their respective investor-protection and consumer-protection duties. China’s national legislature will deliberate on the plan as part of its ongoing annual meeting.

Editing by Peter Thal Larsen and Amanda Gomez

Our Standards: The Thomson Reuters Trust Principles.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

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