Turf Battles May Impede Financial Regulatory Reform
The global credit crisis, the global recession, the decline in real estate values and the negative effects of these events on the banking industry have stimulated interest in regulatory reform of the financial sector. The existence of complex interactions among participants and products in the global financial markets has become more apparent. Unprecedented measures have been taken to address frozen credit markets, the collapse of massive financial firms and the spreading contagion associated with “toxic” assets. Questions have been raised about the adequacy and effectiveness of many existing regulatory structures and about whether regulation should be extended to activities that currently are unregulated. There are perceived advantages and risks associated with concentrating regulatory authority in a single regulator. There has been discussion of the possibility of having a panel of regulators deal with systemic risk issues. Such an approach would be similar to the proposed European Systemic Risk Council, which would include the president of the European Central Bank and central bank governors from the European Union’s 27 member countries.
Although there is general recognition that disruptions in financial markets cannot be eliminated, the need for more effective safeguards against systemic risk is clear. Despite statements that something must be done, there is considerable disagreement about the exact nature of the changes that should be made. Reform will be politically difficult because of the interests of market participants, regulators and Congressional committees in preserving existing regulatory jurisdictions and objectives. Any financial industry regulatory reform raises questions about who should be performing particular kinds of regulation and how that regulation should be performed. Set forth below are some of the more contentious issues:
Should there be one or more than one systemic risk regulators? Should hedge funds be regulated? Should currently unregulated derivatives be regulated? Should there be increased regulation of the mortgage industry? Should there be regulation of the sale of securitized assets? Should there be federal regulation of the insurance industry? Should some or all federal bank regulatory agencies be consolidated? Should failing non-bank financial companies be placed into receivership? Should there be a reallocation of jurisdiction between the SEC and the CFTC? Should there be a clearinghouse for over-the-counter derivatives? Should credit default swaps be regulated? Should short selling be more tightly regulated? Should there be more countercyclical capital requirements? Should the use of leverage be more tightly regulated? Should there be more regulation of money market funds? Should the role of state banking regulation be diminished? Should there be more robust enforcement of consumer protection laws? Should there be more disclosure of positions of larger market participants? Should regulatory changes extend to compensation and corporate governance?
Whether or not all of these issues are resolved in the near future, it seems clear that substantial changes in the operation of financial market regulation lie ahead. What is also clear is that the outcome of turf battles will have a major role in determining the future of the financial regulatory structure.
Recent news reports highlight some of the problems that can arise in the context of turf disputes. According to a recent article in The Economist, “The stiffest resistance to change is coming not from Wall Street but from Washington, DC, where government officials, regulators and congressional leaders are locked in turf wars and ideological battles.” Bloomberg reports that because of “resistance on Capitol Hill” and “pushback from entrenched interests,” a merger of the SEC and the CFTC may not be pursued. An article in The Wall Street Journal comments on the FDIC’s “increasingly tough position” toward the management of Citigroup Inc. leading to “a bitter clash between regulators” about the speed and adequacy of efforts to improve the firm’s capital position. In an earlier article The Wall Street Journal reported on Congressional committee disputes over jurisdiction of the regulation of over-the counter derivatives. As the most traumatic aspects of the financial crisis pass into memory, it seems increasingly likely that bureaucratic infighting will play a major role in limiting the scope of any reform of the financial sector.
If you have questions, please contact Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.