Navigating the Patchwork of Financial Oversight Authorities
The banking sector in the United States has seen a significant transformation over the past century, with its regulatory structure evolving in response to financial crises and changing economic needs.
The Federal Reserve System, created in 1913, provides central banking functions, while the Federal Deposit Insurance Corporation (FDIC), established in response to bank failures in the 1920s and early 1930s, insures deposits and manages failed bank resolutions. The Office of the Comptroller of the Currency (OCC), a federal agency that supervises national banks, was created in 1863.
The Office of Thrift Supervision, which supervised savings and loans institutions, was abolished as part of the Dodd-Frank Act in 2010. This legislation, enacted in response to the Global Financial Crisis, aimed to reduce systemic risks, increase oversight of large, systemically important financial institutions (SIFIs), and establish the Financial Stability Oversight Council (FSOC) for broad systemic risk monitoring.
Despite periodic efforts to consolidate the bank regulatory system for greater efficiency, these attempts have not been universally successful. Greater efficiency is still seen as a necessity, with figures like Donald Kohn, who served as vice chair of the Fed from 2006 to 2010, advocating for improvements.
The current structure of U.S. bank regulators has evolved from fragmented regional oversight towards a more centralized and integrated framework, centred on the Federal Reserve, FDIC, SEC, and new systemic risk monitors. This evolution has been driven largely by lessons from financial crises and legislative reforms, such as the Banking Act of 1935, the Great Depression reforms, late 20th Century deregulation, and the post-2008 Financial Crisis reforms.
The Basel Accords, starting in 1988, set international minimum capital requirements and liquidity standards, progressively strengthened through revisions in 2004 and 2010. These shaped regulatory capital standards, with the U.S. enhancements post-2008 incorporating their principles into national regulation.
Recent discussions around bank regulator frameworks are likely to continue, with proposals for consolidation being considered. Treasury Secretary Scott Bessent may play a role in this consolidation as part of the Trump administration's plans to achieve regulatory reform. Sarah Bloom Raskin, a law professor at Duke University and Biden administration nominee to be the Fed's vice chair for supervision, sees consolidation as a chance to capitalize on various agencies' core strengths to enhance supervision.
However, merging functions comes with considerations, including innovation versus risk and independence from politics. The Consumer Financial Protection Bureau (CFPB), a financial regulator focused on the consequences to consumers rather than the functions of banking itself, serves as an example of a separate entity within the regulatory framework.
As the banking sector continues to evolve, the debate over the optimal structure of bank regulators is likely to persist, with ongoing discussions around consolidation, efficiency, and systemic risk monitoring.
- The evolution of the banking-and-insurance industry in the United States has been influenced significantly by policy-and-legislation, with legislative reforms such as the Dodd-Frank Act and the Basel Accords shaping regulatory structure and capital standards.
- In the wake of financial crises and changing economic needs, the role of politics has been apparent in the transformation of the banking sector, with politicians like Donald Kohn advocating for improvements and Treasury Secretary Scott Bessent potentially playing a role in future consolidation efforts.
- The general-news media often reports on this ongoing debate about the optimal structure of bank regulators, discussing aspects such as consolidation for greater efficiency, the balance between innovation and risk, and the importance of agency independence from politics, as demonstrated by the creation of separate entities like the Consumer Financial Protection Bureau.
