Banking Regulation Exists, It’s just Bad
There was a recent Daily Show clip highlighting the disparity between U.S. and Canadian banking regulation (unfortunately the link has died, R.I.P.). Canada’s bank regulation is among the most effective in the world and Canada simply doesn’t have the number or severity of banking crises that the U.S. does. However the hedge fund manager on the clip refers to America’s banking sector as a bastion of the free market, but nothing could be further from the truth. Denying there is financial regulation in the U.S. is just as insane as denying that America has a military or denying the existence of Medicare. In addition to the dozens of laws passed concerning financial regulation, the U.S. has 10+ agencies tasked with regulating the financial sector:
The Treasury Department
U.S. Securities and Exchange Commission (SEC)
Financial Industry Regulatory Authority (FINRA)
Commodity Futures Trading Commission (CFTC)
Federal Reserve System (“Fed”)
Federal Deposit Insurance Corporation (FDIC)
Office of the Comptroller of the Currency (OCC)
National Credit Union Administration (NCUA)
Office of Thrift Supervision (OTS)
Consumer Financial Protection Bureau (CFPB)
Federal Housing Finance Agency
Fannie Mae/Freddie Mac (quasi-governmental)
Whatever the troubles of the U.S. banking sector, underregulation is not among them. However, many people have a misconception of what the nature of regulation is. Regulation is a set of rules which firms have to follow. They can be either good or bad, and outcomes depend not on the quantity of them, but on what they consist of. No one in their right mind would blame the loss of their favorite sports team on “the rulebook not being big enough”. Similarly, bad outcomes in the economic sector depend not on the size or complexity of the regulation, but on its particular composition.
In America, when Congress deigns to write a financial law, the first people they call up are the major investment banks. The regulations are bought and paid for by the banks. If you think more regulations are the answer, you’ve got to ask yourself, why would a bank write a regulation that hurt it? Most people just see “Financial Reform” in the title of a newspaper article and assume all is right with the world, at least they do until the next banking panic hits.