State bank regulators are warning that Senate Banking Committee Chairman Christopher Dodd's proposal to create one monolithic federal bank regulator would increase risks to the system and would favor precisely the gigantic banks whose conduct most needs to be reined in.
"The unintended consequences of such a proposal will likely create a too-big-to-fail regulatory agency that reinforces a too-big-to-fail industry," Neil Milner, president and C.E.O. of the Conference of State Bank Supervisors, said in a statement.
"The federal government policies and actions of the past 18 months have already produced a more consolidated industry -- with a handful of 'haves' benefiting from explicit and implicit federal backing and with the rest of the banking industry relegated to 'have not' status," the group wrote in a Monday letter to Dodd obtained by the Huffington Post. "Excessive regulatory consolidation will only perpetuate this dichotomy by subjecting the nation's over 8,000 banks...to a regulatory regime designed to accommodate the needs and business priorities of handful of the nation's largest and most politically prominent institutions."
Dodd argues, in a summary of his 1,136-page bill, that having a single agency "eliminates the convoluted system of multiple federal bank regulators to increase accountability and end unnecessary overlap, conflicting regulation, and 'charter shopping,'" which refers to banks shopping around for the most lenient regulator.
But the state regulators insist: "It would be dangerous to place all regulatory authority under one agency, which would remove critical layers of financial supervision. A single federal regulator, contrary to improving regulatory accountability, would increase the likelihood of regulatory capture by eliminating checks and balances."
"Regulatory capture" refers to instances in which agencies created to serve the public interest through regulation instead end up working for the benefit of those they're supposed to be overseeing.
"It is no coincidence that the nation's largest banks support regulatory consolidation, while the community and regional banks oppose your proposal. The mega-banks support the creation of a monolithic regulator because they fully expect to enjoy greater access and greater influence if such an agency is created," the regulators wrote.
They also argued that the creation of such an agency would punish small banks, which did not cause the crisis.
"Smaller institutions, the very banks that prevented a complete collapse of our economy, would be further disadvantaged, to the point where we would eventually be left with an industry consisting of nothing more than a handful of mega banks," the regulators wrote. Small banks "kept credit flowing in our economy and throughout the country, even as our largest institutions all but ceased lending to preserve the capital necessary to survive the collapse of the capital markets."
Indeed, a Huffington Post review of banking data shows that banks with more than $10 billion in assets have cut the amount of loans they carry on their balance sheets by a combined $343 billion, or six percent, since last year. Given the recession, a downturn in lending was expected. But smaller banks only cut their loans by one percent.
"To reward the legions of community and regional banks that kept our economy afloat in our darkest days with a regulatory regime that would at best ignore their needs, and at worst, seek to merge them out of existence altogether, would...unjustly punish those very institutions that sustained our nation," the state regulators wrote.
Banks can currently pick their own federal regulator, and can choose whether to have a state charter or a federal one. Under Dodd's proposal, banks could still choose between the one federal regulator or a combination of state and federal regulation.
The state regulators fear, however, that the plan could have the practical effect of killing the dual system down the line as banks find it more attractive to simply have one regulator.
READ the letter BELOW