A Pragmatic Approach to the Phased Consolidation of Financial Regulation in the United States

Abstract

This essay proposes a phased transformation of financial regulation in the United States to focus the Federal Reserve Board on oversight of market stability, including systemically important institutions throughout the financial services industry, and to assign all other regulatory functions, including routine supervision and consumer protection, to an independent consolidated agency. I. The authority of the Federal Reserve Board to oversee financial market stability should be expanded to cover all sources of systemic risk in the financial services industry, should be structured to coordinate effectively with other supervisory agencies, and should be designed to allow for consistent, appropriate forms of intervention in response to systemic risks. II. Even after the authority of the Federal Reserve Board has been expanded, the consolidation of other federal financial regulatory functions should proceed; the experience of other leading jurisdictions indicates that consolidated supervision offer numerous benefits in terms of the quality and completeness of financial regulation and that the principal objections to consolidated supervision can be met through statutory safeguards and institutional design. III: Experience in other leading jurisdictions also demonstrates that many of the benefits of consolidated oversight can be achieved without the statutory consolidation of front-line supervisory units and the world's premiere consolidated agency, the British FSA, was established in a multi-stage process whereby the enactment and implementation of new substantive statutes did not occur until the FSA has been in operations for several years. IV. Drawing on these experiences, U.S. regulatory consolidation should follow a four-stage process: 1) immediate enhancement of the President's Working Group on Financial Markets; 2) prompt enactment of legislation creating an independent United States Financial Services Authority (USFSA or Authority) to provide industry-wide oversight, coordinate existing regulatory structures, and lay the groundwork for combination of existing supervisory agencies; 3) a second round of legislation authorizing the merger into the USFSA all other federal supervisory agencies; and 4) resolution of the organizational structure of the Authority should be postponed until regulatory consolidation is complete. V. This four-phase approach to regulatory consolidation improves the likelihood of successful transition by delaying controversial decisions, avoiding unnecessary steps, and providing an organizational structure that can lead reform while safeguarding continuity of supervision. VI. The creation of a United States Financial Services Authority is also consistent with expansion of the Federal Reserve Board's role in overseeing market stability and would actually improve the capacity of the Board to perform that function effectively.