How Volcker Would Redesign the Financial System

WASHINGTON — Former Federal Reserve Board Chairman Paul Volcker and his nonpartisan think tank proposed a massive shake-up of the U.S. financial regulatory system on Monday that would consolidate oversight into three super regulators.

The plan would divide the regulatory framework into three categories, with one building off the current Financial Stability Oversight Council to focus on stability issues and craft policy, another in charge of supervising all financial institutions and a final piece that would combine the Securities and Exchange Commission and the Commodity Futures Trading Commission to police the capital markets.

"The transformation of the financial landscape placed the outmoded and fragmented regulatory framework under significant strain in the run-up to the financial crisis," according to a blueprint provided by the Volcker Alliance, a think tank set up by the former Fed chairman in 2013. "What we insist on is that the status quo is not satisfactory."

Volcker is scheduled to give remarks this morning at the National Press Club about his regulatory restructuring plan.

The group's blueprint says the current system was "never coherently designed" and instead was developed "in a piecemeal fashion over the past 150 years."

Volcker's plan, which he first previewed in a speech last month, would divide up the current federal regulators and restructure them based on what they do, rather than who they oversee. It would mirror the United Kingdom's system, which was reworked following the financial crisis, by splitting off supervision and compliance from rulemaking and policy development.

Policymaking

The plan would largely leave the development of regulation and policymaking to a special committee within the FSOC. Volcker proposes the creation of a Systemic Issue Committee that would designate systemically important financial institutions "and require new or enhanced prudential standards and safeguards on all activities and practices that could pose a threat to systemic stability even if conducted outside the present universe of prudential supervision."

In Volcker's vision, the FSOC would be a coordinating council. It would be able to review the rules and regulations of all member agencies and recommend or require changes in order to maintain financial stability. The Treasury secretary would still chair the council but no longer participate in regulation and supervision so as to keep the "independence of the regulatory agencies."

The SIC would consist of the heads of six agencies  -- the Fed; the Federal Deposit Insurance Corp.; the Federal Housing Finance Agency; the Consumer Financial Protection Bureau; the newly created capital markets cop (which would be known as the Investor Protection-Capital Market Conduct Regulator); and the Office of Financial Research  -- along with a state insurance commissioner. The Fed would communicate the council’s decisions.

The Office of Financial Research, which was created by the Dodd-Frank Act, would be spun off from the Treasury and become its own entity.

Supervision

The supervision component of Volcker's vision would be called the Prudential Supervisory Authority. The PSA would be an independent agency that would "eliminate gaps and overlaps" and "centralize resources" by combining the prudential supervisory functions of the Fed, the Office of the Comptroller of the Currency and the FDIC. It would also take over some of the SEC and CFTC's oversight, including supervision of broker-dealers and money market funds.

The PSA would be headed by the Fed vice chair with the chairman of the FDIC, the head of the combined SEC-CFTC regulator and two presidential nominees included as part of its governing body.

While the Fed would not directly supervise banks, it would have the power to set rules such as capital and liquidity requirements for all entities, activities and practices subject to PSA's supervision or as authorized by the SIC. It would have access to all exam reports and data from the PSA and OFR and have backup exam authority. Additionally, the Fed would keep its monetary policy responsibilities and continue to be the lender of last resort.

The FDIC would maintain its role as deposit insurer as well as its resolution powers, while the OCC would be eliminated.

Additionally, the PSA would have a "special division for the supervision of true community banks."

The Investor Protection-Capital Market Conduct Regulator would "assure effective and efficient direction of the key responsibilities of investor protection and capital market conduct."

The board of the merged SEC-CFTC agency would be made up of five members appointed by the President and confirmed by the Senate and funded through fees and assessments, outside of the Congressional appropriations process. (Both the SEC and CFTC currently receive funding through Congressional appropriations.)

Volcker's plan does not make any changes with regards to current consumer protection structure.

Rationale

The Volcker Alliance said change was needed because of how much the system has been altered.

"Unlike the regulatory system, however, the financial system has experienced significant transformation in the past few decades," the group said, noting that there has been a buildup of assets concentrated in a few giant and complex institutions as well as the less-regulated shadow banking system.

It was also critical of "interagency jurisdictional conflicts" which it claimed often led to delays in creating rules during the crisis and that "no single agency had a comprehensive understanding of the risk in the financial system, as each agency remained focused only in it area of supervision."

While the Dodd-Frank Act sought to expand regulation it did not address the structure of the regulators, the group said.

"As a result, many of the structural deficiencies highlighted by the financial crisis remain substantially unaddressed," the blueprint said, adding that "the multiagency framework continues to fuel interagency tension."

The group also added that restructuring the regulatory system "has been on the public agenda for many decades" with more than 25 proposals since World War II.

"That the regulatory system needs fixing should not be news," the blueprint said, but "opposition from various stakeholders that benefited from the status quo" has stopped previous reform attempts.