Trump wants to streamline bank regulation. Here's how he should do it.

Andrew Harrer/Bloomberg

According to recent news reports, the incoming Trump administration wants to streamline federal bank supervision. These headlines are already producing some eyerolls, as consolidation of federal supervision has come up repeatedly. In light of our federalist structure and shared power between the national and state governments, there will always be a dual banking system.

However, consolidation of federal supervision into the Office of the Comptroller of the Currency would be an improvement.

We regulate banks so they operate in a safe and sound manner, and so their failure doesn't burden the taxpayer. Banks take risks to earn a return; their maturity transformation facilitates lending that contributes to economic growth. Because maturity transformation poses risks, the federal government provides deposit insurance to depositors, and thus effectively grants banks a monopoly on insured deposits. Direct and indirect supervision costs are the tax imposed on banks in exchange. If executed well, supervision results in strong banks, contains taxpayer costs and supports economic growth. If executed poorly, supervision can reduce banks' efficiency, result in more crises and shift lending to nonbanks.

The current structure of federal bank supervision lends itself to the latter set of outcomes. Over time, crises have resulted in the creation of multiple federal supervisors. Most Americans have no idea that U.S. banks have two or more federal supervisors. An insured national bank with a holding company will be subject to supervision by the OCC, the Federal Reserve and the Federal Deposit Insurance Corporation. If a bank's assets exceed $10 billion, the Consumer Financial Protection Bureau oversees some consumer compliance. U.S. federal supervision is so complex that the public and often Congress cannot understand who is accountable. Our structure leads to duplication, burden, and delayed and/or inconsistent supervisory messages.

Direct U.S. federal supervision costs about $7.5 billion per year — $3.0 billion, $2.5 billion, $1.3 billion and $0.7 billion at the FDIC, Fed, OCC and CFPB, respectively. Banks pay about $5 billion, and about $2.5 billion of Fed and CFPB expenses reduce Fed remittances, increasing the budget deficit. Indirect costs to banks are harder to quantify, but include responding to multiple — and potentially conflicting — inquiries and exams on the same topics. Finally, this structure permits charter flipping — banks choosing their federal supervisor. Even after reforms enacted in 2008, if not under a consent order, banks still need only get permission from the new supervisor to change charters.

The Government Accountability Office, or GAO, concluded the existing federal supervision structure does not ensure efficient and effective oversight. The International Monetary Fund also has noted costs and risks related to bank regulatory fragmentation. Continuation of the current federal supervision system does not make sense. The next administration aims to improve economic efficiency. Consolidation of federal supervision into the OCC is a great place to start. A single federal supervisor would partner with state bank regulators more effectively.

Why the OCC? First, among federal supervisors, the OCC has a single head with clear accountability and more statutory independence. Second, last month the GAO issued a report examining whether three federal banking regulators are escalating supervisory concerns to ensure prompt actions from banks. In light of the 2023 bank failures, GAO analyzed data on supervisory concerns opened between 2018 and 2022, reviewed exam documents for a sample of 60 banks, compared regulators' communications of supervisory concerns against policies and interviewed over 100 federal bank examiners. GAO made recommendations to the Fed and FDIC about weaknesses in escalating supervisory concerns, while concluding that OCC escalates supervisory concerns in a manner consistent with procedures. Third, OCC has absorbed other supervisors before. Analysis of the closure of the Office of Thrift Supervision found benefits from the transfer to the OCC of 649 federal thrift charters. After the transition to OCC in 2011, the authors find former OTS banks increased small-business lending on average by approximately 10% which was related to greater board turnover, replacement of executive directors and improved risk modeling.

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What about the FDIC? The FDIC faces significant cultural challenges. What about the Fed? Some may pearl-clutch at removing supervision from the Fed. But no other advanced economy has its central bank trying to engage in so much supervision. Through the last three U.S. banking crises (S&L, 2008 and 2023) — more than any other advanced economy — the Fed's leaders have argued the virtues of Fed supervision. There are at least three reasons to be skeptical.

First, as noted by the IMF, "with the Fed's much broader mandate which includes monetary policy goals of promoting maximum employment and stable prices, there is some potential for bank supervision to interact with these goals." Simply, there can be tensions between monetary policy and supervisory goals. The 2023 failures demonstrated negative synergies between Fed supervision and monetary policy. Does the Fed's inflation mandate contribute to a sense that guardrails on interest rate risk are not quite as necessary? Quantitative easing created uninsured deposits. Fed leadership's transitory inflation error compounded into supervision.

Second, supervision is not the Fed's core function. In fact, fewer Fed leaders now have deep supervision expertise. Recall former-examiners-turned-Fed-presidents George, Hoenig or Rosengren. As a result, current Fed leadership tends to have limited firsthand experience in executing supervision.

Finally, supervision may reduce Fed independence. The creation of a vice chair for supervision post in 2008 may create a perception that the FOMC should be "politically balanced," like the FDIC board. While central banks and supervisors both must be accountable, their accountability is different. 2023 illustrates the tension in Fed leadership being independent on monetary policy and still accountable on supervision.

To be clear, all bank regulators have valuable staff. The FDIC's knowledge of community banking, deposit insurance, orderly resolution and systemic risk are key. The Fed is strong in issues related to large bank holding companies and stress testing. As a combined federal supervisor, OCC would need more expertise in these areas.

In sum, Congress and the next administration should consolidate federal supervision into the OCC. It would promote stronger banks, lower taxpayer costs, stronger economic growth and even Fed independence.