Senator Elizabeth Warren told New York Federal Reserve President William Dudley to “man up.” Warren was expressing her frustration at a perceived lack of competent bank regulation. While many believe that the problem with Federal oversight is negligence or impotence, some banking officials think that the Federal government’s dual role as both enforcer and regulator is to blame posing the question – can an agency effectively act as regulator and enforcer, and effectively manage the banking market?
Bank regulation involves a great degree of catching problems before they start, behind the scenes maneuvering, and understanding of the industry to effectively prevent catastrophes or injustices from occurring. Unfortunately, the people best suited for this task are those who have a background quite similar to those they must oversee. This places the regulatory role in jeopardy of corruption if regulators are not carefully selected. But in order to ensure no cross-contamination has occurred, sometimes regulators are chosen that don’t have the best credentials. This makes room for error.
As enforcer, the federal government has an even more complex task as investigator, trying to figure out where others went wrong. However, enforcers don’t necessarily need a strong banking background, they can bone up on procedure after the initial investigation. But enforcers must possess integrity, strength, persistence, and the desire to find the truth.
When enforcers and regulators are part of the same organization, conflict can create hostility, confusion, and of course ineffectiveness in the overall goal, to make sure that banks are identifying and controlling their risks. Will the federal government ever get it right? The jury is still out.
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