Each depositor insured to at least $250,000 per insured bank

By: Sheila C. Bair*
New York Times, 9/1/2009 -- Washington -- THE Obama administration has proposed sweeping changes to our financial regulatory system. I am an active supporter of the key pillars of reform, including the creation of a consumer financial protection agency and the administration's plan to consolidate the supervision of federally chartered financial institutions in a new national bank supervisor. This consolidation would improve the efficiency of federally chartered institutions while not undercutting our dual system of state and federally chartered banks.

But some are advocating even more drastic changes, like the creation of a single regulator for all banks (and bank holding companies). We clearly need to streamline the system, but a single regulator is not the solution. Calls for consolidation beyond the administration's plan fail to identify the real roots of last year's financial meltdown. The truth is, no regulatory structure -- be it a single regulator as in Britain or the multiregulator system we have in the United States -- performed well in the crisis.

The principal enablers of our current difficulties were institutions that took on enormous risk by exploiting regulatory gaps between banks and the nonbank shadow financial system, and by using unregulated over-the-counter derivative contracts to develop volatile and potentially dangerous products. Consumers continue to face huge gaps in personal financial protections. We also lack a credible method for closing large financial institutions without inflicting severe collateral damage on the economy.

The creation of a single regulator for all federal- and state-chartered banks would not address these problems. Rather, it would endanger a thriving, 150-year-old banking system that has separate charters for federal and state banks. Within this system, state-chartered institutions tend to be community-oriented and very close to the small businesses and consumers they serve. They provide loans that support economic growth and job creation, especially in rural areas. Main Street banks also are sensitive to market discipline because they know that they're not too big to fail and that they'll be closed if they become insolvent.

Concentrating power in a single regulator would inevitably benefit the largest banks and punish community ones. A single regulator's resources and attention would be focused on the largest banks. This would generate more consolidation in the banking industry at a time when we need to reduce our reliance on large financial institutions and put an end to the idea that certain banks are too big to fail. We need to shift the balance back toward community banking, not toward a system that encourages even more consolidation.

A single-regulator system could also hurt the deposit-insurance system. The Federal Deposit Insurance Corporation currently supervises state banks. The loss of a significant regulatory role would limit its ability to protect depositors by identifying and assessing risks in the financial system.

We can't put all our eggs in one basket. The risk of weak or misdirected regulation would be increased if power was consolidated in a single federal regulator. We need new mechanisms to achieve consensus positions and rapid responses to financial crises as they develop.

I have advocated the creation of a strong council of federal financial regulators. This council would monitor the financial system to help prevent the accumulation of systemic risks and would also have the authority to close even the largest institutions. But we don't need -- and can't afford -- to depend on one supreme regulator to have sole decision-making authority in times when our entire financial system is in flux.

One advantage of our multiple-regulator system is that it permits diverse viewpoints. The Federal Deposit Insurance Corporation voiced strong concerns about the Basel Committee on Banking Supervision's relatively relaxed rules for determining how much capital banks should have on hand. In a single-regulator system, it's very likely that these rules would have been put into effect much more quickly and with fewer safeguards, and our largest banks would have faced the current crisis with much smaller buffers of capital. This is not about protecting turf. This is about protecting consumers and the safety of our financial system.

Working with Congress, we need to draw on the best ideas available to plug regulatory gaps as outlined in the administration's proposal. We may never have a better opportunity to address the root causes of this crisis -- and prevent it from ever happening again.

*Sheila C. Bair is the chairman of the Federal Deposit Insurance Corporation.