Treasury Proposes Axing OTS, NCUA

Sweeping Changes Would Restructure Agencies, Institutions
Treasury Proposes Axing OTS, NCUA
The US Treasury on Monday released its 200+ page "Blueprint for a Modernized Financial Regulatory Structure", calling for the most extensive regulatory overhaul since the Great Depression.

The plan calls for the elimination of the Office of Thrift Supervision (OTS) and the Commodity Futures Trading Commission (CFTC), rolling their functions into the Office of the Comptroller of The Currency (OCC) and the Securities and Exchange Commission (SEC) respectively.

The Blueprint also proposes three distinct regulators to "focus exclusively" on financial institutions:

Market stability regulator (the Federal Reserve Bank),
Prudential financial regulator (roles of the OCC, OTS, and NCUA),
Business conduct regulator (most roles of the CFTC and SEC, and some roles of bank regulators. (See Treasury Fact Sheet)

For those who may think this comes solely as a result of the recent subprime mortgage meltdown or the Bear Stearns buyout, the answer is "no." Treasury has been working on this blueprint for more than a year, and solicited public comment on the proposed changes in October 2007. This proposed regulatory structure change has its roots in previous Treasury studies done in 1984 and in 1991, which included the idea of functional regulation.

Reaction from industry pundits and professionals varies from positive to downright negative.

"I cannot imagine it will be very popular with the respective agencies, but I do think a current review is warranted, given the regulatory environment," says Agnes Bundy Scanlan, a lawyer with Goodwin Procter and board member of the International Association of Privacy Professionals.

Robert Matthews, of Matthews Business Solutions and former regulatory compliance auditor at Chase Manhattan Bank, sees the blueprint as having high aspirations but not a lot of muscle. "The summary began on a hopeful note citing the benefits in the UK of the FSA, (Financial Services Authority) but then degenerated into an alphabet soup of new regulatory agencies," Matthews says. "I believe it will take a much larger crisis than we now face to force meaningful changes. Regulator shopping is not about to come to an end anytime soon."

Impacts and Reactions
Because the proposed changes are so sweeping, they are unlikely to be enacted before the current Administration leaves office in 2009. But the ideas nevertheless are garnering serious response from parties that would feel their impact.

Credit unions, for instance, which are now regulated by the National Credit Union Administration (NCUA) under separate charters, would lose their unique place as a consumer-owned structure under the proposed blueprint, says Daniel Mica, President and CEO of the Credit Union National Association.

"This will result in the demise of credit unions as they function today and severely limit choices in the financial marketplace for consumers," Mica says.

Mica also thinks separating oversight functions based on prudential financial regulation, business conduct and market stability could lead to increased bureaucracy and overlapping jurisdictions, given the complex interconnections entailed in these issues. "This is just the opposite result of what the report seeks to achieve," he says.

Cathy Allen, President of the Santa Fe Group, a financial services consultancy, sees the blueprint having positive impact on the industry as a whole. "The Fed will have these broader powers to help with the overall health of the economy," Allen says. "But they need to have the ability to go after a single firm that is causing a problem or not doing right."

The second positive Allen sees is a focus on broader consumer issues that regulates business conduct and consumer protection. "This is just the kind of place for consumers to talk about their problems that they're having with a bank, a broker or other company that isn't doing right by them," Allen says.

Wall Street will benefit at the expense of Main Street, according to Camden Fine, President and CEO of the Independent Community Bankers of America (ICBA) "This seriously flawed Treasury proposal could spell the end of community banking in the United States," Fine says. "It would eliminate the dual banking system, gut state regulatory authority across nearly the entire financial services spectrum, and heighten systemic risk by furthering bank consolidation and concentration of our nation's financial assets."

Fine says the ICBA strongly supports the dual banking system because it allows for diversity of financial institutions and supports financial institutions of various complexity and size. The community banking association supports independent financial regulators because "not only are they more insulated from political pressure, but concurrent rules developed by several agencies can yield a superior product with greater acceptability and legitimacy," Fine says.

Another banking association also sounds the alarm on the dissection of the existing regulatory structure. Ed Yingling, American Bankers Association President and CEO, notes in a statement, "We are disappointed that in several important respects the proposed blueprint comes up short. In particular, dismantling the thrift charter and crippling state banking charters will weaken banking in America."

There is a missed opportunity to buttress the OTS -- to use those people who have a great deal of expertise in the evaluation of mortgage credits in the examination of mortgage lenders and to let them use those skills in the broader mortgage banking brokerage business, says ABA's Doug Johnson, Vice President and Senior Advisor, Risk Management Policy. He also finds it ironic that while Treasury is looking to give a national insurance charter, it is at the same time proposing to tear down the very reason for the success - the dual banking system.

He believes that the Federal Reserve is really the best entity to protect and uphold the resiliency of the markets and the financial services industry, not just from a fiscal transaction facilitation standpoint, but also from a settlement and liquidity standpoint. "They need the proper tools to do that," Johnson says.

This blueprint, Johnson says, is a good effort to put some parameters around the ensuing debate. "It is not the end game, but the beginning of the game. Question to answer is 'What is the most reasonable and rational regulatory structure to have in our country?'"

What Next? There will be significant buzz in the boardrooms of financial institutions as a result of the Treasury blueprint, says Stephen Katz, President of Security Risk Solutions, a financial services consulting company. "It's going to get really interesting to see who will be in charge of what," Katz says.

Katz sees positives for financial institutions both large and small in these proposed regulatory changes. "Having a consistent set of regulations -- across the board -- will benefit all institutions. It is just a matter of time before we have a single set of regulations across the entire financial services sector," he says.

The proposal also serves as a wake-up call to all institutions. This action by Treasury will cause institutions to focus on safety and soundness risks, and Katz calls on regulators to also focus on the same thing. "[We] need to get the regulators to focus on the safety and soundness issues of the institutions," he says. "This is something they haven't been doing for a very long time."

ABA's Johnson predicts that the blueprint may make it through the slew of legislative rounds and hearings. "The planets are potentially better aligned than past attempts to do this kind of reform," he says. The timing, however, may not be able to be measured, especially if or when Congress becomes involved

About the Author

Linda McGlasson

Linda McGlasson

Managing Editor

Linda McGlasson is a seasoned writer and editor with 20 years of experience in writing for corporations, business publications and newspapers. She has worked in the Financial Services industry for more than 12 years. Most recently Linda headed information security awareness and training and the Computer Incident Response Team for Securities Industry Automation Corporation (SIAC), a subsidiary of the NYSE Group (NYX). As part of her role she developed infosec policy, developed new awareness testing and led the company's incident response team. In the last two years she's been involved with the Financial Services Information Sharing Analysis Center (FS-ISAC), editing its quarterly member newsletter and identifying speakers for member meetings.

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