CUNA Regulatory Comment Call

November 7, 2007

EXECUTIVE SUMMARY

The Treasury Department is seeking comments through November 21, 2007 on the regulatory structure of financial institutions in this country and whether changes are needed to improve regulation of those entities. The request follows a Government Accountability Office study released last month that examines federal financial institution oversight and recommends consolidation of the regulators.

Comprehensive restructuring would require statutory changes, which are not going to be made this year for a variety of reasons. Also, we are not aware that this is an upcoming issue next year or beyond for either chair of the financial services committees in the House and Senate. In light of this, it is very unclear when, if ever, restructuring of financial services regulation will occur.

Nonetheless, the GAO study was required by Congress, and any time the government reviews regulatory consolidation there is reason for concern. Also, while credit unions are not a specific target of the review, there is no doubt that the banker groups will seize the opportunity to denounce the tax exempt status and the need for a separate credit union regulatory agency. In light of this, it is important that CUNA be involved in the comment process with Treasury to ensure policymakers are provided thorough analysis and support for continuation of a separate federal regulator as well as insurer for credit unions.

Please submit your comments to CUNA by November 19, 2007.Treasury’s request for comments may be accessed here and the GAO report here. If you have questions about this request, please contact CUNA's SVP and Deputy General Counsel Mary Dunn at mdunn@cuna.coop.

Highlights of Treasury’s Request for Comments

According to the request, Treasury is embarking on a broad review of the regulatory structure of financial institutions. The request is short and provides few insights into the agency’s process; the questions from the Treasury document are listed below. First, however, a recent speech by Treasury Assistant Secretary for Financial Institutions David Nason, provides a few more details of this initiative:

• It has been ten years since the Treasury has released a financial services industry study, even though many changes have occurred in this sector since then.
• The current regulatory system has evolved to respond to changes in the marketplace by expanding but not always by focusing on the broader objective of regulatory effectiveness and protecting consumers and investors.” (Consumer protection as an objective for Treasury is novel but reflects who is in charge at the other end of Pennsylvania Avenue!)
• Treasury’s review will take several months, be comprehensive and propose recommendations to achieve a balance between marketplace efficiencies and consumer protection.
• Treasury plans to develop a “blueprint” for regulatory reform, focusing on institutions, securities, futures and insurance firms. Some of its recommendations will be narrow and could possibly be implemented without statutory changes while other longer-term recommendations would require review and action by Congress.

With this brief background, here are the issues Treasury is raising regarding financial institutions in its request for comments:

I. General Issues

• What are the key problems or issues that need to be addressed by a review of the current regulatory structure for financial institutions?
• What do you view as the significant market developments over the past two decades (e.g. securitization, institutionalization, financial product innovation and globalization) and please describe what opportunities and/or pressures, if any, these developments have created in the regulation of financial institutions?
• Does the ``functional'' regulatory framework under which banking, securities, insurance, and futures are primarily regulated by respective functional regulators lead to inefficiencies in the provision of financial services?
• Does the ``functional'' regulatory framework pose difficulties for considering overall risk to the financial system? If so, to what extent have these difficulties been resolved through regulatory oversight at the holding company level?
• Many countries have moved towards creating a single financial market regulator (e.g., United Kingdom's Financial Services Authority; Japan's Financial Services Agency; and Germany's Federal Financial Supervisory Authority (BaFin)). Some countries (e.g., Australia and the Netherlands) have adopted a twin peaks model of regulation, separating prudential safety and soundness regulation and conduct-of-business regulation.
• What are the strengths and weaknesses of these structural approaches and their applicability in the United States? What ideas can be gleaned from these structures that would improve U.S. capital market competitiveness?
• What should be the key objectives of financial institution regulation? How could the framework for the regulation of financial institutions be more closely aligned with the objectives of regulation?
• Can our current regulatory framework be improved, especially in terms of imparting greater market discipline and providing a more cohesive look at overall financial system risk? If so, how can it be improved to achieve these goals? In regards to this set of questions, more specifically:
• How should the regulation of financial institutions with explicit government guarantees differ from financial institutions without explicit guarantees? Is the current system adequate in this regard?
• Is there a need for some type of market stability regulation for financial institutions without explicit Federal Government guarantees? If so, what would such regulation entail?
• Does the current system of regulating certain financial institutions at the holding company level allow for sufficient amounts of market discipline? Are there ways to improve holding company regulation to allow for enhanced market discipline?
• In recent years, debate has emerged about ``more efficient'' regulation and the possibility of adopting a ``principles-based'' approach to regulation, rather than a ``rules-based'' approach. Others suggest that a proper balance between the two is essential. What are the strengths, weaknesses and feasibility of such approaches, and could a more ``principles-based'' approach improve U.S. competitiveness?
• Would the U.S. financial regulatory structure benefit if there was a uniform set of basic principles of regulation that were agreed upon and adopted by each financial services regulator?
• Does the current regulatory structure adequately address consumer or investor protection issues? If not, how could we improve our current regulatory structure to address these issues?
• What role should the States have in the regulation of financial institutions? Is there a difference in the appropriate role of the States depending on financial system protection or consumer and investor protection aspects of regulation?
• To what extent should the design of regulatory initiatives in the United States be informed by the competitiveness of U.S. institutions and markets in the global marketplace? Would the U.S. economy and capital market competitiveness be better served by pursuing greater global regulatory convergence?

II. Specific Issues for Depository Institutions

• Are multiple charters for insured depository institutions the optimal way to achieve regulatory objectives? What are the strengths and weaknesses of having charters tied to specific activities or organizational structures? Are these distinctions as valid and important today as when these charters were granted?
• What are the strengths and weaknesses of the dual banking system?
• What is the optimal role for a deposit insurer in depository institution regulation and supervision? For example, should the insurer be the primary regulator for all insured depository institutions, should it have back-up regulatory authority, or should its functions be limited to the pricing of deposit insurance, or other functions?
• What role should the central bank have in bank regulation and supervision? Is central bank regulatory authority necessary for the development of monetary policy?
• Is the current framework for regulating bank or financial holding companies with depository institution subsidiaries appropriate? Are there other regulatory frameworks that could or should be considered to limit the transfer of the safety net associated with insured depository institutions?
• What are the key consumer protection elements associated with products offered by depository institutions? What is the best regulatory enforcement mechanism for these elements?

Brief Summary of the GAO Report’s Recommendations

As part of the 2006 Financial Services Regulatory Relief Act, Congress directed the Governmental Accountability Office to study and review the efficiency of consolidating the financial regulators as well as charter simplification and homogenization of the industry. The GAO issued its report in October and made the following recommendations, which were included in earlier reports from GAO on this topic:

• Consolidating the regulatory structure within functional areas;
• Moving to a regulatory structure based on regulation by objective;
• Combining all financial regulators into a single entity or authorizing a single entity to oversee all large, complex internationally active firms, while leaving the rest of the structure in place.

The report also provided several goals that should be achieved in regulatory restructuring:

• Consolidated oversight with coordinated regulation and supervision of individual components;
• Independence from undue political pressure;
• Consistent rules, consistently applied;
• Enhanced efficiency and reduced regulatory burden;
• Transparency in the rulemaking process;
• Commitment to consumer and investor protection; and
• Ensuring safety and soundness.

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