Senate Committee on Banking, Housing and Urban Affairs

Strengthening and Streamlining the Federal Supervision of Financial Institutions

Thank you Chairman Dodd, Ranking Member Shelby and members of the Committee for asking me to discuss with you the reform of federal regulation of financial institutions

I would like to share with the Committee my thoughts on consolidation of the federal financial regulatory agencies and what it would take to make them successful in the future. However, this is part of a larger puzzle – the reorganization of federal financial regulation generally and, in some respects, it is difficult to discuss the narrower topic without examining the broader context. I will therefore also say something about possible complementary changes in the roles of the Federal Reserve, the SEC and the proposed CFPA.

A summary of my testimony today is as follows:



  • The best framework to guide current reform efforts is an objectives approach that divides regulation up into micro-prudential, macro-prudential and conduct of business regulation.
  • The quality of regulation must be improved regardless of where it is done. Regulatory and supervisory agencies must have better qualified, better trained and better paid staff with clear objectives to improve safety and soundness and encourage innovation. Regulatory personnel must be accountable for their actions.
  • A single federal micro prudential regulator should be created combining the regulatory and supervisory functions currently carried out at the Fed, the OCC, the OTS, the SEC and the FDIC. This regulator should partner closely with state regulators to ensure the safety and soundness of state chartered financial institutions, sharing supervisory authority.
  • The US needs effective conduct of business regulation. The SEC is currently charged with protecting shareholders and the integrity of markets and must improve its performance in this area. In my judgment, the SEC should also create a new division within the agency to protect consumers, that is to say, it would add a CFPA division and become the consolidated conduct of business regulator. Although my first choice is for a single conduct of business regulator, a well-designed standalone CFPA could also be effective.
  • The Fed should be the systemic risk monitor with some additional regulatory power to adjust lending standards. In this it should work with a Financial Services Oversight Council, as has been proposed by the Treasury.