Meltdown 101: Why do we have so many different bank regulators, and what do they do?

Meltdown 101: Are there too many bank regulators?

WASHINGTON — The financial crisis has renewed the focus on bank regulation. Critics contend the patchwork system contributed to the crisis by allowing some banks to slip through the cracks and others to seek weaker oversight.

Experts, including former regulators, say it’s time to end the system in which different agencies oversee different types of banks.

Eugene Ludwig, who headed one of these agencies during the Clinton administration, recently told Congress the financial crisis showed that “the current outdated structure of the system has failed America.” He called the “alphabet soup of regulators … a product of history, not deliberation.”

Congress is in the midst of restructuring the rules to bring about the most radical financial changes since the Great Depression. The regulatory jigsaw has become a flash point: The Obama administration proposed merging two of the agencies. Some powerful senators want to go further, creating a single supervisor for American banks.

Here are some questions and answers about banks and the regulators who oversee them.

Q: What kinds of banks and regulators are we talking about here?

A: Variety abounds in the U.S. system. There are scores of big bank holding companies, such as Citigroup Inc. and Bank of America Corp., which sit atop their deposit-taking banks and fall under the supervision of the Federal Reserve. Nationally chartered banks are the province of the Office of the Comptroller of the Currency, an agency of the Treasury Department. The office also oversees U.S.-based branches of banks headquartered overseas.

The Office of Thrift Supervision, also within Treasury, regulates national savings and loans — which must have at least 65 percent of their lending in mortgages and other consumer loans. That made them especially vulnerable to the housing downturn. Savings and loans sometimes are called thrifts. Thrift holding companies also come under the OTS’ oversight.

The Federal Deposit Insurance Corp. is the back-up regulator for all the roughly 8,100 federally-insured banks. It is the primary supervisor for state-chartered banks that are not members of the Federal Reserve system. That means the FDIC watches many banks already overseen by the OCC, OTS, Fed and state regulators.

Then there are credit unions, cooperatives that are owned by their members. Their regulator is the National Credit Union Administration.

Q: That seems pretty complicated. How did we end up with so many regulators?

A: The bank regulator system looks like a quilt because that’s how it was stitched together. After financial crises, the government patched the existing system of regulation — often by adding a new office — to improve oversight of the problem banks.

The OCC was created in 1863, during the Civil War, as part of an effort to establish a single, national currency.

The agencies that became the OTS, FDIC and NCUA came about between 1932 and 1934, in response to the 1929 stock market crash and the thousands of bank failures around the Great Depression.

The FDIC was given a dual mission when it was created in 1933: Making sure state-chartered banks are safe and sound, and running the fund that insures all bank deposits to protect consumers when banks fail.

Q: Those sound like reasonable responses to past crises. Why do people think we’re due for another change?

A: Critics say the patchwork system contributed to the financial crisis by fostering “regulatory arbitrage” — allowing financial institutions to shop for the regulator that will be the most lenient. The poster child for that problem is the insurance conglomerate American International Group Inc.

AIG was regulated by the OTS, but its exploding business of credit default swaps was run out of London and elsewhere, and fell through the regulatory cracks. The result: about $182 billion in government commitments to prop up the New York-based company since its near-collapse helped spark the financial crisis.

Another massive failure was Countrywide Financial Corp. The Calabasas, Calif.-based mortgage lender was regulated jointly by the OCC and the Fed. After OCC regulators started cracking down on reckless subprime lending, Countrywide reorganized in 2006 under a thrift charter. That made it subject to OTS regulation, which executives saw as more lenient.

Q: If the regulatory system led to the financial crisis, shouldn’t it be streamlined?

A: The Obama administration says its proposals would solve the problem. The administration proposed merging the OTS and OCC into a single National Bank Regulator, while letting the other agencies keep their power. It dropped an earlier plan to combine more agencies.

Critics, including powerful lawmakers, have said the administration should have stuck with an earlier proposal to create a single, unified bank regulator. Senate Banking Committee Chairman Christopher Dodd, D-Conn., wants to combine powers spread across the Fed, OTS, FDIC and OCC.

That’s a challenge politically because the regulators are fiercely protective of their turf. They say giving up power would weaken oversight.

Fed Chairman Ben Bernanke has objected to a proposed new agency that would take away the central bank’s oversight of consumer financial issues. Comptroller of the Currency John Dugan and FDIC Chairman Sheila Bair also have criticized that proposal, and object to giving the Fed more power to oversee systemwide risk.

Dodd and others say the financial crisis showed that the system needs a fundamental overhaul. They think the jigsaw puzzle of regulators is a historical accident, and the administration plan is yet another Band-Aid at a time when surgery is required.