In the wake of subprime losses we are hearing claims that the United States should have regulated its banks more. It is worth pointing out that the U.S. has some of the most heavily regulated banks in the world:
1. The Bank Holding Company Act of 1940, still in force, prevents bank from owning non-financial corporations.
2. The previous Glass-Steagall Act (repealed in 1999) discouraged banks from diversifying out of home mortgages.
3. The Office of the Comptroller of the Currency charters, regulates, and oversees banks, including with respect to risk.
4. Several rounds of the Basel accords, including subsequent fine-tunings, have regulated bank capital holdings and reporting requirements. These are international regulations and not the sole design of a possibly defective U.S. regulatory system.
5. Banks are chartered by individual states and subject to varying regulations, disclosure, and reporting requirements, including with respect to risk.
6. Banks are regulated and supervised by the Fed, especially with regard to their risk-taking.
7. Banks are regulated and supervised by the FDIC, especially with regard to their risk.
8. Banks face additional regulations, both at the state and federal level, to the extent they are involved in commodities and insurance markets.
9. The Federal Housing Finance Board regulates Federal Home Loan Banks, which are involved in mortgage markets.
10. The Sarbanes-Oxley Act applies to publicly traded banks.
11. The Gramm-Leach-Bliley Act, the revision of the Glass-Steagall Act, regulates bank assets, albeit less than in times past.
12. The Home Mortgage Disclosure Act "…requires financial institutions to maintain and annually
disclose data about home purchases, home purchase pre-approvals, home
improvement, and refinance applications involving 1 to 4 unit and
multifamily dwellings." These regulations are intended to limit the ability of banks to discriminate against borrowers; in practice this encourages subprime loans.
13. The Community Reinvestment Act encourages banks "to reinvest in the communities they serve," which again in practice encourages subprime loans.
14. I believe this list is not complete.
I guess we didn’t have enough bank regulation!
It is also worth noting that many European banks have suffered heavy losses as well, despite operating under different regulatory regimes.
It is plausible to argue that the United States should have fewer bank regulators (I’ll nominate the Fed for the main role), but that consolidation should be accompanied by greater efficacy of regulation. In the meantime there are too many regulatory authorities, and too many regulations. We have completely blurred lines of accountability, legal, political, economic, and otherwise.