Financial Regulatory Reform, the Elizabeth Warren Controversy, and the Importance of Political Leadership

Now that President Obama signed the Dodd-Frank regulatory reform bill yesterday, the focus will shift to the Executive branch.  The various agencies involved are likely not to be in total harmony.  As I have indicated in a previous post, there was a missed opportunity here to do more serious regulatory restructuring in order to help mitigate the problem of regulatory capture.

One agency, though, that may be more resistant to regulatory capture under the new structure is the new Bureau of Consumer Financial Protection.  One sign of the nervousness of financial institutions and their advocates about the Bureau is the controversy over whether Elizabeth Warren should be appointed as director.  A lot of liberals are pushing for her, because of her record of advocating for a stronger consumer protection role for the federal government with respect to financial products and services and her expertise in consumer finance issues.  (For a somewhat skeptical view on whether she should be appointed, see Neil Irwin's post on the Washington Post's website.  Ezra Klein, also of the Washington Post and a Warren supporter, comments on Irwin's post here.)  

Part of the reason for the controversy over Warren, I suspect, is fueled by the fear of financial institutions that this would be a person with strong views who would establish precedents on the agency's role and its relationships with the other regulators.  Because of the focus of the bureau on consumer protection, it could be more difficult for regulated entities to influence, and a strong head at the outset could make the agency more powerful than some might want.

Whoever becomes the head of the new bureau can expect that there will be strong pushback as the bureau begins the rulemaking process.  What is unknown is how hard the other financial regulators will try to clip the wings of the new agency.  Possibly exacerbating the turf considerations of agencies with different missions and constituencies, there are areas of overlapping jurisdiction.  For example, loose underwriting standards for loans is obviously a financial safety and soundness issue (which the financial regulators should have done more about during the buildup to the financial crisis).  Making loans, sometimes with confusing terms, to people who are not likely to be able to afford them is also a consumer protection issue.  

In regard to the tension between the various regulators, two other upcoming appointments are critical.  John Dugan, the Comptroller of the Currency, will be leaving that post next month as he finishes his 5-year term.  The Administration has not announced whom they intend to nominate as the new Comptroller.  When he leaves, Julie Williams, the First Senior Deputy Comptroller and Chief Counsel, who is known as a strong and effective advocate for her agency, will likely become acting Comptroller.  How the acting Comptroller and the new one, once that person is nominated and confirmed, work with the director of the new consumer bureau, and more generally with the other financial regulators, will be important.

Also, Sheila Bair's term as chair of the FDIC ends next summer and, according to Bloomberg News, she has indicated that she will not request to be reappointed for another term.  This is another key position whose occupant will be in a position to influence how the regulators will work together under the new legislation.

The new Financial Stability Oversight Council ("FSOC") will have the power to veto new rules of the Bureau if two-third of its members agree. The FSOC could work harmoniously together or could become similar to the President's Working Group on Financial Markets of the 1990's when the Treasury, the Fed, and the SEC thought that the CFTC was attempting to regulate or effectively ban products (OTC derivatives) that were not, in their view, subject to CFTC jurisdiction.  Other areas of tension among the agencies can emerge, but a likely candidate at the outset is disagreements over consumer protection rules.  It will be very important how the members of the FSOC manage their disagreements at its inception.  The leadership abilities and political skills of the heads of the FSOC agencies will be critical in this regard.