Speaking in October at a panel held by the Volcker Alliance, Citigroup chairman Michael O’Neill likened the current banking regulator system to a “spaghetti junction, sometimes with competing goals and instructions.” His suggestion was to combine the Federal Reserve, Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency into one powerful banking regulator, citing the redundancy of having multiple agencies cite a bank for similar violations. Each firm has its own interests, according to O’Neill, while they all fail in transparency and communication.. Although the Citigroup chairman makes a fair point recognizing the redundancy and lack of transparency in the system today, having only one regulator firm would increase the magnitude of the largest faults in our regulatory regime, the culture of capture.
Capture occurs when a public agency’s priorities shift from serving the communal interest, to progressing those of the companies they are supposed to regulate. In no other industry do the public and private sectors work so closely in hand. It is incredibly common to see former bank executives take positions in the Treasury Department, and former government regulators take positions atop a hedge fund. The indelible truth is that the partnership between banks and government is a mutually beneficial one, with banks taking the role of bailout agents at times and while the government creates steep barriers of entry to the industry and sets interest rates. Banks must be continually supervised, fostering a sense of dependency and association that only grows when regulators and bank executives develop a professional relationship over the years. The culture of capture blurs the line between serving the public as a regulator and serving the company one is supposed to regulate.
One recent example of this comes from a ProPublica report detailing the termination of Federal Reserve compliance examiner Carmen Segarra, who continually challenged the conflict of interest policy at Goldman Sachs in the face of opposition from supervisors. Segarra was exactly what the doctor ordered in the wake of the Great Recession, a firebrand who was in this case intrepid in her review of Goldman’s extremely vague and muddied code of conflict policy. Nonetheless, her superiors were soft and sided with Goldman rather than their own employee. Columbia University Finance Professor David Beim attested this and other events of capture to the risk averse culture of regulator agencies noting that “this behavior could be chalked up to a natural tendency to want to maintain good relations with people you see everyday.” This tendency however leads to the corporate co-opting of regulators.
The regulatory system as it stands may or may not benefit form a combined banking bureaucracy, but the real problem can be tackled by combating the culture of capture. Professor Beim suggested the hiring of “out-of-the-box thinkers,” those who are not afraid to stand up to the aura of big bankers as well as their own supervisors. As the regulatory system is broken, employees must challenge age-old traditions and the buddy-buddy culture that exists between regulators and banks. Transparency and effective communication are two of the most important measures taken to defend against the redundancy and secrecy mentioned by O’Neill in the opening paragraph. Instead of a combined regulatory agency, it is possible that many, specialized agencies reporting to the federal government can better safeguard against collusion as there would be so many different regulators banks would have to comply with. In any case, transparency, courageous employees and effective communication are the most efficient ways to stop the collusion occurring between bankers and regulators.