WASHINGTON -- Whether the change involves "major surgery" as House Financial Services Committee Chairman Barney Frank promises or the political equivalent of a tummy tuck, the way the government regulates financial services probably won't be the same after Congress and the next president are finished.
The problems of certain banks and credit unions--as evidenced by the wave of mergers and closings--coupled with the tendency of Democrats toward more policing of the marketplace could cause financial institutions to face more oversight.
Frank has said he favors keeping the tax-exempt status of credit unions and having them keep an independent regulator. His Senate counterpart, Banking Committee Chairman Christopher Dodd has been a friend of credit unions but hasn't made the same expressions of support for them as Frank.
Credit unions, which are already more heavily regulated than banks, could have to share a regulator with other financial institutions. That was an idea floated in the regulatory Blueprint issued by Treasury Secretary Henry Paulson earlier this year, and GOP presidential nominee John McCain has praised the idea on consolidating agencies, though he hasn't mentioned credit unions specifically. Democratic nominee Barack Obama has talked about modernizing the regulatory structure but hasn't discussed consolidating financial services regulators.
NCUA Chairman Michael E. Fryzel said while it is too early to know what any reorganization would look like, his agency would fight to remain separate because it's the best way to protect the interests of credit unions.
Two long-time watchers of financial services regulatory policy doubt that credit unions will come under the same regulator as banks, even if McCain comes from behind in the polls and wins the election.
"Credit unions have a lot of political support, and they will undoubtedly flex their muscle to stop that," said Alex Pollock, the former president/CEO of the Federal Home Loan Bank of Chicago. "Credit unions know that is better to have a regulator who is a cheerleader for you than one you have to share with other types of institutions."
John Pachkowski, an analyst at CCH Inc., a financial services research and consulting firm, predicted that that the turf war among financial services companies would result in keeping the status quo with regard to credit union regulation.
Both Pollock and Pachkowski said they could envision a scenario in which the Office of Thrift Supervision could be absorbed into another agency, possibly the Office of the Comptroller of the Currency. Pollock, a resident fellow at the American Enterprise Institute, said the high-profile failures of Indymac and Washington Mutual have given the office that regulates thrifts a black eye.
He also noted that the decision by investment banks Goldman Sachs and Morgan Stanley to become depository institutions and therefore under the supervision of the FDIC could also discourage consolidating the regulators because the FDIC already has responsibility for overseeing several large banks.
NAFCU President/CEO Fred Becker said that when lawmakers make changes in the way financial services are regulated he hopes they realize that most of the problems were caused by investment banks and mortgage companies that were outside the federal regulatory structures, not by credit unions and community bankers.
"They should take a scalpel, not something stronger," he said.
He also noted that despite the leanings of some on Capitol Hill toward more regulation, there is still a chance that Congress will approve a measure that will allow credit unions to lend more money to businesses. But he wants to change the way members of Congress perceive the issue.
"We need to show that this is economic empowerment--increasing the amount of capital available for companies to use to help grow the economy--not regulatory relief."
Becker said as banks get larger they will find it harder to provide personal service to personal and business customers, and credit unions will be ready to fill the void.
But whatever regulatory changes are made by the next Congress and president, there are still likely to be severe economic crises in the future that can't be anticipated by those writing the laws, noted AEI's Pollock.
"There will be a legislative reaction to this, and those making the changes will say, 'this will prevent there being another financial bust.' But there always is," he said.
--cmarx@cutimes.com
