Volcker calls for overhaul of financial regulatory system

Former Federal Reserve Chairman Paul Volcker is calling for a reshaping of the U.S. financial oversight regime, which he says is splintered and ineffective.

A public policy group led by Volcker called the Volcker Alliance issued a report (PDF) Monday on the regulation of banks and Wall Street. The report says the array of government agencies that oversee the financial system has changed little since the Depression-era 1930s and can't keep up with a fast-moving industry. It calls for a simpler setup.

“The system for regulating financial institutions in the United States is highly fragmented, outdated, and ineffective,” the report says. “A multitude of federal agencies, self-regulatory organizations, and state authorities share oversight of the financial system under a framework riddled with regulatory gaps, loopholes, and inefficiencies.”

Under the group's recommendations, the Federal Reserve would keep primary responsibility for financial stability. However, authority shouldn't be "overly concentrated" in one agency, the group maintains. A new, independent Prudential Supervisory Authority would assume the oversight functions now exercised by the Fed, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp. (FDIC) for banks, and by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) for brokerage firms, money market funds and futures dealers.

The SEC, which is the primary regulator of the securities markets, and the CFTC, which oversees futures and options markets and exchanges, would merge under the Volcker plan. The OCC would be eliminated altogether.

"Failure to reorganize the regulatory structure will contribute to the buildup of systemic risk and make us more vulnerable to the next financial crisis," the report says.

Volcker and his colleagues acknowledge that changes shaking up the status quo don't come easily. More than 25 such proposals have been advanced since World War II — without success — the report notes.

The 2010 financial reform legislation enacted after the financial crisis and colloquially known as the Dodd-Frank bill, brought the most sweeping overhaul of consumer and finance rules since the Depression. However, it left largely intact the system of regulation in which different agencies oversee different types of banks and financial institutions.

Volcker, who served as Fed chairman from 1979 to 1987, headed President Barack Obama's Economic Recovery Advisory Board during the crisis. He also advised lawmakers as they shaped the financial overhaul package. His thinking was behind a provision in the law that became the Volcker Rule, which limits high-risk trading bets by big banks that could implode at taxpayers' expense.

The regulatory system was stitched together like a quilt over a century and a half. After financial scandals or crises, the government patched the system — often by adding a new office — to improve oversight of problem banks, according to The Associated Press.

“Even as America continues its long climb back from the financial crisis, it is all too clear that the Federal financial regulatory system needs restructuring to deal effectively with the threats to financial stability,” Volcker said in a news release.

Critics like Volcker say the patchwork system breeds "regulatory arbitrage," allowing banks and other financial institutions to shop for the regulator that will be the most lenient. Turf fights among agencies, conflicting priorities and overlapping authorities prevail, they say.

The bipartisan Volcker Alliance was launched in 2013 to “address the challenge of effective execution of public policies and to help rebuild public trust in government,” according to the organization’s mission statement.

Its board includes Sheila Bair, a Republican former head of the FDIC under then-President George W. Bush, and Alice Rivlin, who has served as the vice chair of the Federal Reserve and a director of the Office of Budget and Management under former President Bill Clinton.

Al Jazeera and The Associated Press. With additional reporting by Tom Kutsch.