WSJ op-ed: “A Government Agency Worth Saving”

Posted on June 29, 2025 by Lawrence Goodman

The Wall Street Journal published an op-ed titled “A Government Agency Worth Saving” by Sheila Bair and me in today’s Weekend Edition. We note that:

– Some underperforming government agencies should be restructured rather than closed. This is true of the Office of Financial Research, which Congress created after the 2008-09 financial crisis to help anticipate and avert future crises.

– To be sure, the OFR has not measured up to its original purpose. But it would be a huge mistake to end access to the data and intelligence that OFR collects during a time of international uncertainty and market turmoil.

– We offer concrete steps on crisis detection and prevention, data and analytics, as well as governance to restructure and refocus OFR – not close it down.

We look forward to any comments you might have.

View the full article here.

President Trump Claims Authority Over Independent Agencies

Posted on February 19, 2025 by Steven Lofchie

In a new Executive Order, President Trump asserted presidential oversight over all federal agencies, including independent agencies.

The EO states that “all executive power” is vested in the President under Article II of the US Constitution and directs agencies to submit draft regulations for White House review, with no exceptions for independent agencies other than the Federal Reserve’s monetary policy functions. The EO mandates that agencies consult with the White House on strategic plans and performance standards.

President Trump asserted that “so-called independent agencies” such as the FTC and SEC exercise “enormous power over the American people without Presidential oversight.” He further said that these agencies: (i) “issue rules and regulations that cost billions of dollars and implicate some of the most controversial policy matters, and they do so without the review of the democratically elected President” and (ii) “spend American tax dollars and set priorities without consulting the President, while setting their own performance standards.”

The EO requires the Office of Management and Budget to adjust independent agencies’ apportionments to ensure tax dollars are spent “wisely.”

Commentary by Steven Lofchie

It is hard to assess the practical significance of this EO; i.e., how much it could change behavior at the regulators. Historically (meaning before the Biden-Gensler era at the SEC and the Obama-Gensler era at the CFTC), the SEC and the CFTC acted in a fairly non-partisan manner, meaning that it was somewhat unusual to have rules or enforcement actions approved by the majority party of the Commissioners over the dissents of the minority party. (There were exceptions to this, such as the SEC’s approval of Reg NMS, over the dissent of the two Republican Commissioners, including and then Commissioner, expected soon-to-be Chair, Paul Atkins, but these were exceptions, not the ordinary course.)

During Mr. Gensler’s tenure at the SEC and the CFTC, unanimity was the exception, and party-line votes the ordinary course. If there is now a shift in the SEC’s priorities (to be consistent with the views of the Republican rather than the Democratic party), that shift is entirely consistent, from a political standpoint, with how the SEC and other “independent” agencies have acted for the past four years.

There is one power that the minority party will continue to have—the power to issue dissents. SEC Commissioners Peirce and Uyeda, and CFTC Commissioner (later Chair) Giancarlo wrote dissents that were meaningful and helped to keep the majority party honest. To that end, independent agencies might consider expanding the staffs that are delegated to each of the non-Chair Commissioners, so that the minority Commissioners have more resources at their disposal to dissent. An enhanced ability to issue public dissents might do more to strengthen the independence of the agency than does the continued pretense that the majority Commissioners operate “independently” of the President.

Primary Sources

CFPB Director Supports FDIC Policy Proposal on Bank Merger Review

Posted on April 8, 2024 by Steven Lofchie

Commentary by Steven Lofchie

CFPB Director Rohit Chopra argued that the FDIC’s proposed policy on bank merger review aims to restore “a comprehensive assessment of the impact on local residents and small businesses.”

In remarks before the National Community Reinvestment Coalition, Mr. Chopra stated that the Bank Merger Act of 1960 required banking regulators to consider three primary factors in the evaluation of bank mergers: the competitive effects of the merger, the financial and managerial resources and future prospects of the company and the convenience and needs of the community to be served. He said that the Supreme Court later emphasized that mergers should be evaluated based on their overall effect on the public interest.

Mr. Chopra argued that, over the years, the rigorous review process intended by the Act diminished, as regulatory agencies began relying heavily on the Community Reinvestment Act (“CRA”) rating as a proxy for assessing the merger’s impact on community convenience and needs. He said this approach was problematic because CRA ratings are backward-looking, evaluating how well banks have met community needs in the past, and may not accurately reflect how a merger would address the broader community’s future needs. According to Mr. Chopra, this shift away from a focus on the public interest created a gap, prompting community groups to negotiate directly with banks, despite lacking the authority to enforce agreements effectively.

Mr. Chopra argued that the FDIC’s proposed policy on bank merger review aims to “address [past] weaknesses and shift back to the original intent of the law by restoring a comprehensive assessment of the impact on local residents and small businesses.” (See related coverage.)

Key features of the proposed policy include:

Community Benefit: The policy mandates that bank mergers factor in the impact on the communities that the merger will affect. The burden of proof is on the applicant to provide actual evidence and if there is no clear benefit, the application can be denied.

Regulatory Accountability: If banks make certain representations or commitments in the application to demonstrate how the community will be better off, including by submitting a Community Benefits Agreement, these requirements may be considered formal conditions for approval.

Consideration of Branch Closures: The policy requires the agency to consider branch closures in the “convenience and needs” review, recognizing the importance of physical bank branches, especially for lower-income, older and rural households. Mr. Chopra argued that, over the past 15 years, regulators have too often ignored branch closures in the context of merger review citing data showing that since 2009, branches have decreased by 15% nationally, a trend driven by megamergers and large bank branch closures.

Compliance with Consumer Protection and Fair Dealing Laws: The policy considers the merging banks’ track record of compliance with laws designed to protect consumers and promote fair dealing. Mr. Chopra said that banks with histories of legal violations may face scrutiny, as mergers can amplify the potential for harm to consumers and businesses.

Commentary by Steven Lofchie

The legislative language authorizing the CFPB (Section 1101 of Dodd Frank) provides as follows:

There is established in the Federal Reserve System, an independent bureau to be known as the ‘Bureau of Consumer Financial Protection’, which shall regulate the offering and provision of consumer financial products or services under the Federal consumer financial laws.

It is not the job of the CFPB to regulate bank mergers. There is no doubt that many of the senior regulators in the government, including Mr. Chopra, are very intelligent, highly educated and have well informed views on subjects that extend outside of their realm of jurisdiction. Even so, when speaking to the public in their regulatory capacity, they really should stick to their day jobs. It is not the job of each regulator to remake the world. Perhaps bank mergers are closer to the CFPB’s day job, than climate change is to the job of the Federal Reserve Board, but they are both stretches.

FRB Governor Bowman Warns of Misplaced Regulatory Priorities

Posted on April 2, 2024 by Steven Lofchie

Commentary by Steven Lofchie

Federal Reserve Board Governor Michelle W. Bowman questioned whether “the volume of [banking regulatory] reforms that have been proposed, recently finalized, or that are in the pipeline … [reflects a loss of focus] on furthering the primary goal of prudential bank regulation and supervision.”

In a “Workshop on the Future of Banking,” hosted by the Federal Reserve Bank of Kansas City, Governor Bowman observed that regulatory responses to the failures of Silicon Valley Bank and Signature Bank “have little relationship to the events surrounding the bank failures and ensuing banking system stress.” She highlighted two concerns: the stagnation of de novo bank formations and the restrictive approaches to bank mergers and acquisitions.

De Novo Bank Formation. Governor Bowman raised concerns over the decline in the number of U.S. banks and the stagnation in de novo formations over the past decade, in light of indications of unmet demand for banking services. She argued that the regulatory and supervisory framework, particularly the lengthy and uncertain application process for new charters and deposit insurance, poses significant obstacles to de novo bank formation. She said that current regulations contribute to delays, increase start-up costs and pose challenges for securing investment. She warned that regulatory expectations can be unclear and that the long-term absence of new bank formation risks (i) reducing the availability of credit, (ii) limiting financial services in underserved areas and (iii) pushing banking activities outside the regulated framework.

Bank Mergers and Acquisitions. Governor Bowman raised concerns about the evolving approach to bank mergers and acquisitions which increases the potential for adverse impacts on the banking system. She said that proposed reforms could introduce delays, create uncertainty and impose new standards that may deter both de novo bank formation and healthy M&A activities. Further, she argued that the regulatory process itself is concerning, noting the prolonged regulatory timelines, the potential requirement to disclose concerns publicly for withdrawn applications and the possibility of regulatory demands not based on statutory requirements. She said that these factors (i) complicate succession planning, (ii) risk creating uncompetitive “zombie banks” and (iii) restrict the strategic options for growth and exit. She said that these factors threaten the dynamism and health of the banking sector.

Commentary by Steven Lofchie

Governor Bowman has been a consistent critic of what she believes are the failures of banking regulators to support new rules with a proper analysis of costs and of their failure to focus on those issues that should be matters of their primary focus (i.e. prudential bank regulation and supervision, rather than e.g. climate change.)

Bair and Goodhart: Bank failures are looming. Let’s make sure executives have skin in the game

Posted on February 22, 2024 by Lawrence Goodman

Sheila Bair and Charles Goodhart penned an opinion piece in The Washington Post – “Bank failures are looming. Let’s make sure executives have skin in the game.” Key themes are:

Serious challenges remain for the U.S. banking system.
Lessons from three high-profile regional bank failures have been forgotten.
Accountability for executives of failed banks should increase. Passage of the Recoup Act would help.

The Washington Post piece is at
https://www.washingtonpost.com/opinions/2024/02/20/sheila-bair-pass-banking-reform-accounability/

For more on lessons from regional bank failures, please find papers where Sheila (Chair) and Charles contributed in their role as CFS Advisory Board members.

“Supervision and Regulation after Silicon Valley Bank”
www.CenterforFinancialStability.org/research/CFSRegPaper101623.pdf
“The Role of Monetary and Fiscal Policies in Recent Bank Failures”
www.CenterforFinancialStability.org/research/CFSMonPaper101623.pdf

CFS Releases New Reports on Banking Stress and Monetary Policy

Posted on October 16, 2023 by Lawrence Goodman

A group of senior advisors to the Center for Financial Stability – Sheila Bair (Chair), Joyce Chang, Charles Goodhart, Lawrence Goodman, Barbara Novick, and Richard Sandor – undertook an assessment of the root causes of recent bank failures.

The work was done with a keen eye on present and future financial system stresses. For instance, bond market losses continue; bank earnings remain under pressure; cumulative Fed rate hikes are now 525 basis points; the fiscal deficit is now $600 billion deeper in the red than last year; and bank stocks remain at or near post crisis lows.

The group represents a wide array of backgrounds in government, academia, and industry and a full range of policy views. While there were differences of opinions on some specific proposals, there was also strong consensus on the main drivers of the failures and key issues related to proffered reforms.

Later in the week, Randal Quarles (CFS Advisory Board Chair) will lead panel discussions with the authors on the reports’ findings.

We look forward to any comments you might have.

To view
“The Role of Monetary and Fiscal Policies in Recent Bank Failures”
www.CenterforFinancialStability.org/research/CFSMonPaper101623.pdf

“Supervision and Regulation after Silicon Valley Bank”
www.CenterforFinancialStability.org/research/CFSRegPaper101623.pdf

The Federal Reserve needs to stay put on rates

Posted on July 24, 2023 by Lawrence Goodman

Today, the Financial Times published Sheila Bair’s Opinion piece noting that:

– The Fed should feel vindicated in its decision to pause rate rises at its policy-setting meeting last month. Although it seems poised to raise them again, the Fed should stay put.

– If the Fed does raise rates again, it could temper the impact by only raising rates on bank reserves, while leaving the rate it pays to money market funds and other non-bank financial intermediaries where it is.

We look forward to any comments you might have.

To view the full article:
https://on.ft.com/3QatT1l

Sheila Bair is a former chair of the US Federal Deposit Insurance Corporation and a senior fellow and Advisory Board member at the Center for Financial Stability.

FT: Bair on Protecting Smaller Banks from Investor Nerves

Posted on May 10, 2023 by Lawrence Goodman

Today, the Financial Times published Sheila Bair’s Opinion piece “Congress must act to protect smaller banks from investor nerves. Measures to shield operational business accounts, introduced during Covid, should be triggered urgently.”

While she does not believe that universal coverage for all accounts is the answer, she does advocate for using the Transaction Account Guarantee (or TAG programme). “To promote banking competition and mitigate concentrations of power, we need to help them protect their core business accounts. Congress needs to reinstate TAG.”

We look forward to any comments you might have.

To view the full article:
https://www.ft.com/content/caae5e89-4f6f-4ec8-94c7-0c15ed4592fa

Sheila Bair is a former chair of the US Federal Deposit Insurance Corporation and a senior fellow and Advisory Board member at the Center for Financial Stability.

US regulators are setting a dangerous precedent on Silicon Valley Bank

Posted on March 16, 2023 by Lawrence Goodman

Former FDIC Chair and CFS senior fellow Sheila Bair penned “US regulators are setting a dangerous precedent on Silicon Valley Bank” in the Financial Times (FT). The piece covers:

– Systemic risk determination,
– Use of FDIC insurance,
– Fed policy.

To view the piece:
https://www.ft.com/content/b860ebb6-f202-4ec6-a80c-8b1527c949f4

U.S. Government Announces Uninsured SVB/Signature Depositors to Be Made Whole

Posted on March 12, 2023 by Steven Lofchie

In a joint statement, the U.S. Treasury, the FDIC and the Federal Reserve Board announced that all depositors, both insured and uninsured, of Silicon Valley Bank and Signature Bank, would be made whole for their deposits. Each bank had been closed this past Friday, SVB by the FDIC and Signature Bank by the New York State banking authorities.

The regulators described the protection of the depositors as not requiring funding from taxpayers as the funding would come from a special assessment on banks that will be paid into the Deposit Insurance Fund.

The regulators had previously said that shareholders and other unsecured creditors of the bank would not be protected (and thus could be wiped out) and that management of the two banks had been removed.

President Joseph R. Biden issued a statement to assure depositors and call on Congress and the banking regulators to “strengthen the rules for banks to make it less likely that this kind of bank failure will happen again.” Numerous other statements have been issued (see primary sources below).

LOFCHIE COMMENTARY

First, the statement that none of the bailout will be borne by taxpayers is somewhat misleading. The bailout is not being financed by other banks buying a business that had positive going forward value. Rather, it is being financed by government-imposed regulatory fees that must be passed through and eaten by shareholders or paid by customers in higher fees or lower interest rates on deposits.

Second, the statement raises many questions. Are all bank deposits from now on implicitly insured? Where will the no-bailout line be drawn in the future? What is the justification? That is not to say that the bailout was not reasonable under the circumstances. Had there not been one, we almost certainly would have seen additional runs on other banks and financial institutions. Depositors were very much poised to move their money from small banks to larger ones. But it will be interesting to see whether depositors begin assessing bank risk more closely going forward, just as institutional investors began to assess broker-dealer risk more carefully after 2008.

Third, the best explanation of the 2008 financial crisis was a 1986 book by Hyman Minsky called “Stabilizing an Unstable Economy.” (See The Future of Financial Regulation.) Minsky argued that periods of financial calm create a lack of focus on real risks, which in turn leads to speculation and thus to instability. The book came briefly into vogue during the 2008 financial crisis, in a period referred to as the “Minsky Moment.”

One could reasonably argue that that the last few years have seen rampant speculation, but by the regulators, not market participants. Rather than focus on the ordinary risks inherent to our economy – money supply, inflation, price volatility – the financial regulators have become distracted by speculative risks that are of high political import, such as climate change, an issue as to which they have neither sufficient knowledge nor actionable data, nor any meaningful ability to influence events.

The FSOC’s 2022 Annual Report (see related coverage) makes 16 references to inflation (many of them about global inflation and very little about the impact of inflation and the attempts to control it on bank risk). By contrast, there are 112 references to climate (not historically regarded as a threat to financial stability). The FSOC 2021 Annual Report managed 41 references to inflation versus 86 references to climate, a lack of attention to actual risk in 2021 that only became more pronounced in 2022. (It also is notable that SVB was particularly focused on ESG lending, not limited to climate.) So while the regulators may have been right that climate risk is a material risk to the financial system, they were likely wrong about the reasons. The risk was that climate change distracted the financial regulators from the relative boring work of financial regulation.

Financial regulators need to devote their attention to the ordinary and mundane matters of financial risk. Attending to mundane matters does not mean adopting a slew of new and burdensome regulations, imposing new weights on the markets to compensate for past regulatory distractions. When the next FSOC Annual Report is published, there should be more references to ordinary risks such as inflation, interest rates, maturity mismatches and failures to diversify risk, than there are to references to climate.