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Tuesday, 28 June 2016

No head, some teeth

Headless financial watchdogs needn't be toothless

Headless financial watchdogs needn’t be toothless. Republicans in the U.S. Senate blocked another of President Barack Obama’s nominees to lead a key agency, the Consumer Financial Protection Bureau. Politics is making it tough to solidify leadership at a handful of top regulators. But as the Federal Deposit Insurance Corp and other overseers are proving, acting directors can do most of the job.

Indeed, the CFPB may be more the exception than the rule. Without a director confirmed by Congress, it lacks the power to supervise non-bank lenders. While this limits its impact, it is able to carry out most of its other duties. It is already examining banks, taking consumer complaints and preparing to issue new rules.

FDIC Acting Chairman Martin Gruenberg has also been waiting for confirmation since July. But he’s nonetheless making his mark. He led the FDIC’s approach to new bank capital rules proposed earlier this week. He has also taken on the usual chair duties, like setting the regulator’s coming budget.

But politics still come into play. As long as Gruenberg remains a nominee, he must tread carefully, so as not to upset either party. While keeping a low profile hasn’t posed a problem yet, his predecessor Sheila Bair became embroiled in several highly controversial initiatives during the financial crisis. When problems arise at banks, an independent agency like the FDIC shouldn’t need to worry about pleasing Congress.

This isn’t a constraint shared by the Federal Housing Finance Agency’s Acting Director Edward DeMarco. The Obama administration designated him for that role in August 2009, but didn’t select him to become the permanent director. It nominated North Carolina Commissioner of Banks Joseph Smith in November 2010. Smith withdrew his name a few months later. No new nominee has been announced.

Meanwhile, DeMarco continues to run the agency with a firmness that has not been without political controversy. He has fought to minimize the taxpayer bailout of Fannie Mae and Freddie Mac by refusing to force mortgage principal writedowns and defended lofty bonuses to qualified employees.

Confirmations are needed to ensure regulators have sufficient authority to properly implement financial reforms - and avoid being captured by special interests like the banks they oversee. But for now, the acting directors seem to be getting things done.

Context News

Republicans in the U.S. Senate blocked the nomination of Ohio Attorney General Richard Cordray on Dec. 8 to lead the newly-formed Consumer Financial Protection Bureau. President Barack Obama named him as director in July.

Republicans promised to oppose any nominee to run the new regulator created as part of the Dodd-Frank Act, as they argue that it is not sufficiently accountable to the legislature. The Senate voted 53 to 45 against advancing to an up-or-down vote on the nomination. That was 7 votes short of the 60 votes needed.

The CFPB is one of several major financial regulators without a confirmed director. The Federal Deposit Insurance Corp has been functioning with an acting chairman since July. The Federal Housing Finance Agency has had an acting director since August 2009.

An earlier version of this item misstated the full name of the FHFA.

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