ABA Testifies on Principles for Restructuring Regulation of Financial Services

WASHINGTON – The American Bankers Association today set forth its principles for reform of regulatory oversight of financial institutions.

Testifying on behalf of ABA before the Senate Banking Committee, Aubrey Patterson, Chairman and CEO of BancorpSouth, said that legislation designed to restructure the financial services marketplace should focus first on three main priorities: creation of a systemic risk regulator; the need for a pre-existing method for bringing orderly resolution to troubled systemically important non-bank financial firms; and the need to address gaps in the regulatory system.

“We agree that these three issues should be the priorities,” said Patterson.  “This terrible crisis should not be allowed to happen again, and addressing these three areas is critical to making sure it doesn’t.”

With regard to a systemic risk regulator, Patterson likened its role to an entity sitting atop a mountain with the responsibility for surveying the entire land for fires.  He said that under our current structure there are multiple regulators sitting on top of smaller mountains with the ability to see only a portion of the land – with some areas effectively unsupervised.

Patterson noted that there has been much focus on vesting systemic risk authority in the Federal Reserve, and he suggested that there are good arguments for looking to the Fed.  However, he also raised concern about not undermining the Fed’s independence.

“ABA’s one concern in using the Fed relates to what it may mean for its independence,” he said.  “We strongly believe in the importance of Federal Reserve independence in setting monetary policy.”

Patterson stated further that a systemic risk regulator must have some authority over accounting policy in order to be effective, and he turned again to his mountain analogy to make the point.

“A systemic risk regulator cannot function if part of the land is strictly off limits and under the rule of some other body, a body that can act in a way that contradicts the systemic regulator’s policies,” he said.  “That is, in fact, exactly what happened with mark-to-market accounting.”

With respect to the second main priority, Patterson stressed that the inability to address systemically important non-bank firms in a predetermined way is vital, and treating some financial institutions as if they are “too big to fail” can have serious unintended consequences and raises competitiveness issues for banks.  

“In an ideal world, there would be no such thing as too-big-to-fail,” he said.  “This concept has profound moral hazard and competitive effects that are very important to address.”

Finally, Patterson said that regulatory gaps have proven to be a major factor in the current economic crisis, particularly with regard to independent mortgage brokers.  It is important to address these gaps, Patterson said, but he also urged Congress to be careful not to impose new, unnecessary regulations on banks.  

“As you contemplate major changes in regulation – and a change is needed – ABA would urge you to ask this simple question:  how will this change impact those thousands of banks that make the loans needed to get our economy moving again?”

For a copy of Patterson’s full testimony click here.

The American Bankers Association brings together banks of all sizes and charters into one association. ABA works to enhance the competitiveness of the nation’s banking industry and strengthen America’s economy and communities. Its members – the majority of which are banks with less than $125 million in assets – represent over 95 percent of the industry’s $13.6 trillion in assets and employ over 2 million men and women.