Complex systems are rarely designed from scratch. Governmental oversight structures often evolve through a series of reactions to crises, profit opportunities, and new technologies, not to mention scandals and other high-profile news events. These systems can retain the essential character for which they were designed and remain relevant for long periods. At other times, they come to outlive their usefulness and increasingly require change.
The decisions that built the current U.S. financial regulatory structure over time were in many cases made to address now-obsolete technologies, practices, and systems. If the structure were designed from scratch today, without the burden of 150 years of history, would anyone propose dividing federal regulation of banks into three different institutions? Surely we would not create two separate agencies to handle capital markets regulation, knowing that there are ever-fewer clear lines between the types of instruments and activities handled by each of the two. Many would question a decision to be the only major industrialized country without any form of national insurance regulation. And, while a separate federal thrift charter once may have made sense, few today know the difference between thrifts and banks.
The NCAA’s college football bowl system is a poster child example of a design that would not be considered a viable suggestion if it were proposed for the first time today. College bowl games date back as far as 1916, with the first Rose Bowl being played in 1902. Over time, cities around the country realized the opportunity to bring in tourism revenue by creating their own postseason games and created their own “bowls.” As college football’s popularity soared in the 20th century, the importance of these games, originally intended as exhibitions, resulted in increasing public demand for a postseason system that would determine an annual champion. Until the 1990s, college football’s champion was decided by votes rather than a game. At times, the two primary voting systems even disagreed on the top-ranked team in a given year.
One way to test a system’s usefulness is to consider whether its design would be considered strategically viable if it were being built for the first time today.
Despite the huge popular and financial success achieved by the NCAA college basketball “March Madness” playoff system, resistance to a college football playoff was substantial. The existing bowl system was defended by some as, for example, making regular season games more meaningful or for not forcing student athletes to play too many games during exam periods or winter breaks. The primary impediment to change, however, was inertia, whether from the entrenched structure that benefited from the system as it was, to those interested in tradition for its own sake. What gave lie to the defense of the bowl system was that no one would propose creating such a setup in a fresh start. Would anyone like to trade March Madness for something more like the bowl system? This structure only made sense as a gradual accretion of decisions that made sense at the time they were made, not as an overall design.
The continued presence of the past decisions that shaped our current financial regulatory structure has real consequences for the sound oversight of our financial system. Over the years, suboptimal design has led variously to destructive turf battles, myopic oversight, and unnecessary burden on regulators and the regulated. At times, it has also hindered the U.S. government’s ability to speak with a unified voice during financial crises at home and abroad.
In past decades, many thoughtful plans have been submitted to address such issues but, aside from occasional progress following financial crises, they have not been enacted. This is a test our political system has failed. We at the Bipartisan Policy Center have issued a series of recommendations to address the gaps and duplication in our U.S. financial regulatory structure. Specifically, we suggest:
- Creating a single banking regulator and examination process to improve the quality of supervision,
- Focusing the Federal Reserve on regulating systemic risk and altering the bank SIFI threshold and determination process to $250 billion to improve financial stability,
- Empowering the Financial Stability Oversight Council to prevent systemic threats and better coordinate regulation,
- Establishing the Office of Financial Research as a fully independent agency outside the Treasury Department to better identify risks to the financial system,
- Creating a single capital markets regulator to improve coordination,
- Creating a federal insurance regulator and charter to improve financial stability and ensure appropriate regulation of insurance, and
- Ensuring independent funding for all financial regulatory agencies.
BPC’s “road map” presents a solid path toward a more effective regulatory system, but it is not the only one. Regardless of our approach, we should not again wait until the next financial crisis happens to make changes that might help to prevent one. The time to debate—and act—is now.
1 The practice of naming games bowls is itself an example of evolution. The Rose Bowl itself was named for the bowl shape of the stadium in which it was played. Other games called themselves bowls to associate themselves with the success of the Rose Bowl, and later, bowl became synonymous with a variety of matchups, football or otherwise.