Hand Banking Regulation Back to the States

The insurance industry is badly regulated, but it is much better regulated than the banking industry.  Consumers have better protections under state regulation.  The states are closer to consumers, and further away from insurers.

In order to change policy in a given state, an insurer would have to develop leverage over legislators, and that is tough, unless you are an in-state insurer.  But at the federal level, there is only one target, and a lot of resources can be deployed, because the payoff will be big.

Beyond that, state regulators are not so smart, and that is a good thing.  That means they will resist sophisticated schemes for solvency and consumer protection on which a sophisticated national regulator would sign off.

It is a lot easier to beat one gorilla than 50 monkeys.  Regulatory capture is a lot harder at the state level, so my recommendation would be to hand banking regulation over to the states.  After that, we can reduce the Fed down to the FOMC and NY Fed, and break their stranglehold on macroeconomics given all that they fund in academia.  End the regional Feds; they don’t do much anyway.

The idea is to get the government out of the lending business, because they aren’t very good at it.

If we would be more radical, end interstate banking.  This is a simple solution to the too big to fail problem.  If JP Morgan becomes 50 banks tomorrow, guess what?  None of those 50 banks would be big enough to cause a systemic crisis.  Same for Citi and Bank of America.  Too big to fail would be solved instantly.

My main point is this: if you don’t want banking regulation corrupted by the banks, then decentralize regulation, making it much harder for banks to aim at a single target.

About David Merkel 144 Articles

Affiliation: Finacorp Securities

David J. Merkel, CFA, FSA — From 2003-2007, I was a leading commentator at the excellent investment website RealMoney.com (http://www.RealMoney.com). Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and now I write for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I still contribute to RealMoney, but I have scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After one year of operation, I believe I have achieved that.

In 2008, I became the Chief Economist and Director of Research of Finacorp Securities. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm.

Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life.

I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

Visit: The Aleph Blog

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