Consolidated Banking, Maybe?

Clearly the cobbled-together oversight from various federal agencies was ineffective to contain the current financial crisis that all but swallowed the U.S. last year — institutions such as but not limited to Citigroup (C: 3.67 0.00 0.00%), Bank of America (BAC: 11.30 0.00 0.00%), JPMorgan Chase (JPM: 36.65 0.00 0.00%) and AIG (AIG: 1.67 0.00 0.00%) — and it remains in fairly close proximity to do so again.

Several weeks ago, U.S. Treasury Secretary Timothy Geithner sent to Congress a proposal to potentially to overall the current supervision of financial markets. While much is still up in the air, it is now expected as early as mid-June 2009 that the Obama Administration will make a formal recommendation to Congress for the creation of a single banking regulator to oversee the entire sector. It would be hoped that if such a proposal were sent to Congress it woud be finalized by the end of the year to help resolve the current quagmire.

Currently, a disconnected grouping of state and federal regulators oversee financial institutions throughout the country. It is not anticipated that the Obama Administration will propose the elimination of this so-called “Dual Banking System.”

The new regulator would serve as primary regulator for the nationally chartered banks and thrifts, serve as a secondary oversight for the more than 5,000 state-regulated banks and the primary regulator for the nationally chartered banks and thrifts, and help to streamline supervision of banks and make it harder for banks to game the system by shopping for the lightest form of oversight.

If passed, the new banking regulatory agency would potentially consolidate the Office of the Comptroller of the Currency and the Office of Thrift Supervision, and take over the supervisory powers from the Federal Reserve and the Federal Deposit Insurance Corp (FDIC), with the Federal Reserve to focus its efforts on overseeing systemic economy risks and FDIC the ability to take large financial companies that aren’t banks into receivership.

Unfortunately, it appears that there is little clarity with respect to the handling the potential jurisdictional fight from a merger of the Securities and Exchange Commission and the Commodity Futures Trading Commission.

It is also unclear how willing Congress would be to go along with the dramatic departure from the norm that the administration is expected to request in the coming weeks. And it appears that each of the banking agencies have prepared for trench warfare in recent weeks — many of the details may ultimately be left up to Congress.