Regulatory Competition between States and Feds Should Be Expanded, not Curtailed

The Washington Post has a fairly lengthy report on the the competing system of bank charters. But rather than analyze how this system of federal and state charters forces regulators to be less onerous, the story presupposes that there somehow is a gap in the regulatory structure that requires attention. This would be a mistake. Indeed, rather than force banks into one national system, the same model should be extended to insurance. Governments — including regulators — are much more likely to act in a responsible fashion when they know their “clients” have a choice:

At least 30 banks since 2000 have escaped federal regulatory action by walking away from their federal regulators and moving under state supervision, taking advantage of a long-standing system that allows banks to choose between federal and state oversight, according to a Washington Post review of government records. The moves, known as charter conversions, highlight the tremendous leverage that banks hold in their relationships with government supervisors. …Some regulatory experts say that eliminating the opportunity to switch regulators is critical to strengthening oversight. …Since 2000, about 240 banks have converted from federal to state charters. Regulators and bank executives say many of those institutions simply wanted to save money. …But the pursuit of leniency is an important undercurrent. …The roughly 1,550 banks with national charters are regulated by the Office of the Comptroller of the Currency. The 5,600 state-chartered banks are regulated under 50 sets of state rules. In a parallel system, the federal Office of Thrift Supervision competes with state regulators to charter savings-and-loans. While every bank and thrift requires a charter to operate, they all have at least two choices. …Critics have long complained that the system allows banks to play regulators against one another, creating what former Federal Reserve Chairman Arthur Burns memorably described as a “competition in laxity.” …A smaller number of banks, about 90, have converted from state to federal charters since 2000.