Differentiating Coordination and Overlap in Banking Regulation

This chapter explores the adverse consequences of conflating the overlap/distinct and coordination/independence dimensions of regulatory authority by focusing on Congress's restructuring of federal banking regulation after the crash of 2008 in the Dodd-Frank Act in 2010. Legislators and financial experts concluded that excessive overlap before 2010 in prudential regulatory authority created three problems: (1) wasteful duplication of effort, (2) inconsistent and conflicting regulatory treatment of financial institutions, and (3) regulatory arbitrage that prompted a race to the bottom among prudential regulators, which increased the risk of systemic failures. Congress addressed the first two problems by requiring greater regulatory coordination, but the chapter contends that the creation of more distinct authority, either substantively or functionally, may have been preferable in light of the weak form of coordination mandated by Dodd-Frank. Dodd-Frank's response to the third problem was misguided for a different reason. Banking regulation experts and policymakers attributed arbitrage to excessive overlap, when in fact it arises from distinct authority among banking regulators. As a result, Congress failed to consider an option that might have been superior to enhanced but non-hierarchical coordination-the creation of more overlap to prevent financial institutions from choosing exclusive regulation by the weakest prudential regulator.