Question

Discuss the case for a "super-regulator" in the context of what you have learned about "regulatory competition."

Answer 1

Regulative competition explains the current scenario in which banks can successfully choose their regulators by selecting whether to be a state or nationwide bank and whether to belong to the Federal Reserve System. If one regulator allows an activity that another restricts, a bank's supervisors can threaten to switch or argue that a competitor who responds to toa more permissive regulator has an unreasonable advantage. This has 2 repercussions: initially, regulators force each other to innovate, enhancing the quality of the regulations they writing. This is a favorable result due to the fact that it guarantees that regulators and banks follow the present finest practices. There is also a less desirable outcome in that bank managers can "shop" for the laxest regulator. This was compounded in the 1990s when Congress got rid of the functional (and geographic) barriers that one separated industrial banking from other kinds of financial intermediation (and which had forbidden interstate branching). It is most likely that in the future regulators and managers will have no choice but to combine forces, either cooperating or combining, and the development of a "super-regulator" would have the advantage of making the process more uniform and meaningful.