Are financial regulators too political or not political enough?

Financial regulation is becoming a snag 22: regulators are too politicized to be left unsupervised, but not political enough for elected officials to adequately control.

In general, financial regulators are expected to address issues that are considered important but not highly controversial, such as: B. the prevention of bank failures. Their design reflects this, with features designed to protect them from political pressure. But with the deadlock in Congress, financial regulators are increasingly being viewed as an alternative to legislation. We hear calls for them use their great power to such controversial topics as the Surroundings, work and restricting access to legal but controversial products and services such as firearms, pornography and payday loans. And sometimes those calls lead to actual policies.

Now government agencies have to do controversial things. For this reason, our system includes Checks and Balances, which subject agencies to a degree of ongoing scrutiny by elected officials. For example, Congress’ power over the purse allows agencies to constrain agencies by limiting spending or cutting budgets. Likewise, agency heads serve at the request of the President, allowing new governments (or governments feeling the political heat) to replace them. Limitations on how long an “acting” head can run an agency prevent a president from completely bypassing the Senate’s confirmation power.

But financial regulators are not treated equally. Many of these regulators — including those of the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Consumer Financial Protection Bureau (CFPB) — don’t rely on Congress or spending authority for budgets . Instead of an agency head serving at the president’s discretion, it is common to see boards with multiple members, often with members who can only be removed.for a reason‘ and with terms exceeding those of the President.

And while many of these boards are branded as non-partisan, the reality is that agencies don’t need a full board of directors to function. The charter of the FDIC states that the agency can operate with only one director. If an auditor is not confirmed at the OCC, a deputy auditor appointed by the Treasury Secretary may run the agency on a permanent basis. The CFPB is the exception, with a solo director at will – but that’s up to the Supreme Court entered to say that the protections originally afforded to the director were unconstitutional.

It’s one of the reasons Republican senators have raised so many objections to President Joe Biden’s Federal Reserve nominees: It’s one of the few tools they have to exercise power over regulators. If they don’t want the Fed trying to discourage banks from activities that could contribute to climate change – something Sarah Bloom Raskin, the supervisor’s nominee for vice chair, has said regulators should do – this is their last best opportunity to exercise scrutiny.

This isolation from political checks and balances is intended to give financial regulators independence from the whims of politics. And that would be acceptable if the agencies were really purely technocratic bodies pursuing uncontroversial goals. But when financial regulation becomes an instrument of broader regulation, isolation can circumvent structural democratic safeguards.

In an ideal world, Democrats and Republicans could reach a broad and lasting agreement to depoliticize financial regulation, keep agency power within intended limits, and leave contentious policy issues to Congress. But that would likely require a level of trust not found in American politics. Given this sad state of affairs, it may be necessary to treat these agencies as political beasts and reform their structure to reflect this.

This means that protections for cause are removed for the agency’s leadership, that all budgets must be approved by Congress, and that either bipartisan bodies be replaced with sole directors, or that at least one member from each major party must be present for a quorum consists. And if officials worry it would give policy too much leverage at the central bank, the Fed’s regulator could be transferred to another agency.

Such drastic steps would present their own political challenges. But if financial regulators are to be political actors, they should be treated as such.