Small chance of a big change

In a potentially highly significant news item, the FT reports that

Congress is set to scrutinise the regulatory framework for investment banks following the Federal Reserve's decision to offer emergency finance - a move that could lead to tighter regulation of these financial groups.

Why is this such a big deal? Well, I suspect that not many Europeans realise the extent of the division between banks and broker/dealers in the US. Large banks are lead regulated by the FED (or the OCC - it's complicated). Broker/dealers are lead regulated by the SEC. The two regulatory frameworks are vastly different. Thus Citigroup is not regulated by the same people or to the same standards as Goldman Sachs. In some areas - notably market manipulation - the SEC is very tough. But some observers doubt that it has either the skills or the desire to regulate the wholesale market activities of the broker/dealers as strictly as the FED does, and its capital requirements are certainly not the same. The failure of the Bear and the subsequent opening of the FED window to the broker/dealers, something that was previously a privilege reserved for banks, seems to have woken people up. Turning back to the FT we find:

"It's clear that there needs to be regulation of the investment banks. Regulation does prevent some of the worst abuses. You can't have certain institutions playing by a different set of rules than others," Barney Frank, chairman of the House financial services committee, told the Financial Times.

Mr Frank said the fact that investment banks were reaping the same benefits as commercial banks but with lighter regulation had "made it easier for us to make the case" for regulatory change. He said the issue would be a "major subject" for the House financial services committee, which he chairs, in the spring.

There will be enormous push back on any move to have the FED take over regulation of the broker/dealers, some from the SEC, some from the firms themselves. Getting something done here will be require political will and astute handling of a diverse community of vested interests, so the assumption must be that nothing much will come of it. But if there is change, it will have a profound impact on US financial services.

Update. There is a reasonable discussion of the historical background (from Glass Steagall to Gramm Leach Bliley) in the CityEconomist blog here.