Recent news reports indicate the incoming administration is considering consolidating federal banking regulators as part of a broader effort to improve government efficiency. I went through two such consolidations during my 36-year career in bank supervision. Efficiency gains are likely to be meager, at best. At the same time, having multiple banking regulators can undermine banking supervision by allowing banks to shop for their own regulators. This element of the current system doesn’t make a lot of sense but is popular with the industry and the most likely reason for consolidation efforts to fail.
The self-styled “Department of Government Efficiency” (DOGE) is a proposed presidential advisory commission, to be headed by Elon Musk and Vivek Ramaswamy. DOGE is supposed to identify potential sources of government waste and inefficiency. Some commentators have stressed potential conflicts of interest. Musk and Ramaswami have a history of pushing the envelope when it comes to stock trades and tax avoidance, so recommendations to reduce funding for the SEC and IRS may be less than public spirited. The experience with the Grace Commission during the 1980s suggests a more fundamental problem.
In the 1980s, President Reagan appointed a commission of private sector CEOs to identify sources of waste and inefficiency in the government. The commission was headed by J. Peter Grace, the long-term CEO of W.R. Grace & Company. The Grace Commission touted huge potential savings from implementing its recommendations. Upon closer review, most of the big-ticket items reflected less “efficiency” gains than policy preferences of corporate CEOs. Few of the recommendations were ever implemented. DOGE will likely meet a similar fate.
The Wall Street Journal reported possible plans to merge federal regulators under a single umbrella. Musk and Ramaswami have joined Treasury Secretary Designate Scott Bressant in interview rounds for top bank regulator positions. These interviews included questions about consolidating banking regulators. Some follow-up commentary also suggested that the future of deposit insurance itself was also uncertain. That interpretation appears to be a stretch, but the WSJ story was vague on specifics.
How Much Money is at Stake?
Consolidating or even eliminating the OCC, FDIC, and Federal Reserve would not save taxpayers a penny. The agencies are not taxpayer funded. Instead, the agencies generate revenue through insurance premiums (FDIC), operations (Federal Reserve), or industry assessments (OCC). The lower costs could theoretically be passed on through lower rates on loans or higher rates on deposits. (Don’t hold your breath.)
The budgets of these agencies are also relatively small in relation to the total federal budget or to the size of the industry they regulate. The table below shows the 2025 regulatory budgets for the FDIC, the OCC, and the Federal Reserve. The FDIC total excludes the cost of receiverships, since that primarily involves paying off depositors and liquidating assets of failed banks. The Federal Reserve does not break down operating costs between bank supervision and financial operations. However, its regulatory staff is roughly the same size as that of OCC, and my estimate reflects that fact. Total spending for the three agencies is less than $6 billion. To place these figures in some perspective, banks under OCC supervision have total assets of roughly $16.7 trillion. The total cost of OCC supervision represents less than 0.01% of the total assets of the banks that agency supervises.
The OTS-OCC Experience
I went through more than my share of reorganizations during my career. Following the 1980s savings and loan crisis, Congress eliminated the Federal Home Bank Board and removed supervisory authority from the Federal Home Loan Banks. The Office of Thrift Supervision was created in their place. We went through multiple reorganizations at OTS, going from twelve districts to four regions. The Dodd Frank Act eliminated the OTS entirely and transferred most of its functions and personnel to the OCC.
The erosion of the OTS’s assessment base meant that its continued operations were no longer viable. The absorption into OCC caused a fair amount of angst at the time and former OTS employees had some legitimate gripes. For many of us, though, it worked out in the long run. I liked the opportunity to challenge myself by dealing with some much larger, more complex banks. OCC probably offered a somewhat better benefit package. That didn’t mean the consolidation improved efficiency.
It’s difficult to compare administrative costs before and after the consolidation. As with Poland in the 1700s, OTS was divided between greater powers, in this case, the Fed, FDIC, and OCC. But here’s one indicator. Dodd Frank provided job and salary protection to former OTS personnel for 30 months. You might think that once the 30-month protection period expired, the OCC would eagerly cut loose all those excess OTS employees. Well, that didn’t happen. It turned out that OCC needed the additional staff and was only too happy to keep the employees and maintain (if not raise) their salaries.
OCC’s way of doing things was not necessarily more efficient. OCC has an accreditation program where only designated national bank examiners (NBEs) can sign a Report of Examination. Other agencies have similar accreditation programs, but OCC has taken an “accept no substitute” view of the NBE. This meant that accredited examiners from other agencies, sometimes with decades of experience, would need to go through the accreditation process. Meanwhile, if you received your NBE back in the 1980s, left to join the circus and came back in the 2020s, you could theoretically lead an exam on Day 1. OCC provided a somewhat streamlined accreditation process for former OTS examiners, but not very streamlined. As of 2014, only 13% of former OTS examiners received the NBE credential. Meanwhile, these examiners spent considerable time going through the commissioning process rather than … examining.
The fate of the Thrift Financial Report (TFR) provides another case in point. The TFR contained more detailed information on mortgages, deposits, and interest rate risk than is available on the Call Report. OTS also had a supervisory model to estimate IRR. An OTS examiner could pull detailed quarterly IRR information with a few keystrokes. The process also lent itself to cross-bank comparisons. OCC ditched both the TFR and the supervisory model in the name of efficiency. The current process is decidedly more labor-intensive. Examiners rely on a bank’s own estimates of its IRR, usually pulled from its ALCOs. Cross-bank comparisons require manual data entry and it’s not always clear whether differences in IRR levels reflect actual risk or a difference in assumptions.
The absorption of OTS into OCC ultimately worked out, but it was much more of a muddle than a seamless transition. A benign economic environment helped. We had nearly nine years of economic growth and low inflation in the years immediately following the merger. It took time for OCC to figure out the highest and best use of its new and existing staff.
Overlap of Regulators
There wasn’t much overlap between the OTS and the OCC. OTS covered thrifts and their holding companies while OCC covered national banks. There is at least some overlap between OCC, the FDIC, and the Fed. National banks, state member banks, and state non-member banks have separate primary federal regulators, but the FDIC serves as the backup regulator, regardless of charter. However, this role is modest. FDIC assigns only a handful of examiners at even the largest banks. The Fed’s resource commitment to BHC supervision is more substantial and can at times overlap bank-level supervision by the OCC and FDIC. The Fed tends to have more in-house expertise in non-bank activities than do the other regulators. OCC supervisors tend to steer clear of activity booked outside the national bank.
The Best Argument for Consolidating Regulators
The U.S. has a dual banking system that allows federally insured banks to operate under either federal or state charters. However, state-chartered non-member banks, state-chartered member banks, and national banks differ little from one another. More significant differences exist between bank and thrift charters, and they already operate under the same regulator. One common defense of state charters is that they allow for innovation. For example, the California Department of Financial Protection and Innovation notes that “Innovations like branching, deposit insurance, trust services, variable rate mortgages, home equity loans, interest-bearing transaction accounts, and checking accounts first appeared in state-chartered banks.” That’s nice, but those “innovations” have been available to federally chartered banks for at least forty years. Deregulation and re-regulation initiatives over the years have blurred the distinction between charter types.
Banks benefit from federal deposit insurance, liquidity facilities, and a host of other implicit and explicit federal backstops. In return, they face a wide range of prudential and compliance regulations, as well as day-to-day supervision. But should banks get to select their own regulators? As I noted in an earlier post, imagine if pharmaceutical companies could go to state FDAs to get approval for new drugs. Having banking supervisors compete for business just makes regulatory capture more likely.
The ability to shop for regulators also makes the banking industry loath to abandon the current regulatory framework. Look no further than the Consumer Financial Protection Bureau (CFPB). In a contest for the most hated regulator, CFPB would win hands down. If you’re a financial institution with over $10 billion in assets, you’re stuck with the CFPB. If a large bank doesn’t like a CFPB regulation or feel its supervision is too heavy-handed, too bad. They can’t shop for another, more friendly regulator. Some of the complaints focus on the agency’s organizational structure or its financing, but the CFPB doesn’t differ much from the other banking regulators in those respects. Instead, these objections represent thinly veiled attempts to kill the agency or at least render it ineffective.
The banking industry and its political allies have made much of the supposed overreach by the CFPB. I doubt whether the public shares these concerns. Is the average person hellbent on preserving overdraft fees with annual percentage rates of sixteen thousand percent? But a well-organized and financed industry can wield a lot of political influence. It’s easy to see where the banking industry doesn’t want a safety and soundness equivalent to the CFPB.
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