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May 12, 2010

Reorgs and Reorgs

Posted by David Zaring

One question about financial regulation has been how to get the government to swing into action and "resolve" banks before things get desperate. But the problem always lies in getting the government to act. For example, the last time the FDIC was reorged, it was supposed to be required to take action against insolvent thrifts through its prompt corrective action powers. So let's see how much notice the FDIC gave the banks that they had to take prompt corrective action before closing them in 2009 (you can get this information from the FDIC website:

That's right, the worse things got, the shorter the notice before a closure. Exactly what PCA was supposed to prevent. Of course, this is not at all to suggest that this was the FDIC's fault, just that forcing action in a timely manner is hard - particularly during a meltdown.

It's fascinating to see the hope that people have for reorgs, which hasn't yet borne fruit for homeland security, and which is always the hope that substantive problems can be solved with procedural fixes. Tino Cuellar, who is in the administration now, has written about it here, and you can see Larry Cunningham and me on it here.

I'm off for an extended trip to China and Hong Kong; it will be interesting to see what's going on in financial regulation over there. But you may be hearing a bit less from me over here for a little while.