May 02, 2011
Was The Office of Thrift Supervsision Really That Bad?
Posted by David Zaring

If you haven't seen it, a Senate committee released a report indicting the Office of Thrift Supervision for regulatory failures that exacerbated the financial crisis, including its inability to detect weakness in WaMu or AIG.  Dodd-Frank shut the agency down, too.  Here's a nice summary of the report from RegBlog.

OTS looked like the worst form of an agency.  Why was it competing for fees with bigger regulators from the banks it supervised?  Was it a good thing that the office derived something like 20% of its budget from examining WaMu alone?  Why even have a pick-your-regulator system to begin with?  But the thing is, the story of OTS, if anything, suggests that it is difficult to lay the blame for a financial panic at the feet of bank supervisors, perhaps because financial panics, when they really get going, at least, aren't very tractable to safety and soundness supervision. 

At least that's what the evidence I've seen suggests.  Dain Donelson and I did a verrrrrrry simple event study comparing OTS and other federal banks over the course of the crisis, and it turns out that they basically performed in the same way.  It wasn't that OCC regulation led to fewer or smaller declines than OTS regulation.  Rather, the publicly traded banks and thrifts did about the same over the crisis (the paper is coming out pretty soon, and I'll post it on SSRN).  So while I don't know if I'm sobbing about the demise of OTS, I wouldn't want policymakers to conclude that, since it has been killed, a problem has been solved.

In fact, though killing an agency would seem to be just the thing to eliminate regulatory shirking - if you don't do your job we'll close you down - if it turns out the OTS didn't do a worse job than anyone else, but just happened to be killable, then the shirking message gets a lot more complex.

Administrative Law, Financial Crisis | Bookmark

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