Are Financial Regulators Too Political, or Not Political Enough?

Regulating financial transactions is becoming a Catch-22. While the regulators themselves are far too politicized for them to leave unsupervised, they’re not sufficiently political to allow elected officials to properly control them.

In general, regulators of financial institutions are expected to address issues that are important, but not too controversial. This is reflected in their design, which includes features that protect them against political pressure. In the face of gridlock in Congress, financial regulators have become an attractive alternative to legislation. They are being called for. Use their immense powerSuch Controversial issuesThe environment, labor, and restricting access to legal-but-controversial products and services like firearms, pornography, and payday loans. These calls can sometimes lead to policies.

Government agencies will do some controversial work. Our system has checks and balances to ensure that agencies are subject to ongoing oversight by elected officials. Congress has the power of control over money, which allows it to regulate agencies by reducing spending or cutting their budgets. Agency heads are appointed by the president at his request. This allows for new administrations to take their place, or administrations that feel the political heat, and allow them to be replaced. The Senate has limitations regarding the time an “acting head” can manage an agency. This prevents a president completely from circumventing its confirmation authority.

Financial regulators, however, aren’t treated in the same manner. Many of these regulators—including those at 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)—do not rely on Congress for budgets or spending authorization. Multi-member boards with many members are common, and often include agency heads who serve only at the President’s pleasure.For a good cause“” and in terms that surpass the President’s.

Although many boards may be labelled bipartisan, agencies do not need to have a complete board in order for them to work. According to the FDIC bylaws, an agency may operate without a full board. A deputy comptroller can be appointed by the Treasury secretary to run the agency in perpetuity if a comptroller cannot be confirmed at OCC. The CFPB is the exception, with an at-will solo director—but that’s because the Supreme Court You have been prompted to enterIt was a statement that protection given to director originally was inconstitutional.

Republican senators are voicing their disapproval at President Joe Biden’s Federal Reserve nominees. It is the only tool that they have to exert power over regulators. If they don’t want the Fed trying to push banks away from activities that might contribute to climate change—something Sarah Bloom Raskin, the nominee for vice chair of supervision, has regulators should do—then this is their last best opportunity to exercise control.

This insulation from politics is supposed to allow financial regulators freedom from the political whims. This might make sense if these agencies are purely technocratic and pursuing non-controversial objectives. However, if financial regulation is used as a means of broadening regulation, insulation may be able to bypass structural democratic safeguards.

A broad, durable agreement could be reached between Democrats and Republicans to depoliticize the financial regulatory system, preserve the agency’s power, and leave the political content to Congress. This would require trusting the American people in a way that isn’t possible. These agencies may need to be treated as political monsters, and their structure should reflect this.

For-cause protections are being removed from agency leadership. All budgets must be approved by Congress. Bipartisan panels can either be replaced or replaced by sole directors. Quorum requirements also apply. If officials are concerned that politicians would have too much power over the Fed, they could shift the Fed’s regulatory authority to another agency.

Political challenges would arise from such drastic actions. Financial regulators will be seen as political actors and should therefore be treated with respect.