The system for regulating financial institutions in the United States is highly fragmented, outdated, and ineffective. A multitude of federal agencies, self-regulatory organizations, and state authorities share oversight of the financial system under a framework riddled with regulatory gaps, loopholes, and inefficiencies.

There is a lot to like in his proposal.  For example, as I previously proposed, he too would strip from the Federal Reserve of its responsibility for micro-prudential regulation of the banks.

However, there are some aspects of his proposal that should be questioned.  For example, Mr. Volcker creates a Prudential Supervisory Authority to be the primary micro-prudential regulator for banks.  He also leaves both the Fed and FDIC with the ability to conduct examinations as needed with the suggestion this retains checks and balances between regulators in the financial system.  I would transfer all micro-prudential regulation to the FDIC.  I would do this as the FDIC’s regulatory interests, to minimize losses incurred by the deposit insurance fund, are aligned with the taxpayers.  This regulatory interest also puts pressure on investors to exert market discipline to restrain bank risk taking to avoid a bank running into trouble and the investors losing their investment because the FDIC closes the bank.  To me, I prefer checks and balances that reduce bank risk taking.

In making his proposal, Mr. Volcker said

The aim is a simpler, clearer, adaptive, and resilient regime that has a mandate to deal with the financial system as it exists now, and is capable of keeping pace with the evolving financial landscape.

The Transparency Label Initiative™ delivers on this aim.  Its division of the global financial system between transparent/unrigged and opaque/rigged is simple, clear, adaptive and resilient.  The Initiative is capable of both dealing with the global financial system as it exists now and keeping pace as the global financial system evolves.

In a press conference announcing his proposal, Mr. Volcker further highlighted why the Initiative is needed when he commented on the need to monitor risk in the shadow banking system,

The underlying problem is the growth of the non-bank part of the system … It’s bad enough having all this duplication and inefficiency when everything was concentrated in the banks, but now the nonbanks are more important in credit creation than the banks.

The Initiative brings the necessary transparency to shadow banking so all market participants, including the regulators, can assess the risks of the shadow banks and how these risks might impact the highly regulated banking system.