Monday, June 20, 2011
Embedded Bank Regulators: Bad idea?
Today the Wall Street Journal reported that the Fed and the OCC are proposing to embed regulators and examiners at financial institutions. They hope that having overseers on site will improve monitoring and control. I worry about the move though. Won't these "embeds" perhaps get too close to the people they are trying to regulate? Economists call this phenomenon "regulatory capture" - something that has occurred in many industries. In many ways, this is what happens to auditors who spend a ton of time on site at clients. They become close/friendly with employees at the client. It affects their independence.
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Embedding personnel is a common practice in large DoD contracts that DCMA manages and DCAA audits. For the government it is almost like a check mark which assures a we've-done-all-we-can attitude. In my opinion the federal government lacks the sophistication and competence to adequately monitor industry. We are much more vulnerable since the Bush administration encouraged we adopt industry practice and make it our policy. One horrible scandal from this of course is DOI and the oil industry. It is doubly difficult when people lack sophistication because they often wield the sovereignty of the government in making these blind decisions so no tough questions are asked. And there are no satisfying answers.
I used to work in the defense industyr, and I remember having audit personnel on-site. You are correct about that practice also being problematic at times.
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