GSEs Need Strong Regulation

Sen. Shelby, R-Ala., is chairman of the Senate Banking Committee and a key player in the debate about possibly revamping oversight of the government-sponsored enterprises. This viewpoint is an excerpt of his statement at a recent congressional hearing in which he outlined several legislative policy challenges facing the committee.

I would like to briefly touch upon the committee's efforts to create a strong and credible new regulator for the Housing GSEs. We have held several hearings this year on this issue and favorably reported legislation out of the committee on April 1. I recognize that Fannie Mae, Freddie Mac and the Federal Home Loan Banks provide real benefits to the U.S. housing market and the promotion of homeownership.

However, it has also become abundantly clear that their respective regulators are woefully inadequate to supervise the institutions. Fannie and Freddie, the second and fifth largest financial institutions in the United States, are too important to the economy to have a regulator with less power than the regulator of a small community bank.

It has been extremely difficult to craft a consensus bill that will enjoy broad support among Republicans and Democrats, and is acceptable to the administration. The tight 12-9 vote on the committee demonstrated that even with expansive affordable housing mandates and watered-down receivership authority, we could not attract enough from across the aisle to ensure enactment into law. The future of the bill remains uncertain, but I intend to continue to press the issue of GSE reform in the Senate.

We have a tremendously dynamic economy where change is a constant and driving force. Businesses need to be able to adapt to changing markets. There are instances, however, where laws and regulations impede this ability. The purpose of regulation is to establish fair markets that promote competition and innovation. Outdated laws only act as a drain on productivity and growth. There are also larger questions regarding the overall structure of the regulatory regime. Our responsibility therefore, extends beyond reviewing the content of regulation. We must pay close attention to the structure of regulatory organizations to ensure they function effectively.

One of my first acts as chairman was to commission the General Accounting Office to perform an analysis of the present regulatory structure of the U.S. financial services sector. During the last 30years, there has been a considerable increase in competition within the financial services industry, both domestically and internationally.

With this significant increase in international activity, there have also been corresponding efforts to develop regulatory models that provide an appropriate framework for globally active financial services firms. And the forces fueling greater domestic and international competition will only continue to grow.

Regulators are increasingly tasked with monitoring worldwide businesses. Global standards have received increasing consideration as markets proliferate and penetrate across the world. To regulate effectively, attention must be paid to the advantages and disadvantages of our current domestic regulatory system, versus consolidated supervision.

Our regulatory system is based on competition and overlap amongst regulatory entities. This has led to some criticisms and complaints of bureaucratic inefficiency. Many of our trading partners have more consolidated regulatory regimes.

However, a single, comprehensive regulator can heighten the consequences of regulatory capture, and can remove innovative pressures. As we in the United States grapple with questions of regulatory restructuring, we must remain mindful of international competitive pressures that our financial institutions face.

We must strive toward regulatory structures that can successfully regulate without unnecessary red tape that hampers competition. We also need regulatory structures that can successfully interact with their counterparts overseas.

As markets continue their trend toward globalization, these issues will need to be addressed. Keeping pace with an increasingly dynamic and global market is a difficult challenge for regulators.

Congress has demonstrated that we can play a vital role in helping regulators adapt to challenges. Needless to say, as markets continue to adapt and innovate - the laws must as well.

In asking the GAO to perform their analysis, I have requested that they specifically analyze the manner in which the current regulatory structure affects competition within the industry and determine whether the structure adequately addresses the needs of both domestic and internationally active firms.

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