Question

what are the pros and cons of each type of consolidation statement.

Answer 1

THE PROS AND CONS OF CONSOLIDATING:

Pro: Consolidated Structure is Better Suited to Financial Conglomerate Regulation Financial industry trends have led to large, complex firms offering a wide range of financial products regulated by multiple supervisory institutions. This complexity manifests itself in the United States and the rest of the world through the increased emergence of financial conglomerates, defined as companies providing services in at least two of the primary financial products—banking, securities, and insurance

Pro: Economies of Scale Another benefit of regulatory consolidation is that it can lead to economies of scale. Economies of scale result when fewer resources are employed per unit of output as firm (or agency) size grows. For instance, a subject matter expert, such as one specializing in credit default swaps, may be underutilized if working for a specialized regulatory institution. Whereas, under a consolidated structure, a single regulatory institution could use one subject matter expert for all sectors, banking, securities, and insurance

Pro: Reduced Overlap and Duplication The complex institutional structure of decentralized regulatory systems, whereby supervision is organized around specialized agencies, has arguably led to a significant amount of overlap and duplication in regulatory efforts, thus reducing efficiency and effectiveness, as well as increasing costs. For instance, in the United States, securities subsidiaries of financial holding companies are primarily supervised by the SEC; however, the Federal Reserve has some supervisory responsibility as umbrella supervisor. Under GLBA, the Federal Reserve generally must rely on SEC findings regarding activities of a securities subsidiary. However, to be well-informed about the financial condition of the holding company, the Federal Reserve must have staff who are very familiar with securities operations in order to interpret SEC findings. In the absence of highly effective (and therefore, costly) coordination between overlapping regulatory authorities, the potential for inconsistent actions and procedures may result in inefficiencies by delaying issue resolution

Pro: Accountability and Transparency In a decentralized supervisory system with multiple agencies reviewing the financial condition of one entity, legislators may have difficulty determining which agency is at fault when a financial institution fails. As a result, agencies may have a reduced incentive to guard against risk, knowing that blame will be dispersed

Con: Lack of Regulatory Competition In order to fully achieve the benefits discussed above, supervisory consolidation would need to be complete—meaning the creation of one supervisor with authority for all supervisory and regulatory decisions across all types of financial institutions. However, there are costs associated with creating a single regulator since it would lack competitors—other regulatory agencies— and therefore have greater opportunity to engage in self-serving behavior to the detriment of efficiency

Con: Fewer New Ideas The multiple regulatory agencies in a decentralized system are likely to produce a range of considered opinions on the most important regulatory questions the system faces, perhaps as many opinions as there are regulators. Competition among regulatory agencies for legislator or financial institution support (often viewed negatively as a power struggle between regulators) will drive idea generation. In contrast, a single regulator, because of its need to speak with one voice, will tend to identify and adopt one view.

Con: Lack of Specialization The combination of all regulatory functions within a single institution may result in a lack of sector-specific regulatory skills, whereby agency staff possess intimate knowledge tailored to a certain sector. Despite the increasing emergence of financial conglomerates worldwide, with many conglomerates sharing a similar set of products, it is not necessarily the case that all institutions have converged on a common financial conglomerate model. For instance, an insurance company that has started to expand services to include areas of banking and securities is likely to remain focused predominantly on its core insurance business, and thus may benefit more from a regulator that has specialized knowledge in insurance (Goodhart et al. 1998)

Con: Loss of Scope Economies Between Consumer and Safety Supervision The Treasury Blueprint as well as the consolidated supervisory system adopted by Australia separate consumer protection supervision from safety and soundness supervision. But separating these two functions may mean a loss of scope economies.10 Scope economies are present when the production of one product, within the same entity, lowers the cost of producing another product. In the United States at least, consumer protection law enforcement in depository institutions is conducted via regular on-site examinations in which examiners review depositories for violations of consumer laws.

Con: Adjustment and Organizational Costs While economies of scale can be utilized once all enabling legislation is in place and the regulatory agency has become fully consolidated, this process of achieving complete integration can be lengthy and costly. For instance, Japan’s consolidated regulator, the Financial Services Authority (FSA), underwent several reforms between 1998 and 2000 before assuming its current responsibilities as an integrated financial services regulator. Observers discuss numerous adjustment costs likely to arise when shifting regulatory and supervisory activities from multiple agencies to one agency.