Response to Obama on Regulatory Reform - Christie Sciacca, ex-FDIC

President Obama this past week made strong remarks to spur Congress and populist support toward banking regulatory reform.

But what's likely to happen? And when?

"There might be stronger regulatory reform than people thought six months ago," says Christie Sciacca, formerly with the Federal Deposit Insurance Corporation, currently a director with LECG in Washington, D.C.. In an exclusive interview, Sciacca discusses:

The substance of Obama's proposals;
What's likely to occur in regulatory reform;
Whether reform will occur in 2010.

Sciacca spent 13 years at the FDIC, where he led examination, supervisory and bank rescue transaction projects in Detroit, New York, and Washington DC. From 1983-1986, Sciacca was Assistant to the Chairman, representing the Chairman on interagency matters, at bank trade association meetings and on all operational and policy matters. Sciacca served as the FDIC's representative on the Vice President's Task Group on the Regulation of Financial Services. In 1996, he returned to the FDIC to establish that agency's International Branch and from 1997-2002 served as the head of all supervisory policy, including domestic and international bank supervision, capital markets and accounting policy.

TOM FIELD: What is the future for banking regulatory reform in 2010?

Hi, this is Tom Field, Editorial Director with Information Security Media Group. We are talking today which Christie Sciacca, former executive with the FDIC. Christie, we have spoken in the past, and it is a pleasure to talk with you again.

CHRISTIE SCIACCA: Oh, thank you, it is a pleasure to be with you.

FIELD: Christie, the President seems to have given regulatory reform a bit of a wake-up call yesterday with his remarks. What do you make of those remarks?

SCIACCA: Well, I agree with you in the sense that he has added a new dimension and perhaps a wake-up call. I think the remarks --while we all see what happened to the market's reaction to the remarks; I think it is understandable that people are angry about banking and what goes on. I am not certain, however, that what was proposed, at least the way I understand what was proposed, is the best way to go about it. I don't know how one stuffs the genie back in the bottle first of all -- that is re-instituting something akin to Glass-Steagall.

And second, I am not sure that I agree that the problems in the financial services industry, in the banking industry ,are or can be solely laid at the feet of proprietary trading and the repeal of Glass Steagall in 1999. The fact is banks are losing money the old fashioned way, and now they have a bunch of bad loans on their books; that is the biggest problem it seems to me in banking.

FIELD: What do you take as the most important message from President Obama and his remarks?

SCIACCA: From a regulatory reform standpoint, I think the most important message is that we have got to do a better job of supervising the banks. I know that wasn't talked about, and there is a separation in my mind between regulation and supervision. There is going to be more regulation -- I think people need to accept that and understand it. And I think there is going to be more strident supervision of the banks in the future.

The question is, is this temporary or is this permanent? The fact of the matter is that there were regulations and policy statements put out 10 year years ago that, if regulators and bankers would have adhered to them in the supervisory process, things might not be as bad as they are today in the banking industry.

FIELD: Sure. Christie, given what we have seen happen in the last year with healthcare reform, for instance, the President came in with some bold ideas and Congress took it up, his ideas have sort of been watered down in the process. Do we see a parallel path happening with regulatory reform? What do you think we can expect with regulatory reform in 2010?

SCIACCA: Well, I think you are right in the sense that right now there are at least three or four views on regulatory reform. There is what the administration and the President announced yesterday and what Paul Volker has been pushing for, for quite a while now, which is somewhat different from the views of Tim Geithner and Larry Summers. And there is Barney Frank, who has weighed in, and Chris Dodd has weighed in.

So all of that is going to have to get put together, and I think we are going to see regulatory reform -- my guess is it would be more strident than we would have otherwise seen because we now have the President's ear, and the legislation may be headed toward something more restrictive than we might have thought before that.

So that is all going to have to be reconciled, and the question is - and you mentioned healthcare reform -- how much of this the Administration and the Congress can deal with all at the same time?

FIELD: You almost got the sense, at least I did, that President Obama was almost conceding his role in healthcare and saying 'Okay let's go to something everybody can agree on.;

SCIACCA: Well, it is interesting because both of them are very populist issues right? Healthcare in this country is a populist issue. Banking reform and what is going on in the banking markets is a populist issue, and the President is making a populist issue by his speech yesterday and by his recent speeches regarding a bank tax and we want all of our money back.

So I think that as is always the case, it seems to me that there will be some compromises here and there, and there will be some strengthening of some people's position and some softening of other people's position. But I think all in it might be more; there might be stronger regulatory reform than people might have thought six months ago.

FIELD: Where is the opposition going to come from Christie? What do you expect people to oppose these ideas on the basis of?

SCIACCA: Well I think the opposition is going to certainly going to come from the banking industry, particularly the large banks because they are the ones who are going to be most affected by this. If there are 10 banks in this country that are affected by it, and that includes investment banks and commercial banks, I think that would be a large number. Most of the banks in this country don't have the issues that the President addressed yesterday; it is this whole "too big to fail" issue.

My view simply is that the better way to go would be to impose higher capital standards on those companies and do a much better job of supervision, and strong supervision. But higher capital may result indirectly in the same thing because if the so-called "to big to fail bank" has to keep higher capital and can't get the returns, it may shrink. So we may end up with the same thing, but I think the opposition is going to come from the banks, the large banks in particular.

I don't know that there is much in the way of sympathy in the general population for large banks, and they are a small part, because there hasn't been lending. The issue in this country right now with respect to banking is the bad loans on the banks' books, and when will they start lending again, coupled with when will consumers start spending again? I don't know if the shifts in the paradigm are temporary or permanent, but I expect even if they are temporary, temporary is going to be for several years and it is not going to be for a couple of months.

FIELD: Christie one last question for you. In a sense of timing, do you think we are looking at regulatory reform earlier now in 2010 than we might have been before?

SCIACCA: I am not sure we are going to see it in this Congress. I think there are too many competing interests, there are too many competing issues -- healthcare is certainly the one you mentioned is amongst them. And we are in an election year, and I don't know how long it will take to get these issues reconciled. I would be surprised if we saw regulatory reform in this Congress.

FIELD: Well, Christie, I won't be surprised if we are talking about this issue again sometime soon.

SCIACCA: I expect you are right.

FIELD: Thank you so much for your time and your insights today.

SCIACCA: Well, thanks for having me.

FIELD: We have been talking with Christie Sciacca. For Information Security media Group, I'm Tom Field. Thank you very much.

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