The US is undergoing a financial earthquake. Its commercial banks and mortgage companies have lent heavily to borrowers -- something that prudent banks with proper risk management systems are not supposed to do. Its “efficient” investment banks readily securitized the loans and sold them to investors, keeping a significant chunk on their balance sheets. Its investors along with European investors and banks willingly invested in these securities.
How could the bank supervision system in one of the world’s most developed countries mess it up so badly?
Part of the answer lies in the fragmented American supervision system of banks and bank-like intermediaries (credit unions, saving associations, etc.) between agencies like the Fed, the Office of the Comptroller of the Currency and the Office of Thrift Supervision. Further is the schism between state and federal supervision -- the difference between state-chartered banks versus federal banks, etc. All this is an inheritance from the peculiarities of US history (still currently evolving), and I believe that it is quite relevant. But that is not the whole story.
More important than this fragmentation are three other important external factors that drove the failure of US bank supervision system... [...] (Read the rest at Today's Zaman