"More than 70% of commercial bank assets are held by organizations that aresupervised by at least two federal agencies; almost half attract the attentionof three or four. Banks devote on average about 14% of their non-interestexpense to complying with rules" (Anonymous 88). A fool can see thatgovernment waste has struck again.
This tangled mess of regulation, among otherthings, increases costs and diffuses accountability for policy actions goneawry. The most effective remedy to correct this problem would be to consolidatemost of the supervisory responsibilities of the regulatory agencies into oneagency. This would reduce costs to both the government and the banks, and wouldallow the parts of the agencies not consolidated to concentrate on their primarytasks. One such plan was introduced by Treasury Secretary Lloyd Bentsen in Marchof 1994. The plan called for folding, into a new independent federal agency(called the Banking Commission), the regulatory portions of the Office of theComptroller of the Currency (OCC), the Federal Reserve Board, the FederalDeposit Insurance Corporation (FDIC), and the Office of Thrift Supervision (OTS).This plan would save the government $150 to $200 million a year.
This would alsoallow the FDIC to concentrate on deposit insurance and the Fed to concentrate onmonetary policy (Anonymous 88). Of course this is Washington, not The Land ofOz, so everyone can't be satisfied with this plan. Fed Chairman Alan Greenspanand FDIC Chairman Ricki R. Tigert have been vocal opponents of the plan.Greenspan has four major complaints about the plan. First, divorced from thebanks, the Fed would find it harder to forestall and deal with financial crises.
Second, monetary policy would suffer because the Fed would have less access toreview the banks. Thirdly, a supervisor with no macroeconomic concerns might betoo inclined to discourage banks from taking risks, slowing the economy down.Lastly, creating a single regulator would do away with important checks andbalances, in the process damaging state bank regulation (Anonymous 88). Toanswer these criticisms it is necessary to make clear what the Fed's job is.
TheFed has three main responsibilities: to ensure financial stability, to implementmonetary policy, and to oversee a smoothly functioning payments system(delivering checks and transferring funds) (Syron 3). The responsibilities ofthe Fed are linked to the banking system. For the Fed to carry out its job itmust have detailed knowledge of the working of banks and financial markets.Central banks know from the experience of financial crises that regulatory andmonetary policy directly influence each other. For example, a banking crises candisturb monetary policy, discouraging lending and destroying consumerconfidence, they can also disrupt the ability to make or receive payments bycheck or to transfer funds. It is for these reasons that it is argued that theFed must maintain a regulatory role with banks.
The Treasury plan would leavethe Fed some access to the review of banks. The Fed, which lends through itsdiscount window and operates an interbank money transfer system, would have fullaccess to bank examination data. Because regulatory policy affects monetarypolicy and systemic risk, it is necessary that the Fed have at least somejurisdiction. The Fed must be able to effectively deal with current policyconcerns. The Banking Commission would be mainly concerned with the safety andstability of the banks. This would encourage conservative regulations, and couldinhibit economic growth.
The Fed clearly has a hands on knowledge of the bankingsystem. "The common indicators of monetary policy - the monetaryaggregates, the federal funds rate, and the growth of loans - are all influencedby bank behavior and bank regulation. Understanding changes and taking action ina timely fashion can be achieved only by maintaining contact with examiners whoare directly monitoring banks" (Syron 7). The banking system is whatultimately determines monetary policy. It is only common sense to have personnelin the Fed that have a better understanding of the system other than justthrough financial statements and examination reports.
The Fed also needs theauthority to change bank behavior that is inconsistent with its establishedmonetary policy and with financial stability. This requires both theresponsibility for writing the regulations and the responsibility for enforcingthose regulations through bank supervision. State banking charters have alreadystarted to be affected. Under the proposed plan, state chartered banks would besubject to two regulators. While the federal bank would have only one.
Thus,making the state bank charter less attractive. However, an increasing number ofbanks are opting for state supervision. It turns out that many banks are afraidof losing existing freedoms, or of failing to gain new ones, if supervision iscentralized. "State regulators have given their banks more freedom thanfederal ones: 17 now permit banks to sell insurance (and five to underwrite it,23 allow them to operate discount stockbrokers and a handful even let them runestate agencies" (Anonymous 91).
The FDIC has two main criticisms of theTreasury's plan. First, FDIC Chairman Tigert believes "that it is veryimportant that there be checks and balances in the system going forward" (Cocheo43). Second, Tigert believes that, since the FDIC is the one who writes thechecks for bank failures, the FDIC should be allowed to keep its independence.It is necessary to maintain the checks and balances of different agencies. Thisseparation is necessary because of the differences in examinations of thedifferent regulatory agencies with respect to the same institutions.
It isimportant "that the independent [deposit] insurer have access toinformation that's available not only through reporting requirements, but alsothrough on-site examinations" (Cocheo 43). Tigert explains that the FDICmust keep backup examination authority. As well as maintain the ability toconduct on-site examinations of all institutions it insures, not just thestate-chartered nonmember banks it supervises directly. "She agrees withthose who say there is no need for duplicative examinations, but insists FDICmust be able to look at institutions whose condition or activities have changeddrastically enough to be of concern to the insurer.
While consolidation of thebank supervisory process is overdue, issues of bank supervision and regulationaffect the entire economy. There is no way to tell what is in store for bankingregulation in the future. It is known, however, that we must beware that all theregulatory agencies in place now, are in place for a reason. Careful thought anddebate must be undertaken before any reform is made.
In the end, Americans seemno more inclined to tolerate concentration among regulators than they are amongbanks. Bibliography"American Bank Regulation: Four Into One Can Go." The Economist 330(March 5, 1994): 88-91. Cocheo, Steve. "Declaration of Independence."ABA Banking Journal 87 (February 1995): 43-48.
Syron, Richard F. "The FedMust Continue to Supervise Banks." New England Economic Review(January/February 1994): 3-8. Works Consulted Anonymous. "Banking BillSpells Regulatory Relief.
" Savings & Community Banker 3 (September1994): 8-9. Broaddus, J. Alfred Jr. "Choices in Banking Policy."Economic Quarterly (Federal Reserve Bank of Richmond) 80 (Spring 1994): 1-9.
Reinicke, Wolfgang H. "Consolidation of Federal Bank Regulation?"Challenge 37 (May/June 1994): 23-29.
