BankingSo Much for That Plan 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, amongother things, increases costs and diffuses accountability for policy actionsgone awry. The most effective remedy to correct this problem would be toconsolidate most of the supervisory responsibilities of the regulatory agenciesinto one agency. This would reduce costs to both the government and thebanks, and would allow the parts of the agencies not consolidated toconcentrate on their primary tasks.
One such plan was introduced byTreasury Secretary Lloyd Bentsen in March of 1994. The plan called forfolding, into a new independent federal agency (called the BankingCommission), the regulatory portions of the Office of the Comptroller of theCurrency (OCC), the Federal Reserve Board, the Federal Deposit InsuranceCorporation (FDIC), and the Office of Thrift Supervision (OTS). This planwould save the government $150 to $200 million a year. This would also allowthe FDIC to concentrate on deposit insurance and the Fed to concentrate onmonetary policy (Anonymous 88). Of course this is Washington, not TheLand of Oz, so everyone can’t be satisfied with this plan.
Fed Chairman AlanGreenspan and FDIC Chairman Ricki R. Tigert have been vocal opponents ofthe plan. Greenspan has four major complaints about the plan. First, divorcedfrom the banks, the Fed would find it harder to forestall and deal withfinancial crises. Second, monetary policy would suffer because the Fed wouldhave less access to review the banks.
Thirdly, a supervisor with nomacroeconomic concerns might be too inclined to discourage banks fromtaking risks, slowing the economy down. Lastly, creating a single regulatorwould do away with important checks and balances, in the process damagingstate bank regulation (Anonymous 88). To answer these criticisms it isnecessary to make clear what the Fed’s job is. The Fed has three mainresponsibilities: to ensure financial stability, to implement monetary policy, andto oversee a smoothly functioning payments system (delivering checks andtransferring funds) (Syron 3).
The responsibilities of the Fed are linked to thebanking system. For the Fed to carry out its job it must have detailedknowledge of the working of banks and financial markets. Central banksknow from the experience of financial crises that regulatory and monetarypolicy directly influence each other. For example, a banking crises can disturbmonetary policy, discouraging lending and destroying consumer confidence,they can also disrupt the ability to make or receive payments by check or totransfer funds. It is for these reasons that it is argued that the Fed mustmaintain a regulatory role with banks.
The Treasury plan would leave the Fedsome access to the review of banks. The Fed, which lends through itsdiscount window and operates an interbank money transfer system, wouldhave full access to bank examination data. Because regulatory policy affectsmonetary policy and systemic risk, it is necessary that the Fed have at leastsome jurisdiction. The Fed must be able to effectively deal with current policyconcerns. The Banking Commission would be mainly concerned with thesafety and stability of the banks. This would encourage conservativeregulations, and could inhibit economic growth.
The Fed clearly has a handson knowledge of the banking system. The common indicators of monetarypolicy – the monetary aggregates, the federal funds rate, and the growth ofloans – are all influenced by bank behavior and bank regulation. Understanding changes and taking action in a timely fashion can be achievedonly by maintaining contact with examiners who are directly monitoringbanks (Syron 7). The banking system is what ultimately determines monetarypolicy. It is only common sense to have personnel in the Fed that have abetter understanding of the system other than just through financialstatements and examination reports.
The Fed also needs the authority tochange bank behavior that is inconsistent with its established monetary policyand with financial stability. This requires both the responsibility for writing theregulations and the responsibility for enforcing those regulations through banksupervision. State banking charters have already started to be affected. Under the proposed plan, state chartered banks would be subject to tworegulators. While the federal bank would have only one. Thus, making thestate bank charter less attractive.
However, an increasing number of banksare opting for state supervision. It turns out that many banks are afraid oflosing 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 themrun estate agencies (Anonymous 91). The FDIC has two main criticisms ofthe Treasury’s plan. First, FDIC Chairman Tigert believes that it is veryimportant that there be checks and balances in the system going forward(Cocheo 43).
Second, Tigert believes that, since the FDIC is the one whowrites the checks for bank failures, the FDIC should be allowed to keep itsindependence. It is necessary to maintain the checks and balances ofdifferent agencies. This separation is necessary because of the differences inexaminations of the different regulatory agencies with respect to the sameinstitutions. It is important that the independent deposit insurer have accessto information that’s available not only through reporting requirements, butalso through 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 andregulation affect the entire economy. There is no way to tell what is in storefor banking regulation in the future. It is known, however, that we mustbeware that all the regulatory agencies in place now, are in place for areason. Careful thought and debate must be undertaken before any reform ismade.
In the end, Americans seem no more inclined to tolerate concentrationamong regulators than they are among banks. BibliographyAnonymous. American Bank Regulation: Four Into One Can Go. TheEconomist 330 (March 5, 1994): 88-91. Cocheo, Steve.
Declaration of Independence. ABA Banking Journal 87(February 1995): 43-48. Syron, Richard F. The Fed Must Continue to Supervise Banks. NewEngland Economic Review (January/February 1994): 3-8. Works ConsultedAnonymous.
Banking Bill Spells Regulatory Relief. Savings & CommunityBanker 3 (September 1994): 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.
