Banking Commission
"More than 70% of commercial bank assets are
held by organizations that are
supervised by at least two federal agencies;
almost half attract the attention
of three or four. Banks devote on average
about 14% of their non-interest
expense to complying with rules" (Anonymous
88). A fool can see that
government waste has struck again. This tangled mess
of regulation, among other
things, increases costs and diffuses
accountability for policy actions gone
awry. The most effective remedy to
correct this problem would be to consolidate
most of the supervisory
responsibilities of the regulatory agencies into one
agency. This would
reduce costs to both the government and the banks, and would
allow the parts
of the agencies not consolidated to concentrate on their primary
tasks. One
such plan was introduced by Treasury Secretary Lloyd Bentsen in March
of
1994. The plan called for folding, into a new independent federal
agency
(called the Banking Commission), the regulatory portions of the Office
of the
Comptroller of the Currency (OCC), the Federal Reserve Board, the
Federal
Deposit Insurance Corporation (FDIC), and the Office of Thrift
Supervision (OTS).
This plan would save the government $150 to $200
million a year. This would also
allow the FDIC to concentrate on deposit
insurance and the Fed to concentrate on
monetary policy (Anonymous 88). Of
course this is Washington, not The Land of
Oz, so everyone can't be
satisfied with this plan. Fed Chairman Alan Greenspan
and FDIC Chairman Ricki
R. Tigert have been vocal opponents of the plan.
Greenspan has four major
complaints about the plan. First, divorced from the
banks, 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 to
review the
banks. Thirdly, a supervisor with no macroeconomic concerns might be
too
inclined to discourage banks from taking risks, slowing the economy
down.
Lastly, creating a single regulator would do away with important
checks and
balances, in the process damaging state bank regulation (Anonymous
88). To
answer these criticisms it is necessary to make clear what the Fed's
job is. The
Fed has three main responsibilities: to ensure financial
stability, to implement
monetary policy, and to oversee a smoothly
functioning payments system
(delivering checks and transferring funds) (Syron
3). The responsibilities of
the Fed are linked to the banking system. For the
Fed to carry out its job it
must have detailed knowledge of the working of
banks and financial markets.
Central banks know from the experience of
financial crises that regulatory and
monetary policy directly influence each
other. For example, a banking crises can
disturb monetary policy,
discouraging lending and destroying consumer
confidence, they can also
disrupt the ability to make or receive payments by
check or to transfer
funds. It is for these reasons that it is argued that the
Fed must
maintain a regulatory role with banks. The Treasury plan would leave
the Fed
some access to the review of banks. The Fed, which lends through its
discount
window and operates an interbank money transfer system, would have
full
access to bank examination data. Because regulatory policy affects
monetary
policy and systemic risk, it is necessary that the Fed have at least
some
jurisdiction. The Fed must be able to effectively deal with current
policy
concerns. The Banking Commission would be mainly concerned with the
safety and
stability of the banks. This would encourage conservative
regulations, and could
inhibit economic growth. The Fed clearly has a hands
on knowledge of the banking
system. "The common indicators of monetary policy
- the monetary
aggregates, the federal funds rate, and the growth of loans -
are all influenced
by bank behavior and bank regulation. Understanding
changes and taking action in
a timely fashion can be achieved only by
maintaining contact with examiners who
are directly monitoring banks" (Syron
7). The banking system is what
ultimately determines monetary policy. It is
only common sense to have personnel
in the Fed that have a better
understanding of the system other than just
through financial statements and
examination reports. The Fed also needs the
authority to change bank behavior
that is inconsistent with its established
monetary policy and with financial
stability. This requires both the
responsibility for writing the regulations
and the responsibility for enforcing
those regulations through bank
supervision. State banking charters have already
started to be affected.
Under the proposed plan, state chartered banks would be
subject to two
regulators. While the federal bank would have only one. Thus,
making the
state bank charter less attractive. However, an increasing number of
banks
are opting for state supervision. It turns out that many banks are afraid
of
losing existing freedoms, or of failing to gain new ones, if supervision
is
centralized. "State regulators have given their banks more freedom
than
federal 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 run
estate agencies" (Anonymous 91). The FDIC has two
main criticisms of the
Treasury's plan. First, FDIC Chairman Tigert
believes "that it is very
important that there be checks and balances in the
system going forward" (Cocheo
43). Second, Tigert believes that, since
the FDIC is the one who writes the
checks for bank failures, the FDIC should
be allowed to keep its independence.
It is necessary to maintain the
checks and balances of different agencies. This
separation is necessary
because of the differences in examinations of the
different regulatory
agencies with respect to the same institutions. It is
important "that the
independent [deposit] insurer have access to
information that's available not
only through reporting requirements, but also
through on-site examinations"
(Cocheo 43). Tigert explains that the FDIC
must keep backup examination
authority. As well as maintain the ability to
conduct on-site examinations of
all institutions it insures, not just the
state-chartered nonmember banks it
supervises directly. "She agrees with
those who say there is no need for
duplicative examinations, but insists FDIC
must be able to look at
institutions whose condition or activities have changed
drastically enough to
be of concern to the insurer. While consolidation of the
bank supervisory
process is overdue, issues of bank supervision and regulation
affect the
entire economy. There is no way to tell what is in store for
banking
regulation in the future. It is known, however, that we must beware
that all the
regulatory agencies in place now, are in place for a reason.
Careful thought and
debate must be undertaken before any reform is made. In
the end, Americans seem
no more inclined to tolerate concentration among
regulators than they are among
banks.
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 Fed
Must Continue to
Supervise Banks." New England Economic Review
(January/February 1994): 3-8.
Works Consulted Anonymous. "Banking Bill
Spells Regulatory Relief."
Savings & Community Banker 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.