"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.