The Failures of Federal Regulation of Banks


"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. 
Works Cited
Anonymous. "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.

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