“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.
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.
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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