
Banking
So Much for That Plan 
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.
<br><br><b>Bibliography</b><br><br>
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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