The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
The FBA and the FRB would need
to agree on any changes to existing
standards (e.g., capital levels) and
develop reporting requirements
through mutual consultation.
Under the task group proposal,
the FBA would determine the
permissible activities for all bank
holding companies and establish
the regulations governing the exercise of such powers. Currently, the
FRB exercises unilateral authority
in such matters. The FRB would
retain the right to disapprove regulations authorized by the FBA that
give bank holding companies new
powers if a two-thirds majority of
the Federal Reserve Board determined that the stability of the U.S.
banking system would be impaired.
State-chartered
Banks. Federal duplication of state supervisory efforts would be reduced
under a new regulatory program.
States could seek certification to
take over many of the current
federal responsibilities for statechartered institutions byestablishing a regulatory program equally
reliable to federal regulation. The
FRB, FBA, and FDIC would set the
criteria for certification. The FRB
would act on specific state applications for certification and would
oversee the process. Each Reserve
Federal Reserve Bank of Cleveland
Research Department
P.O. Box 6387
Cleveland, OH 44101
-
Address Correction Requested: Please send
corrected mailing label to the Federal Reserve
Bank of Cleveland, Research Department,
P.O. Box 6387, Cleveland, OH 44101.
Bank would establish a formal
State Advisory Council for interaction between the FRB (the sole
federal regulator) and the state
banking authorities.
FDIC. The FDIC would lose
its supervisory responsibilities,
operating solely as an independent
insurance corporation. The FDIC
would have the authority to grant
insurance, set risk-related premium
levels, revoke insurance, or take
other enforcement actions. The
FDIC would retain the authority
to examine a troubled bank in
conjunction with the bank's primary supervisor.
The SEC and the Department
of Justice. The regulation of all
securities activities of banks and
thrifts would be consolidated in the
Securities and Exchange Commission (SEC). Currently, the SEC and
the depository institutions' regulatory agencies monitor securities
activities. The Department of
Justice would enforce antitrust
laws applicable to banks and
thrifts, curtailing the involvement
of the financial regulators in antitrust cases.
Conclusion
The task group
yet been drafted
form. Although
tion is expected
proposal has not
into legislative
the administrato support the pro-
posal, the recommendation could be
modified or rejected altogether at
anyone of several junctures. The
financial regulatory system has
been the subject of much debate for
many years. In past years (1937,
1949, 1961, and 1971), Congress did
not act on reports recommending
changes to the financial regulatory
system. In 1984, however, we are
faced with a rapidly changing
financial environment. Market
forces and technology have altered
the financial industry and will continue to spur further deregulation.
Little by little, the financial
industry is being deregulated in the
same way that it became regulated.
Rather than continuing to act on
changes in driblets, Congress could
control the deregulation process
by carefully and thoroughly considering legislation that (1) expands
the powers and boundaries of depository institutions and (2) streamlines and strengthens the structure
of regulatory agencies. Comprehensive legislation to deregulate depository institutions has been introduced into Congress. The proposal
adopted by the Task Group on
Regulation of Financial Services
complements that legislation by
recommending reorganization of
the structure of regulatory agencies
to meet the demands of the evolving financial marketplace.
BULK RATE
U.S. Postage Paid
Cleveland,OH
Permit No. 385
Federal Reserve Bank of Cleveland
econo
co
Reorganizing the
U.S. Banking
Regulatory
Structure
by Sandra Pianalto
New financial instruments, new
breeds of financial institutions,
and different market conditions
have developed in the United
States since the mid-1970s. The
traditional product, geographic,
and institutional boundaries of our
financial industry have been questioned by advances in technology,
inflation, high and varying interest
rates, and an increasing demand
for more and better services from
financially sophisticated consumers. Several pieces of legislation
have been enacted to respond to
these many changes in the financial marketplace. Two pieces of
legislation-the
Financial Institutions Regulatory and Interest Rate
Control Act and the International
Banking Act, both enacted in
1978-placed domestic banks on
more equal footing with foreign
banks. The Depository Institutions
Deregulation and Monetary Control
Act of 1980 and the Garn-St Germain Act of 1982 established procedures to eliminate deposit interest-
••
Sandra Pianalto coordinates the government
a/lairs program lor the Federal Reserve Bank
0/ Cleveland.
The views stated herein are those 0/ the author
and not necessarily those of the Federal Reserve
Bank 0/ Cleveland or of the Board 0/ Governors
0/ the Federal Reserve System.
rate ceilings and gave financial
institutions broader product
powers. Yet, even with this widesweeping deregulatory legislation, many issues in banking structure remain unresolved.
While the goal of financial deregulation is to reduce the barriers to
competition and hence create a
more efficient marketplace, the
safety and soundness of the financial markets are still important
considerations in the ongoing process of deregulation. In December 1982 the Reagan administration
charged a task group to examine
the current regulatory structure and
whether it could meet the demands
of our evolving financial system.
Chaired by Vice President George
Bush, with Treasury Secretary
Donald Regan as vice chair, on January 31, 1984, the Task Group on
Regula tion of Financial Services
unanimously endorsed a proposal
to reorganize the federal agencies
that regulate commercial banks}
Reorganization and
Regulatory Relief
Banks and other depository institutions perform special functions
in our economy. While holding the
bulk of America's liquid savings,
these institutions also operate the
payments mechanism, supply much
••
1. In addition to Vice President Bush and Secretary Regan, the members of the task group
included the Attorney General, the director
of the Office of Management and Budget, the
chairman of the Council of Economic Advisers,
the assistant to the president for Policy Development, the Comptroller of the Currency, and
ISSN 0428-1276
April 9, 1984
of the credit used in our economy,
and serve as the conduit for monetary policy. The safety and soundness of our depository institutions
are necessary to ensure a properly functioning economy. Indeed,
the first banking regulations in
the United States were enacted in
response to bank failures. Repeatedly in the nineteenth century and
again in the Great Depression,
bank failures caused severe disruptions in our economy. As a result,
Congress erected regulatory barriers that prohibited commercial
banks from engaging in the risky
activities that led to earlier bank
failures. Deposit insurance and
banking regulations were enacted
to instill confidence in banks and to
protect the stability of the banking
system. However, today's financial system is more sophisticated
than the financial system of the
1930s, and yesterday's banking
regulations may no longer serve
today's needs.
To many observers, the U.S.
financial regulatory structure
seems to be a hodgepodge of complex rules and procedures, with
multiple regulators overlapping in
powers and responsibilities. Many
regulations resulted from crisis
situations and were adopted on a
piecemeal basis. Congress is currently considering proposals to
change existing bank regulations .
the chairmen of the Federal Reserve Board, the
Federal Deposit Insurance Corporation, the
Federal Home Loan Bank Board, the Securities
and Exchange Commission, the Commodity
Futures Trading Commission, and the National
Credit Union Administration.
The congressional banking committees are discussing legislation
that would allow banks to offer a
broader array of financial services.'
Many state legislatures are
examining legislation not only to
expand bank powers but also to
relax geographic barriers. Commercial banks and S&Ls have
already entered the securities discount brokering business and are
now lobbying state legislatures for
the authority to enter other business lines and to expand into new
geographic markets. South Dakota,
for example, has passed legislation
that permits its state-chartered
institutions to engage in a full
range of insurance activities. Fifteen states have enacted some form
of interstate banking legislation.'
Currently, five federal agencies
regulate U.S. depository institutions: three agencies supervise
banks, one monitors savings and
loan associations (S&Ls), and
one regulates federal credit unions.'
In addition to the federal regulators, agencies in each of the 50
states supervise state-chartered
banks and state savings banks,
S&Ls, and credit unions. The overlapping powers and divided authorities inherent in this structure
often result in jurisdictional disputes and inconsistencies in enforcement, creating further conflict and
confusion in an already complicated financial services industry.
Such disarray results in part from
regulators trying to apply banking
laws established many years ago to
institutions operating in a rapidly
changing financial environment.
Overly restrictive provisions of
existing laws, in conjunction with
exploitation of loopholes in those
laws, have produced conflicts in the
regula tors' in terpreta tions of those
laws. For instance, while the regulator of the lead bank of a bank
••
2. Proposals were introduced in the Senate and
the House to expand the powers of bank holding companies, streamline the procedures of the
Bank Holding Company Act, and clarify the
definitions of a bank and a thrift and the scope
of powers for state-chartered banks. These proposals are S.1069 and H.R. 3537, the administration's Financial Institutions Deregulation Act;
Existing Regulation of Banks and their Holding Companies
Proposed Regulation of Banks and their Holding Companies
(Includes thrifts with identical bank portfolios)
Regulatory agencies {)
Department
of
Justice'
'I
Federal
Banking
Agency
••••• ~l
-
I
Federal
Deposit
Insurance
Corporation
-
Types of regulated institutions
a. Antitrust
enforcement only.
SOURCE: Office of the Vice President of the United States.
holding company might consider an
activity or expansion permissible,
the regulator of the bank holding
company itself might interpret the
pertinent law differently. To simplify the regulatory system and
settle some of the conflicts among
regulators, legislation should be
passed that expands the powers of
depository institutions, spells out
the banking powers of nondepository institutions, and defines
the term bank. Indeed, the task
group indicated that its proposed
reorganization would complement
existing legislation dealing with
broadened powers and services for
depository institutions and simplification of procedures under the
Bank Holding Company Act.
Regulatory Fundamentals
The task group identified four
fundamental principles to be incorporated into any reorganization of
the regulatory structure. These
principles address the concern for
S.2134, the Depository Institutions Holding
Company Act Amendments of 1983, introduced
by Senator Proxmire, ranking minority member
of the Senate Committee on Banking, Housing,
and Urban Affairs; and S.2181, the Financial
Services Competitive Equity Act, introduced by
Senator Gam, chairman of the Senate Committee on Banking, Housing, and Urban Affairs.
safety and soundness, introduce
efficiency and flexibility, and provide the regulatory system with
the ability to monitor the evolving
financial environment.
First, the task group recognized
the need to continue the dual banking system. This is the state/federal banking system, which serves
as a system of checks and balances
and also allows states to act individually on banking matters and
thus test new ideas. Many of the
existing national powers and structures were authorized first at the
state level. Negotiable order of
withdrawal (NOW) accounts, for
example, were tested by a few
states before being authorized
nationwide by the Monetary Control Act. The concept of deposit
insurance was tested by more than
a half dozen states before the Federal Deposit Insurance Corporation (FDIC) was established
50 years ago.
Second, to eliminate inconsistencies, one federal agency should
handle the day-to-day regulation of
••
3. See Thomas M. Buynak, Gerald H. Anderson,
and James J. Balazsy, Ir., "Banking without
Interstate Barriers;' Economic Commentary, Federal Reserve Bank of Cleveland, March 12, 1984.
a.
b.
c.
d.
e.
I
II
r
I
--"\
III
!Ii
=-
I.-
(5
-
-.
,
Federal
Reserve
Board
-
-
-J I
I
,-
--
1J
I Department
i
of
Justice
'"" ""
...
-
II
J
I
~~.
~ll'llib
I
National banks
and
holding company
__
Securities
and
Exchange
Commission
State
Bank
Departments
!
~u~
d
=, =
c
~
.t
State banks
and
holding company
Only for public companies.
Antitrust enforcement only.
State examination is not approved as equivalently reliable to federal examination.
Examination of troubled institutions.
International class holding companies to remain subject to FRB supervision.
-
SOURCE: Office of the Vice President of the United States.
state-chartered banks. Under the
current regulatory system, the
Federal Reserve Board supervises
state-chartered banks that are
members of the Federal Reserve
System, and the FDIC supervises the federally insured statechartered banks that are not
mem bers of the Federal Reserve
System.' This divided authority
over similar institutions can cause
inconsistencies in what are deemed
to be permissible activities among
state banks. In the past year, for
example, the FDIC took a more
lenient view of securities activities
of state-chartered banks. Such
different treatments could give
state banks competitive advantages, depending on whether they
were regulated by the Federal
Reserve or the FDIC.
Third, to minimize overlapping
responsibilities, regulation of
individual banking institutions
(i.e., banks and their holding com-
••
4. The regulators and their functions are (1) the
Comptroller of the Currency (a bureau of the
Treasury Department), supervising all national
(federally chartered) banks; (2) the Federal
Reserve System, supervising state-chartered
banks that are members of the Federal Reserve
System and bank holding companies; (3) the
FDIC, supervising insured state banks that are
panies) should be integrated under
a single federal agency. Currently,
the Federal Reserve System regulates all bank holding companies,
even those whose subsidiary banks
are supervised by the Office of
the Comptroller of the Currency
(national banks) or by the FDIC
(state banks that are not members
of the Federal Reserve System).
Finally, the task group recognized that it was of critical importance to maintain the Federal
Reserve System's meaningful role
in the regulatory process. As
the nation's central bank, the Federal Reserve is responsible for
maintaining the stability of our
financial system. To carry out this
responsibility, in 1913 the U.S.
Congress authorized the Federal
Reserve System to operate the
nation's payments mechanism, to
maintain liquidity in the economy
through lending operations at the
discount window, and to regulate
and supervise key institutions in
not members of the Federal Reserve System;
(4) the Federal Home Loan Bank Board, regulating federally chartered S&Ls and savings banks;
and (5) the National Credit Union Administration, chartering, regulating, and insuring federal
and FSLIC-insured state credit unions.
domestic and international financial markets. These functions complement the Federal Reserve's
responsibility for conducting monetary policy. Maintaining a stable
and smoothly functioning financial
system requires direct and current
knowledge of the financial markets,
both foreign and domestic. The
Federal Reserve acquires such
knowledge through its role of
assuring compliance with regulations and uses this flow of information to conduct monetary policy.
Proposed Changes
The task group has proposed that
two federal agencies regulate banks.
A new Federal Banking Agency
(FBA) would regulate, supervise,
and examine all national banks; the
Federal Reserve Board (FRB) would
regulate, supervise, and examine
all state-chartered banks (member
and nonmember). The FBA would
be created within the Treasury
Department to carry out the current responsibilities of the Office of
the Comptroller of the Currency,
plus some new responsibilities outlined in the following discussion.
Bank Holding Companies.
The FBA would regulate bank
holding companies if the lead bank
were a national bank; the FRB
would regulate holding companies if
(1) the lead bank were a state
bank, or
(2) the holding company were in
an international class, i.e., the
holding company
(a) had a bank with foreign
branches or subsidiaries,
(b) had assets of more than
0.5% of aggregate bank
holding company assets, or
(c) was a foreign-owned
holding company.
There are approximately 50 such
international class holding companies operating in the United States .
••
5. State-chartered membership in the Federal
Reserve System is voluntary; national banks are
required to join the System.
The congressional banking committees are discussing legislation
that would allow banks to offer a
broader array of financial services.'
Many state legislatures are
examining legislation not only to
expand bank powers but also to
relax geographic barriers. Commercial banks and S&Ls have
already entered the securities discount brokering business and are
now lobbying state legislatures for
the authority to enter other business lines and to expand into new
geographic markets. South Dakota,
for example, has passed legislation
that permits its state-chartered
institutions to engage in a full
range of insurance activities. Fifteen states have enacted some form
of interstate banking legislation.'
Currently, five federal agencies
regulate U.S. depository institutions: three agencies supervise
banks, one monitors savings and
loan associations (S&Ls), and
one regulates federal credit unions.'
In addition to the federal regulators, agencies in each of the 50
states supervise state-chartered
banks and state savings banks,
S&Ls, and credit unions. The overlapping powers and divided authorities inherent in this structure
often result in jurisdictional disputes and inconsistencies in enforcement, creating further conflict and
confusion in an already complicated financial services industry.
Such disarray results in part from
regulators trying to apply banking
laws established many years ago to
institutions operating in a rapidly
changing financial environment.
Overly restrictive provisions of
existing laws, in conjunction with
exploitation of loopholes in those
laws, have produced conflicts in the
regula tors' in terpreta tions of those
laws. For instance, while the regulator of the lead bank of a bank
••
2. Proposals were introduced in the Senate and
the House to expand the powers of bank holding companies, streamline the procedures of the
Bank Holding Company Act, and clarify the
definitions of a bank and a thrift and the scope
of powers for state-chartered banks. These proposals are S.1069 and H.R. 3537, the administration's Financial Institutions Deregulation Act;
Existing Regulation of Banks and their Holding Companies
Proposed Regulation of Banks and their Holding Companies
(Includes thrifts with identical bank portfolios)
Regulatory agencies {)
Department
of
Justice'
'I
Federal
Banking
Agency
••••• ~l
-
I
Federal
Deposit
Insurance
Corporation
-
Types of regulated institutions
a. Antitrust
enforcement only.
SOURCE: Office of the Vice President of the United States.
holding company might consider an
activity or expansion permissible,
the regulator of the bank holding
company itself might interpret the
pertinent law differently. To simplify the regulatory system and
settle some of the conflicts among
regulators, legislation should be
passed that expands the powers of
depository institutions, spells out
the banking powers of nondepository institutions, and defines
the term bank. Indeed, the task
group indicated that its proposed
reorganization would complement
existing legislation dealing with
broadened powers and services for
depository institutions and simplification of procedures under the
Bank Holding Company Act.
Regulatory Fundamentals
The task group identified four
fundamental principles to be incorporated into any reorganization of
the regulatory structure. These
principles address the concern for
S.2134, the Depository Institutions Holding
Company Act Amendments of 1983, introduced
by Senator Proxmire, ranking minority member
of the Senate Committee on Banking, Housing,
and Urban Affairs; and S.2181, the Financial
Services Competitive Equity Act, introduced by
Senator Gam, chairman of the Senate Committee on Banking, Housing, and Urban Affairs.
safety and soundness, introduce
efficiency and flexibility, and provide the regulatory system with
the ability to monitor the evolving
financial environment.
First, the task group recognized
the need to continue the dual banking system. This is the state/federal banking system, which serves
as a system of checks and balances
and also allows states to act individually on banking matters and
thus test new ideas. Many of the
existing national powers and structures were authorized first at the
state level. Negotiable order of
withdrawal (NOW) accounts, for
example, were tested by a few
states before being authorized
nationwide by the Monetary Control Act. The concept of deposit
insurance was tested by more than
a half dozen states before the Federal Deposit Insurance Corporation (FDIC) was established
50 years ago.
Second, to eliminate inconsistencies, one federal agency should
handle the day-to-day regulation of
••
3. See Thomas M. Buynak, Gerald H. Anderson,
and James J. Balazsy, Ir., "Banking without
Interstate Barriers;' Economic Commentary, Federal Reserve Bank of Cleveland, March 12, 1984.
a.
b.
c.
d.
e.
I
II
r
I
--"\
III
!Ii
=-
I.-
(5
-
-.
,
Federal
Reserve
Board
-
-
-J I
I
,-
--
1J
I Department
i
of
Justice
'"" ""
...
-
II
J
I
~~.
~ll'llib
I
National banks
and
holding company
__
Securities
and
Exchange
Commission
State
Bank
Departments
!
~u~
d
=, =
c
~
.t
State banks
and
holding company
Only for public companies.
Antitrust enforcement only.
State examination is not approved as equivalently reliable to federal examination.
Examination of troubled institutions.
International class holding companies to remain subject to FRB supervision.
-
SOURCE: Office of the Vice President of the United States.
state-chartered banks. Under the
current regulatory system, the
Federal Reserve Board supervises
state-chartered banks that are
members of the Federal Reserve
System, and the FDIC supervises the federally insured statechartered banks that are not
mem bers of the Federal Reserve
System.' This divided authority
over similar institutions can cause
inconsistencies in what are deemed
to be permissible activities among
state banks. In the past year, for
example, the FDIC took a more
lenient view of securities activities
of state-chartered banks. Such
different treatments could give
state banks competitive advantages, depending on whether they
were regulated by the Federal
Reserve or the FDIC.
Third, to minimize overlapping
responsibilities, regulation of
individual banking institutions
(i.e., banks and their holding com-
••
4. The regulators and their functions are (1) the
Comptroller of the Currency (a bureau of the
Treasury Department), supervising all national
(federally chartered) banks; (2) the Federal
Reserve System, supervising state-chartered
banks that are members of the Federal Reserve
System and bank holding companies; (3) the
FDIC, supervising insured state banks that are
panies) should be integrated under
a single federal agency. Currently,
the Federal Reserve System regulates all bank holding companies,
even those whose subsidiary banks
are supervised by the Office of
the Comptroller of the Currency
(national banks) or by the FDIC
(state banks that are not members
of the Federal Reserve System).
Finally, the task group recognized that it was of critical importance to maintain the Federal
Reserve System's meaningful role
in the regulatory process. As
the nation's central bank, the Federal Reserve is responsible for
maintaining the stability of our
financial system. To carry out this
responsibility, in 1913 the U.S.
Congress authorized the Federal
Reserve System to operate the
nation's payments mechanism, to
maintain liquidity in the economy
through lending operations at the
discount window, and to regulate
and supervise key institutions in
not members of the Federal Reserve System;
(4) the Federal Home Loan Bank Board, regulating federally chartered S&Ls and savings banks;
and (5) the National Credit Union Administration, chartering, regulating, and insuring federal
and FSLIC-insured state credit unions.
domestic and international financial markets. These functions complement the Federal Reserve's
responsibility for conducting monetary policy. Maintaining a stable
and smoothly functioning financial
system requires direct and current
knowledge of the financial markets,
both foreign and domestic. The
Federal Reserve acquires such
knowledge through its role of
assuring compliance with regulations and uses this flow of information to conduct monetary policy.
Proposed Changes
The task group has proposed that
two federal agencies regulate banks.
A new Federal Banking Agency
(FBA) would regulate, supervise,
and examine all national banks; the
Federal Reserve Board (FRB) would
regulate, supervise, and examine
all state-chartered banks (member
and nonmember). The FBA would
be created within the Treasury
Department to carry out the current responsibilities of the Office of
the Comptroller of the Currency,
plus some new responsibilities outlined in the following discussion.
Bank Holding Companies.
The FBA would regulate bank
holding companies if the lead bank
were a national bank; the FRB
would regulate holding companies if
(1) the lead bank were a state
bank, or
(2) the holding company were in
an international class, i.e., the
holding company
(a) had a bank with foreign
branches or subsidiaries,
(b) had assets of more than
0.5% of aggregate bank
holding company assets, or
(c) was a foreign-owned
holding company.
There are approximately 50 such
international class holding companies operating in the United States .
••
5. State-chartered membership in the Federal
Reserve System is voluntary; national banks are
required to join the System.
The FBA and the FRB would need
to agree on any changes to existing
standards (e.g., capital levels) and
develop reporting requirements
through mutual consultation.
Under the task group proposal,
the FBA would determine the
permissible activities for all bank
holding companies and establish
the regulations governing the exercise of such powers. Currently, the
FRB exercises unilateral authority
in such matters. The FRB would
retain the right to disapprove regulations authorized by the FBA that
give bank holding companies new
powers if a two-thirds majority of
the Federal Reserve Board determined that the stability of the U.S.
banking system would be impaired.
State-chartered
Banks. Federal duplication of state supervisory efforts would be reduced
under a new regulatory program.
States could seek certification to
take over many of the current
federal responsibilities for statechartered institutions byestablishing a regulatory program equally
reliable to federal regulation. The
FRB, FBA, and FDIC would set the
criteria for certification. The FRB
would act on specific state applications for certification and would
oversee the process. Each Reserve
Federal Reserve Bank of Cleveland
Research Department
P.O. Box 6387
Cleveland, OH 44101
-
Address Correction Requested: Please send
corrected mailing label to the Federal Reserve
Bank of Cleveland, Research Department,
P.O. Box 6387, Cleveland, OH 44101.
Bank would establish a formal
State Advisory Council for interaction between the FRB (the sole
federal regulator) and the state
banking authorities.
FDIC. The FDIC would lose
its supervisory responsibilities,
operating solely as an independent
insurance corporation. The FDIC
would have the authority to grant
insurance, set risk-related premium
levels, revoke insurance, or take
other enforcement actions. The
FDIC would retain the authority
to examine a troubled bank in
conjunction with the bank's primary supervisor.
The SEC and the Department
of Justice. The regulation of all
securities activities of banks and
thrifts would be consolidated in the
Securities and Exchange Commission (SEC). Currently, the SEC and
the depository institutions' regulatory agencies monitor securities
activities. The Department of
Justice would enforce antitrust
laws applicable to banks and
thrifts, curtailing the involvement
of the financial regulators in antitrust cases.
Conclusion
The task group
yet been drafted
form. Although
tion is expected
proposal has not
into legislative
the administrato support the pro-
posal, the recommendation could be
modified or rejected altogether at
anyone of several junctures. The
financial regulatory system has
been the subject of much debate for
many years. In past years (1937,
1949, 1961, and 1971), Congress did
not act on reports recommending
changes to the financial regulatory
system. In 1984, however, we are
faced with a rapidly changing
financial environment. Market
forces and technology have altered
the financial industry and will continue to spur further deregulation.
Little by little, the financial
industry is being deregulated in the
same way that it became regulated.
Rather than continuing to act on
changes in driblets, Congress could
control the deregulation process
by carefully and thoroughly considering legislation that (1) expands
the powers and boundaries of depository institutions and (2) streamlines and strengthens the structure
of regulatory agencies. Comprehensive legislation to deregulate depository institutions has been introduced into Congress. The proposal
adopted by the Task Group on
Regulation of Financial Services
complements that legislation by
recommending reorganization of
the structure of regulatory agencies
to meet the demands of the evolving financial marketplace.
BULK RATE
U.S. Postage Paid
Cleveland,OH
Permit No. 385
Federal Reserve Bank of Cleveland
econo
co
Reorganizing the
U.S. Banking
Regulatory
Structure
by Sandra Pianalto
New financial instruments, new
breeds of financial institutions,
and different market conditions
have developed in the United
States since the mid-1970s. The
traditional product, geographic,
and institutional boundaries of our
financial industry have been questioned by advances in technology,
inflation, high and varying interest
rates, and an increasing demand
for more and better services from
financially sophisticated consumers. Several pieces of legislation
have been enacted to respond to
these many changes in the financial marketplace. Two pieces of
legislation-the
Financial Institutions Regulatory and Interest Rate
Control Act and the International
Banking Act, both enacted in
1978-placed domestic banks on
more equal footing with foreign
banks. The Depository Institutions
Deregulation and Monetary Control
Act of 1980 and the Garn-St Germain Act of 1982 established procedures to eliminate deposit interest-
••
Sandra Pianalto coordinates the government
a/lairs program lor the Federal Reserve Bank
0/ Cleveland.
The views stated herein are those 0/ the author
and not necessarily those of the Federal Reserve
Bank 0/ Cleveland or of the Board 0/ Governors
0/ the Federal Reserve System.
rate ceilings and gave financial
institutions broader product
powers. Yet, even with this widesweeping deregulatory legislation, many issues in banking structure remain unresolved.
While the goal of financial deregulation is to reduce the barriers to
competition and hence create a
more efficient marketplace, the
safety and soundness of the financial markets are still important
considerations in the ongoing process of deregulation. In December 1982 the Reagan administration
charged a task group to examine
the current regulatory structure and
whether it could meet the demands
of our evolving financial system.
Chaired by Vice President George
Bush, with Treasury Secretary
Donald Regan as vice chair, on January 31, 1984, the Task Group on
Regula tion of Financial Services
unanimously endorsed a proposal
to reorganize the federal agencies
that regulate commercial banks}
Reorganization and
Regulatory Relief
Banks and other depository institutions perform special functions
in our economy. While holding the
bulk of America's liquid savings,
these institutions also operate the
payments mechanism, supply much
••
1. In addition to Vice President Bush and Secretary Regan, the members of the task group
included the Attorney General, the director
of the Office of Management and Budget, the
chairman of the Council of Economic Advisers,
the assistant to the president for Policy Development, the Comptroller of the Currency, and
ISSN 0428-1276
April 9, 1984
of the credit used in our economy,
and serve as the conduit for monetary policy. The safety and soundness of our depository institutions
are necessary to ensure a properly functioning economy. Indeed,
the first banking regulations in
the United States were enacted in
response to bank failures. Repeatedly in the nineteenth century and
again in the Great Depression,
bank failures caused severe disruptions in our economy. As a result,
Congress erected regulatory barriers that prohibited commercial
banks from engaging in the risky
activities that led to earlier bank
failures. Deposit insurance and
banking regulations were enacted
to instill confidence in banks and to
protect the stability of the banking
system. However, today's financial system is more sophisticated
than the financial system of the
1930s, and yesterday's banking
regulations may no longer serve
today's needs.
To many observers, the U.S.
financial regulatory structure
seems to be a hodgepodge of complex rules and procedures, with
multiple regulators overlapping in
powers and responsibilities. Many
regulations resulted from crisis
situations and were adopted on a
piecemeal basis. Congress is currently considering proposals to
change existing bank regulations .
the chairmen of the Federal Reserve Board, the
Federal Deposit Insurance Corporation, the
Federal Home Loan Bank Board, the Securities
and Exchange Commission, the Commodity
Futures Trading Commission, and the National
Credit Union Administration.
@FedFRASER