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March 2, 1984
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Reorganization?
Following 14 months of deliberation, the
Task Group on Deregulation of Financial
Services headed by Vice President George
Bush recently made its recommendations
for changes in the federal bank supervisory
and regulatory structure. Over the years a
number of proposals for revamping this
structure have been advanced, including
several which found accommodation in
formal legislative proposals. They invariably
generated considerable controversy and,
with one exception, failed of adoption.
Nevertheless, in the view of the Bush
Task Group, the requirements of a rapidly
changing financial environment now justify
a modification of the present bank supervisory and regulatory apparatus. This Letter
will discuss the Task Group's recommendations, and some previous proposals for
reorganization.
The current system
When the Task Group commenced its investigations early last year, it noted that the
current system of Federal Regulation of
financial institutions and services is highly
complex and fragmented, the end-product
of a series of piecemeal changes made in
response to specific problems or perceived
needs as they arose over the last 60 years.
Under the present system, three separate
federal agencies regulate commercial banks
-the Office of the Comptroller of the Currency (in the Treasury Department), which
exercises primary supervisory and examination authority over some 4,600 national
banks, the FDIC, with primary authority over
some· 8, 900 state-chartered banks that are
not members of the Federal ReserveSystem
(plus some 330 mutual savings banks), and
the Federal Reserve, which exercises primary authority over approximately 1,000
state-chartered member banks.
Under the Bank Holding Company Act the
Fed also regulates all bank holding com-
panies (about 5,000 in number), including
those whose banks are regulated by the'
Comptroller and the FDIC. This includes
exclusive authority to define what activities
are so "closely related to ba'nking" or an
"appropriate incident thereto" as to be
permissibleforthe holding companies' nonbank subsidiaries. Under Congressional
mandate, the Fed also exercises authority
over Edge Act and international banking
activities, and has rule-writing authority
for a host of consumer protection laws such
as Truth in Lending and Equal Credit
Opportunity.
Finally, the Federal Home Loan Bank Board
and Credit Union National Association
exercise federal authority over the nation's
savings and loans and credit unions, respectively, while each of the fifty states has its
own authority for supervising and regulating
state-chartered banks and thrifts.
Bush proposals
The Bush Task Group's recommendations
would, in its estimation, result in a substantial modification of the current bank
regulatory system in a manner that would
"significantly benefit the public" by
reducing unnecessary overlap and duplication, waste and inefficiency. In conjunction
with pending legislative proposals, which
would permit a greater deregulation of
financial services, the Task Group also
bel ieves that adoption of its recommendations also would encourage innovation and
competition in the provision of financial
services.
The Federal Banking Agency
The main recommendation of the Task
Group is that a Federal Banking Agency
(FBA) be created to replace and assume the
responsibilities of the Comptroller within
the Treasury Department. It would supervise, examine and regulate all federally
chartered (national) banks and all but some
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- - - - - - - - - - - - - ,- - In addition, the Fed initially would continue
to regulate bank holding companies whose
lead bank is state-chartered, and initially
would assume responsibility (from the FDIC)
forthe supervision, examination and regulation of approximately 8,900 state-chartered
non,me!l1 ber banks (which together with
state member banks hold 40 percent of the
total assetsof banks in the U.s.).
35 of the largest or "international class"
bank holding companies whose lead bank is
a national bank, It also would assurne, from
the Board of Governors, authority to define
those non-banking activities that are permissible for a holding company's non-bank
subsidiaries,
For its part, the Fed would relinquish its
present rule writing authority but would still
be empowered to cornment on the proposed
"permissible activities" (and implementing
regulations) prior to their publication by the
FBA. And, by a vote of five of the seven
membersof the Board of Governors, it cou Id
veto the FBA's regulations if it determined
that their adoption would (1) impair the stability of the U.S. banking system, or (2) have
a seriously adverse effect on safe and sound
financial practices.
" Certification" program
The word "initially" is significant because
the Task Group recommendations postulate
that "to the maximum degree practical and
prudent," the Fed, in conjunction with the
FBA and FDIC, is to establish a "certification" program specifying the criteria and
standards under which state authorities
would assume the responsiblity for exercising current federal examination and
supervision authority ove'r state chartered
banks and bank holding companies.
The FDIC
The FDIC would be limited to activities
related to its deposit insurance function, and
would forego general supervisory authority
over state-chartered banks. However, it
would retain its authority to examine banks
for insurance purposes, keeping the authority to deny or revoke insurance, and to set
premium levels in relation to the riskiness of
a bank's assets.In essence, this means that
its examination activities would focus on
troubled banks.
The criteria and standards to be established
for "certifying" a state authority are to be
adopted by majority vote of a committee
consisting of the FBA, the FRB, and the
FDIC. The Board of Governors, "in consultation" -with the other two agencies, would
act on specific appl ications for certification
by a state authority, but the FDIC could veto
certification applications as well as the
Board's certification decisions, and also
could recommend the revocation of certification decisions at any time. Subsequent to
the certification, the Board would exercise
oversight authority including, in the case of
state regulation of bank holding companies,
the right to review and disapprove state
decisions which are considered to be inconsistent with federal law or regulation. In the
event or to the extent that a state is not
certified, the Fed would exercise responsibility for the federal supervision and
regulation of that state's banks and statechartered holding companies.
The Fed
The Fed would retain direct authority for
supervising, examining and regulating some
50 so-called "international class" bank
holding companies. These entities, which
include the 35 whose lead bank is federally
chartered and 15 whose lead bank is statechartered, are defined by the Bush Task
Group as those which (1) own or control
U.S. banks with foreign branches or
"material" foreign banking subsidiaries;
(2) have assetswhich aggregate more than
a half percent of the assetsof all (domestic)
bank holding companies; or (3) are a foreign
bank or a foreign holding company which
owns or controls either a U.s. bank or
a foreign bank with branches, agencies or
banking subsidiaries in the United States.
... and the thrifts
Finally, recognizing that in an era of rapidly
progressing deregulation and homogenization of financial services the differences
2
M ON ETARY POLICY OBJECTIVES FOR 1984
Federal Reserve Chairman Paul Volcker presented a report to the Congresson the Federal
Reserve's monetary policy objectives for 1984 on February 7. The report includes a
summary of the Federal Reserve's monetary policy plans along with a review of economic and financial developments in 1 983 and the economic outlook in 1984. Single or
multiple copies of the report can be obtained upon request from the Public Information
Department, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco, CA
941 20. Phone (415) 974-2246.
between commercial banks and thrifts
rapidly is being obliterated, the Task Group
recommends that the nation's savings and
loan associations continue to be subject to
supervision and regulation by the Federal
Home Loan Bank Board only if they maintain a given proportion (not specified) of
their assetsin the financing of housing.
Institutions Examination Council to solve
this problem. However, the Council
recently was criticized by the General
Accounting Office for not having achieved
its objectives of bringing about greater
uniformity in examination and supervisory
procedures and reporting forms among its
member agencies.
In summary, while none of the existing
federal banking agencies would be eliminated, adoption of the Task Group's
recommendations would result in a substantial reallocation of the three banking
agencies' present functions, including a
reduction from three to two in the numberof
agencies involved in day-to-day supervision.
Initial response
The Task Group's recommendations by all
counts will be drafted into legislative form
for submission to the Congress fairly soon,
and wi II have the endorsement of the Administration. Chairman Volcker has said that
the recommendations "adequately reflect
the concerns of the Federal Reserve" for
maintaining an effective presence in the
supervisory and regulatory process. This is
essential, he noted, to the implementation of
the System's other responsibi I ities, inasmuch as monetary policy and supervisory
and regulatory policies all affect bank
liquidity and the viability of the financial
structure.
Pastefforts at reform
Recent history is littered with the bones
of numerous proposals to revamp the supervisory and regulatory structure. Consolidation of bank supervisory and regulatory
functions into the Fed was recommended in
1949 by the Hoover Commission and by the
Commission on Money and Credit in 1961 ,
except that the latter advocated a separate
agency to supervise all federal thrift institutions.ln 1962, President Kennedy's Advisory Committee on Banking (the "Saxon
Committee") recommended that the Fed be
divested of aI/ supervisory and regulatory
responsibilities except those pertaining to
monetary policy. In the same year, Governor Robertson proposed the establishment
of a single Federal Banking Commission to
handle all supervisory and regu latory
matters (on which the Fed would have one
member), thereby limiting the Fed to the
conduct of monetary pol icy.
Nevertheless, the denouement of the Task
Group's recommendations is uncertain, as
the reception they have received in the
Congress thus far has been less than overwhelminglyenthusiastic.
Senate Banking Chairman Jake Garn (R-UT)
credits the proposals as a "heck of a good
starting point," but questions the need for
the Fed to be directly involved in regulatory
matters in order to conduct monetary policy; he also argues that Congress should
decide what services institutions should be
allowed to offer "before we decide who
regulates." The Senate Banking Committee's ranking minority member, William
Proxmire (O-WI), has called the Task Group
proposals "an ill-disguised power grab over
bank regulation by the Reagan Administration." Others still ask "what consolidation?", while yet others appear inclined
toward the traditional view, "if it isn't
broken, don't fix it."
Verle B. Johnston
In 1974, Chairman Burns of the Board of
Governors called the bank supervisory
system "a jurisdictional tangle that boggles
the mind" but warned of the threat to innovation and flexibility that would result from
the concentration of power in a single
regulatory agency. The Financial Institutions
Regulation Act, enacted late in 1978, established the inter-agency Federal Financial
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BANKING DATA-TWELFTHFEDERAL
RESERVE
DISTRICT
( Dollar amounts in millions)
SelectedAssetsand Liabilities
LargeCommercialBankS
Amount
Outstanding
Change
from
Changefrom
yearago
Dollar
Percent
Loans,LeasesandInvestments'2
loans andLeases
1 5
Commercial and Industrial
Realestate
loans to Individuals
Leases
U.s. Treasury and Agency Securities 2
Other Securities2
Dueto reportingdelays
tableis not
availablethis week.
Total Deposits
Demand Deposits
DemandDepositsAdjusted3
4
Other TransactionBalances
Total
Balances
Money Market Deposit
Accounts-Total
Time Deposits in Amounts of
$100,000or more
Other Liabilities for Borrowed MoneyS
WeeklyAverages
of Daily Figures
Reserve'Position,All ReportingBanks
ExcessReserves
(+ l/Deficiency(-)
Borrowings
Net freereserves(+ llNet borrowed(-)
Weekended
Weekended
Comparable
period
Includeslossreserves,
unearnedincome,excludesinterbankloans
Excludestradingaccountsecurities
Excludesu.s.
governmentanddepositoryinstitutiondepositsandcashitems
ATS,NOW,SuperNOW andsavingsaccountswith telephonetransfers
5 Includesborrowingvia FRS,TI&L notes,FedFunds,RPsandothersources
6 Includesitemsnot shownseparately
Editorialcommentsmaybeaddressed
to theeditor (GregoryTong)or to theauthor.... Freecopiesof
FederalReservepublicationscanbe obtainedfrom the PublicInformationSection,FederalReserve
8ankof SanFrancisco,P.O.Box7702,SanFr.;tncisco
94120.Phone(415)974-2246.
1
2
3
4
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