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LM101918
Federal Deposit lnswance Corpwation
Federal Reserve System
C3mpt:oller
of the Currency,
Department
of the Treasury
.
cmx7-2
APRIL 14, 1977
Contents
-------Page
f
r
CHAPTER
1
INTRODUCTION
1
2
A CSRONOLOGYOF PROPOSED CHANGES
I!J RECUT.4T'ZRYSTRUCTURE
5
3
ARGUMENTS FOR AND AGAINST ONE CONSOLIDATED
AGENCY
Arguments
for
cansolfdation
Increased
effectiveness
in handling
problem or failing
banks
Increased
effectiveness
in dealing
with
ballk holding
companies
More efficient
operation
Increased
accauntabllity
to the
Congress and the public
More uniform
treatment
of a!.: banks
Integrate
bank supervision
and monetary
policy
Arguments
--.
I
12
against
15
20
23
26
27
31
consolidation
Removing a system that wcrks well
Excessive
centralization
of power
Restricting
innovativeness
Weakening the dual banking system
37
39
41
44
4
A FEDERAL DANK EX~.I:iNATION COUNCIL
49
5
HOW SANKERS VIEW F.%XlLATORY STRUCTURE
56
.---
-.
CHAPTER 1
‘
I
i
’
INTRODUCTION
There has been much public
debate by congressional
committees,
trade associationsp
Goverment
advisory
groups,
academicians,
and the regulators
themselves
on whether the
current
Federal structure
for regulating
commercial
banks
should be changed.
We have recently
completed
a study of the effectiveness of the Federal Deposit
Insurance
Corporation
(FDIC),
the Federal Reserve System (FRS), and the Office
of the
Comptroller
of the Currency
(OCC) in supervising
commercial banks.. ("federal
Sunervision
of State and National
Banks," OCG-77-1, and "Highlights
of a Study of Federal
Supervision
OF: State and National
Banks," OCG-i7-la,
Jan. 41, r977.)
The GAO study was undertaken
at the request of several
congressional
committees.
Primarily,
we were asked to evaluate the agencies'
efforts
to (1) identify
unsound conditions
and violations
of laws and regulations
in banks, and (2) cause
bank management to take corrective
actions,
We were not asked
to determine
whether the Federal bank regulatory
agencies
should be reorganized.
Thus, we have not attempted
to
determine
the "ideal"
organizational
structure
for regulating
banks. During the course of our study, however, we gained
some pe:spective
on the debate about the need tc reform
the present system.
For example, our report pointed
out several areas where the three agencies should be
working together
more closely.
.
h
As part of our study , we reviewed numerous studies,
congressional
hearing
records and reports,
and other documents pertaining
to the-Federal
bank regulatory
structure.
The purpose of this paper is to briefly
summarize these
discussions
and proposals
for restructuring
and to present
our observations.
TKE EXISTING REGULATORY STRUCTURE
The discussion
in this paper is primarily
limited
to
TDIC, FF.SI and WC--the
three Federal agencies that regulate
and supervise
commercial
banks. Hob<:ver, some proponents
of change have also included
other Federal regulatory
agencies
in their proposals:
--The Federal Home Loan Bank Board, which charters,
regulates,
and supervises
savings and Loan associations,
and directs
the operations
of the Federal
Savings and Loan Insurance
Corporation
and the
Federal Home Loan Mortgage Corporation.
--The Yational
Credit
Union Administration,
charters1
insures,
and supervises
Federal
unions and may also insure State-chartered
unions.
which
credit
credit
FDIC, FRS, and OCC have similar
supervisory
responsibilities.
Their structure
is also similar,
but FRS is less
centralized.
The agencies receive no congressional
appropriations
but rely essentially
on the banks they supervise
and their
investments
in U.S. Government securities
for
operating
funds.
OCC was established
in 1863. The Comptroller
of the
Currency,
who performs his duties
under the ganeral direction of the Secretary
of the Treasury,
is appointed
by the
President
and confirmed
by the Senate for a term of 5 years.
To carry out .its responsibilities,
OCC has approximately
based in 14 regional
offices
and 143
2,000 bank examiners,
subregional
offices.
FRS was established
in 1913 to carry out monetary policy
and improve the supervision
of banking in the United States,
as well as provide
various
central
banking services
for banks
FRS bank supervision
is carried
on
and the U.S. Government.
by the Doard of Governors and the 12 Federal Reserve banks
and their
25 branches.
The Reserve banks operate as relatively
autonomous units with their
own staffs
and budgets,
and
each has a supervision
or examination
department.
FRS has
about 700 bank examiners.
FDIC is an independent
agency created
depositors
against
losses resulting
Managemen:
of FDIC is vested in a Board of
of three
members, one of whom, by law, is
f tne Currency.
It has 14 regional
offices
sub-offices.
small
-.
.
,
The three agencies have several
respect to banks for which
they
are
--Eionitor
and examine
are seing
operated
banks
legally
-
in 1933 to insure
from bank failures.
Directors
consisting
the Comptroller
and about 150
functions
the
primary
to determine
and soundly,
2 -
in common with
supervisor:
.whether
they
--Approve
or deny applications
changes, such as branches,
.
tory
for structural
and other
mergers, and relocation.
--Administer
securities
(under the Securities
registration
requirements
Exchange Xct of 1934).
In addition
functions.
each agency
As supervisor
has certain
of national
--Charters
national
unique bank regulabanks the Comptroller:
banks.
--Issues
rules and regulations
governing
structure
of national
banks and their
investment
practices.
--Determines
when national
appoints
FDIC to be the
The Federal
--Admits
the corporate
lending
and
banks become insolvent
and
receiver
for such banks.
Reserve:
State-chartered
banks
to membership
--Determines
margin requirements,
of credit
that may be extended
equity
securities.
--Establishes
maximum interest
may pay on savings and time
--Regulates
the foreign
--Regulates
the activities
that is, the amount
to purchase or hold
rates that
deposits.
activities
in FRS.
of all
of bank holding
member banks
member banks.
companies.
--Establishes
rules for all banks to disclose
interest
rates and terms of repayment ("Lruth
in lending").
FDIC is
authorized
to:
--Approve
or deny applications
from State-chartered
banks for deposit
insurance.
National
banks receive
FDIC insurance with their
charters
as do State banks
with FRS nembsrship,
and therefore,
do not require
FDIC approval.
--Act
as receiver
for
all
insured
banks which
close.
--Operate
special
deposit
insurance
national
banks
u? to 2 years to provide
limited
banking services
communities
where banks have closed.
for
to
-3-
‘s%
.
_.-
--Purchase
assets from, make deposits
in, or extend loans
tc, any insured banks which have closed or are in danger
of: clo5ing.
As of December 31, 1975, 4,744 national
banks and 9,640
State banks were insured by FDIC.
All national
banks and
1,046 State banks were members of FRS. FDIC has statutory
authority
to examine all insured
banks, FRS has statut0r.y
authority
to examine all member banks, and OCC has statutory
authority
to examine all national
banks. As a matter of practice
FDIC examines only i;lsured State banks that are not members
of FRS, FRS examines 0.11~ State member banks, and OCC examines
national
banks.
-4-
CEIAPTER 2
RESTRUCTURING PROPOSALS
.
Since
restructuring
possibilities:
the passage
proposals
of the Federal
have centered
Reserve Act in 1913,
on the following
1.
Consolidate
Federal
Reserve System.
bank supervision
in the Federal
2.
Consolidate
supervision
in the Federal Deposit Insurance Corporation
since a grincilal
purpose of bank
examination
is protecting
the insurance
fund.
3.
Consolidate
supervision
in the Department
of the
Treasury as the "logical"
center of financial
policymaking
in the Federal Government.
4.
Consolidate
supervision
in a new agency
"Federal
Bank Commission.*
5.
Consolidate
supervision
of all State banks in a new
agencyp retain
the Office
of the Comptroller
as
supervisor
of national
banks, and keep the Federal
deposit
insurance
program separate from the two
supervisory
agencies,
or establish
an overall
coordinating
council.
such as a
There are also variations
of the above restructuring
possibilities
which, for example, retain
FDIC as a
separate agency and consolidate
OCC and FRS bank examination
activities
into a new agency. To consolidate
bank supervision
generally,
and examination
specifically,
in one new or
existing
agency does not necessarily
mean that the other
agencies must be abolished.
At least one proposal
has
called
for consolidating
examination
in FDIC but retaining
FES and OCC by redefining
their
supervisory
functions.
.
/
Finally,
there are loss drastic
proposals
which seek to
improve coordination
and cooperation
between the agencies.
One recent proposal
was to create a Fed,:ral Bank Examinaticn
Council
and leave unchanged the present Federal bank regulatory
agencies.
The Council would establish
uniform
Federal bank
examination
standards
and procedures
and recommend furtner
improvements
in bank supervision.
(See ch. 4.)
The following
chart summarizes many of the restructuring
proposals
which have been made over about the last 60 years.
Following
this char?. each proposal
is briefly
described.
-5-
.
SUMMARYOF RESTRUCTURINGPROPOSALS
Centralize
Policymaking
All
or Some Federa% Sank Supervision
or
in One of The Following Agencies
FRS FDIC
--
I.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14..
15.
16.
17.
18.
19.
20.
21.
22.
23.
1919-21--Legislative
proposals,
66th and 67th Congresses
1937 ---Brownlow Committee report
1937--%ookings
Institution
reFort
1938--Legislative
proposal,
35til Congress
1339--Legislative
proposals,
76th Congress
1949--Hoover Ccnmission report
1961--Commission on Money
and Credit report
1962--0CC hdvisory Committee
on aanking report
1962--FDIC Chairman Cocke's pla?
1963--Legislative
proposal,
88th Congress
1965--Legislative
proposal,
89th Congress
196S--Legislative
proposal,
89th Congress
1965--Independent
Bankers
Association
of America plao
1969--Legislative
proposal,
9lst Congress
1971--i-iunt Commission reTort
1974--FRS Governor Sheehan's plan
197%-FDIC Chairmar. Wille's
,lan
1975-- Financial
Institutions
and
Nation's
Economy r=xommendation
1975--Legislative
prcyosal,
94th Congress
1976--Legislative
proposal,
94th Congress
1976--Legislative
proposal,
94th Congress
1977--Legislative
proposal,
95th Congress
1977--Legislarive
prcposal,
95th Congress
X
X
Treasury
Bank
Comission
X
X
X
X
X
X
X
X
X
X
New
Agenties
PROPOSALS TO RESTRUCTURE
FEDEFAL BAfl3K SUPERVISIC?
1.
1919-192s.
Legislative
proposals,
66th and 67th Congresses.
Under the Federal Reserve Act of 1913# national
banks
automatically
became members of the new Federal Reserve
System.
Supervision
of Reserve
member banks was thus divided
between two Federal agencies.
Between 1919 and 1921 at least
four bills
were introduced
in either
the Hc,use or Senate to
end this division
of supervisory
responsibility
by abolishing OCC and transferring
its examination
and supervisory
functions to FRS.
2.
1937.
Brownlow
Committee
report.
The President's
Committee on Administlative
Management
(Brownlow Committee)
recommended that each Government corporation
(such as FDIC) "should also be placed under a supervisory
agency in the appropriate
department."
Presumably FDYC would
have been placed in the Department of the Treasury.
Since OCC
was already a bureau within
the Department of the Treasury,
this Kecommendation would have per%ly centralize?
bank supervision
in Treasury.
FRS would have continued
as a separate
agency.
a
Brookings
Institution
report.
3.
1937.
--E
A Brookings
Institution
report,
"Investigation
of Executive Agencies of the Government,”
took the view that bank
examination
WLS more important
to FDIC than to OCC or FRS
hecause of the need to protect
the insurance
fund.
It
recommended abolishing
OCC. All insured banks, including
membe:s cf FRS, would have been examined by FDIC.
FDIC
would have chartered
national
banks subject
to an FRS veto.
FDIC would have had similar
veto power over State banks wishing to join the Federal Reserve System. while the supervisory
functions
of FRS would have been transferKed
to FDIC, FRS
would have had access to the examination
rsgorts
of Reserve
member banks, and would have been permitted
to make special
purpose examinations.
4.
1938.
Legislative
proposal,
',Sth
Congress.
A Senate bill
was introduced
which would have transferred
all the bank supervisory
functions
oLc ?RS and FDIC co OCC, which
would have been renamed the "Federal
Bureau of Examination
and Supervision"
within
the TreasuKy Department.
The deposit
insurance
function
of FDIC would have been vested in a "Federal
Bureau of Insurance,"
also within
the Treasury Dspartment.
-7-
5.
1939.
Legislative
proposals,
76th Congress.
A House bill
was introduced
which would have abolished
A senate bil?
OCC and transferred
its functions
to FDIC.
was introduced
to give the examination
functions
of FRS and
OCC to FDIC.
6.
1949.
Xoover
Commission
report.
The various
task forces of the Commission
tion of the Executive
Sranch of the Government
mission)
made the following
recommendations:
on Organixa(Hoover Com-
--The Task Force on Fiscal
Budgeting
and Accounting
Activities
suggested that OCC "more properly
belongs
under the Federal Reserve Board than in the Treasury
Department."
---The Task !?orc.\ on Lending Agencies suggested that
PD7C functiors
be transferred
to FRS. The task force
stated that,
if it
diti not study OCC, but its rept,rt
had, it would have suggested transferring
OCC functions
also to FRS.
--The :ask Force on Regulatory
Conmissions
suggested
th?. all Federal bank supervision
be comoined, preferat,::, in FRS.
The adoover Commission itself
recommended that FDIC be
transferred
to the Trea-ury
Department.
The Commission also
recommended creating
a Xational
Monetary and Credit
Council
to coordinate
bank supe:vision
by the Treasury
Department
and FRS.
7.
1961.
Commission
on Money and Credit
report.
The Commission on Money and Credit,
established
by the
Committe*
for Economic Development,
a Frivate
study group,
recommended that the supervisory
functions
of OCC and FDIC
be transferred
to PRS.
a,
OX Advisory
Committee on Banking report.
--1962,
Tne Comptroller
of the Currency's
Advisory
Committee on
3anking recommended that the sole Federal requlatary
authority
over insured State banks be vested in FDIC, >thich would be
reorganized
under a single
administrator
and transferred
to
the Treasury
Department.
Authority
to aoprove branches of State
banks would be vested in State ,,uthorities.
The Committee's
-
--
8 -
,
report did
information
function.
not discuss
how FRS would obtain bank examination
which might be needed to discharge
its monetary
9.
FDIC Chairman
1962.
Cocke's
p lan.
The Chairman of FDIC, Erle Cocke, suggested that FDIC
be given overall
responsibility
for examining
all federally
insured banks.
FDIC would have alternated
with OCC for examining national
banks and with State banking authorities
for State
insured banks. FRS would have mad? no examinations,
but it
would have received
examination
reports
for all Reserve member
banks.
10,
12, and 14. 1963, 1965, and 1969.
Legislative
proposr;lr,
and 91st70ngresses.
_ a-- 88=89th,
.- ,'
Various House a.ld Senate bills
were considered
which
would have combir,ed the examinaticl
2nd supervisory
functions
of FRS, FDIC, and CCC in a new agency called
the Federal Banking Commission.
11.
1965.
Legislative
orooosai - 2 --_Rjt'l Congress.
A House bill
was introduced
which would have transferred
the bank exe.n).,ation
s,.d supervision
function
cf FRS, FDIC,
and OCC to ??r Secretary
oI the Yressury.
13.
-1965.
indesendent
*----
15.
1971.
Hunt Commission
Bankers
X;ociation
of America plan.
-The Independent
Bankers Association
of America recommended
that FRS be relieved
of its examination
functions,
which apparently would have been transferred
to FDIC. FDIC would have
alternated
with OCC for examining national
banks and with
State banking authorities
for State insured banks.
reuort.
The Presidential
Commission on Financial
Structure
Regulation
(Hunt Commission)
recommended establishing
--an "Administrator
OCC's supervisory
of Nstional
Banks"
responsibilities,
and
incorporating
--an "Adminis:: rator of State Banks" incorporating
and FDIC's supervisory
responsibilities,
and
--an "Federal
Deposit Guarantee Administration"
ating FDIC's insurance
responsibilities.
FRS's
incorpor-
-9=%
_--
Unlike various
a multi-member
to the single
16.
1974.
proposals
to ves t supervisory
authority
in
commission,
the Bunt Commission was attracted
administrator
idea.
FRS Governor
Sheehan's
plan.
A member of the FRS Board of Governors,
John E. Sheehan,
suggested that all Federal bank examination
and supervision
be centralized
in the Federal Reserve System.
Governor Sheehan
cited the structure
of FRS, “with its seven-man Board of
Governors --with
long terms" and its insulation
from “short-run
political
pressures"
as one reason for locating
regulatory
responsibility
in FRS.
17.
1975.
FDIC Chairman
Wille's
.plan.
The Chairman of FDIC, Frank Wille,
suggested that the
examination
and supervisory
functions
of FDIC and FRS be
merged into a new agency under a single
administrator.
He
also ?roposcd a five-member
Federal Banking Board with power
to implement a "uniform
national
policy"
for bank regulation.
18.
1975.
FINE study
report.
A study conducted by a subco.mmittee of the House Committee
on Banking,
Currency and BoJsing,
entitled
"Financial
Institutions and the Ration's
Economy~ (FINE\,
recommended establishing
a "Federal
Depository
Institutions
Commission"
which would have
combined the supervisory
and examination
functions
of FDIC,
FRS, OCC, the Federal Hone Loan Bank Board, arid the National
Credit
Union Administration.
19.
1975.
Legislative
proposal,
94th Congress.
A Senate bill
(S. 2298) was introduced
which would have
combined the examination
and supervisory
functions
of FRS, FDIC,
and OCC in a nev agency called
the Federal Bank Commission.
20.
-
1976.
Legislative
proposal,
94th Congress.
The Financial
Reform Act of 1976, derived
from hearings
held on the 1975 FINE study, was introduced
as a Eouse Banking,
Currency and Housing Committee print.
The act would have
established
a Federal Banking Commission,
merging OCC and
FRS supervisory
responsibilities,
including
those for bank
holding
com?anles.
FEIC would havt continued
as an independent
agency.
- 10 -
21.
1976.
Legislative
propasal,
94th
Ccngress.
A Senate bill
(S. 3494) was introduced
which would have
The Council
established
a Federal Bank Examination
Council.
would 'nave rrescribed
uniform
standards
and procedures
for
conducted schools for bark examinFederal bank examinations,
ers, developed uniform
reporting
systems,
and made recommendations
for uniformity
in other supervisory
matters.
I
22.
1977.
Legislative
proposal,
95th Congress.
Resub=lissif>n of S. 3494 which would
Bank Examination
Council,
as S. 711.
23.
1977 D
Legislative
pr3Dosa1,
95th
establish
a Federal
Congress.
A Senate bill
substantially
identical
to S. 2298 was
This
introduced
to establish
a Federal Bdnk Commission.
bill
(S. 684) would, in the words of its sponsor,
W***
preserve
and strengthen
*** the dual banking system ***n
by accepting
bank examinations
made by State authorities
in lieu of Commission examinations.
- 11 -
--
CHAPTER 3
ARGUMERTS FOR AHD AGAINST
A SIKGLE AmY
Many proposals
have been made to restructure
the
bank
regulatory
system, usually
in one existing
agency (for
example, the Department
of the Treasury)
or a new agency,
such as a "Federal
Bank Commission,"
This chapter discusses
each principal
argument made in
recent years for and against
consolidating
the Federal bank
regulatory
agencies.
For each argument, we have paraphrased
or excerpted
statements
supporting
and opposing the argument
and, in some cases, added our own observations.
In the
interest
of brevity
we have not cited all who expressed views
on the arguments but rather
have selected
a few to summarize
the salient
features
of each argument,
We reviewed more than 100 statements
a2d articles
on
this
issue.
Many of them are from the following
volumes,
which are referred
to in the text as shown below:
Senate Committee on Banking,
Housing and Urban
Affairs,
"Compendium of Major Issues in Bank
Regulation,"
Aug. 1975; cited as i975 Compendium.
"Federal
Bank Commission Act,"
hearings
during Ott: and Dee, 1975; cited as 1975 hearings
on
Federal Bank Commission.
hearings
hearings
Sank Com..ission Act--1975,"
. "Federal
during Feb. and Mar. 1976; cited as 1976
on Federal Bank Commission.
House Committee on Banking,
Currency and Bousing,
Subcommittee
on Financial
I:istitutions
Supervision,
Regulation
and Insurance,
"Financial
Institutions
and
the Nation's
fco;,omy (FINE) Discussion
Principles,"
hearings duri:?g Dec. 1975 and Ja:). 1976; cited as
1975-76 hearings
on FINE discussion
principles.
L.
during Mar:
Reform Act.
"The Financial
Reform Act of 1976," hearings
1976; cited
as 19?6 hearings
on Financial
Ke also reviewed other materials
which are cited
in full
the text.
Our recent report
on the agencies (OCG-77-l)
also cited.
- 12 -
I _-
in
is
Included
are statements
made by persons who, at the
time of their
testimony,
were officiais
of one of the three
Federal agencies or a State banking authority.
We have
identified
them accordingly.
Statements
made by former
supervisory
officials
are not so identified.
Former r'3Ic'
Chairman Wille
summarized arguments for and against
colxsolidation.
These arguments,
however, did not necessF,riiy
represent
his own views and are referred
to as "cited
by Wille,”
The principal
argtments
for and against
consolidation
of the regulatory
system are listed
below and discussed
in
more detail
in the remainder of this chapter.
ARGUMENTS WR CCNSOLIDATION
1.
A consolidated
agency would avoid the present system's
problems in dealing
with problem or failing
banks.
The problems commonly cite,d relate
to (1) a need for
the agencies to coordinate
efforts,
which may require
considerable
timr and effort,
(2) the different
supervisory
goals and tools of the three agencies,
and (3)
a reluctance
on the part of the regulators
to take
effective
action
against
banks with problems for fear
that these banks will
change supervisors.
2.
A consolidated
agency would avcid the division
of
supervisory
responsibiiity
where, in some cases, one
agency is responsible
for a bank holding
company
and another agency or agencies are responsible
for
the subsidiary
banks.
3.
A consolidated
agency would be more economical
and efficient because many of the existing
forms of duplication
would be eliminated.
4.
A consolidated
agency would be more accountable
Congress ahd the public
because congressional
oversight
would not be fragmented.
5.
A consolidated
agency would result
in more uniform
regulation of banks because all banks would be subject
to only
one, rather
than three,
regulators.
6.
Bank supervision
and monetary policy
should be integrated
because (1) knowledge about the banking industry,
and
ability
to influence
that industry,
are essential
to
the iormulation
of monetary policy
and (2) FRS has
iender-of-last-resort
responsibility
for many banks it
does not supervise.
- 13 -
to the
ARGWETTS AGAINST CONSOLIDATION
c.
7.
Problems in the banking industry
are not caused by the
tripartite
yegulatory
system and could be resolved
by
better
coordination,
which would avoid needlessly
disrupting
the system.
8.
Consolidation
would result
in excessive
centralization
of power in one agcncyp leading
to overzealousness
in
protecting
existing
banks, adversely
affecting
competition
among banks, and discouraging
banks from
being innovative.
9.
The present system promotes innovativeness
on the part
of bank regulators
to devise better
administrative
and examining
techniques
and avoids an organizational
conservatism
that could occur under a consolidated,
non-competitive
environment.
10.
The present system preserves
dual hanking by allowing
banks to chose their
Federal regulator
and thus providing
protection
against
rigid
or arbitrary
regulation.
.
- 14 -
ARGUMENTS FCR CO!?SOLIDATIOM
1.
Increased
effectiveness
in handling
nroblem or failinq
banks
Supporting
views
Even though each bank is primarily
supervised
by one
instances
all three Federal agencies
agency, in certain
may become involved
in handling
a problem or failing
bank.
This multiplicity
can create several problems.
These problems
relate
to (1) the considerable
time and effort
required
to coordinate
the agencies'
efforts.
(2) the different
supervisory
goals and tools of the three agencies and (3)
a reluctance
on the part of regulators
to take effective
action
against
banks with problems for fear that these banks
will
change regulators.
The agencies have different
tools for co?ing with
failing
banks, which makes it difficult
to ccnsider
all alternatives
concurrently.
OCC has more flexibility
in arranging
a national
bank merger which requires
no Federal assistance;
FRS can provide
loans to help maintain
a bank's
liquidity;
and EDIC can Drovide other types of financial
assistance.
(Cited by' FDIC Chairman Willc,
1975 Compendium, p. 1016.)
An FRS Governor cited
the 1974 failure
of Franklin
?aational Sank as a concrete
example which illustrated
one
in the current
system. The agencies
of the problems inherent
had different
goals: OCC, the bank's primary
regulator,
was concerned about the financial
soundness of the bank:
FDIC was concerned about the threat of loss 'io the insurance
fund; and FRS was concerned about the $1.7 billion
it had
lent the bank and possible
effects
on the Nation's
economy.
of Franklin
National
He concluded
that the ultimate
dispos ition
Bank through merger was "an admirable
piece of financial
craftsma.lship,"
although
the
Drocess
took
too
long.
In
his
estimation,
the "need to coorhinate
each step among thres
each with its own separate law, was
Federal regulators,
a primary
culprit
in the exasperating
delay."
(pp. 1026-28.)
(FRS Go~'F nor Sheehan, 1375 Compendium).
:n the opinion
of some the basic cause of Froblems
which they believe
exist
with the present
system-a-such as
ineffectiveness
in handling
problem or failing
banks and
in the treatment
of all ban,;s--is
the lack of uniformity
attributable
to the subtle pressure
that may ‘be exerted
by banks on their
regulators
to be lenient
in their
actions
Since banks are able to switch from one
against
banks.
- 15 -
it is
regulator
to another,
and State banki,Tg agencies
banks to the least restrictive
there is competition
among
supervision
of banks, (This
to as "competition
in laxity'l
on pages 27 to 30. )
believed
by some that the Federal
would not want to lose their
regnlator
and, as a result,
the agencies to be lax in their
condition
has been referred
and is discussed
in more detail
As "competition
in laxity"
relates
to the effectiveness
of the Federal agencies in dealing with problem and fai.
247
banks, a former FRS b,overnor contended that a primary
factor
in recent failures
was
"an institutionalized
reluctance
on the part of
regulators
to pull the rug out frcrm under their
own banks.
To do so causes unhappy tremors among
the other banks in their
sphere and puts the
particular
regulator
at a psychological
and
political
disadvantage
with its fellow
regulators,
with the Congress and with the industry."
(J.L. Robertson,
1975 hearings
on Federal Bank
Commission,
p. 9.)
The Chairman
and urban Affairs
of the Senate
stated:
Committee
on Banking,
Housing
"I might say in the past 4 years we have had four of the
largest
bank failures
in the history
of the Nation.
All
of these have been national
banks.
There's
evidence that
these failures
could have been avoided if the Comptroller
had taklzn a tough early
stand to prevent unsound banking
practices
in those institutions.
This regulatory
laxity
on the part of the Office
of the Comptroller
has largely
been responsible
for what Chairman Burns of the Federal
Reserve has referred
to as a competition
in laxity
among
the Federal bank regulators."
1976
(Sen. Proxmire,
haarings
on Federal Bank Commission,
p. 61.)
Objecting
views
The current
system has worked well,
not only since FDIC
was established
over four decades ago, but even during the
most recent haif-dozen
years.
For example,
--fess
than 120’banks
have failed
since 1944, a r?te of
f-ilure
far below that of businesses
in general.
(Haywood,
1976 hearings
on Federal Bank Commission,
p. 151.)
- 16 -
--Since
1933, demositors
have lost less than- $22
million
from the closing
of insured banks.
(Comptroller
of the Currency Smith,
1976 hearings
on Federal Bank Commission,
p. 112.)
--Depositors'
less than
(Raywood,
losses since 1934 have been limited
1 percent of total
deposits
in failed
ibid.,
p. 151.)
An FDIC group
reviewing
the
restructuring
issue
to
banks.
concluded:
"**+ the existing
acency structure
was not a significant factor
in any Of the recent failures
which have
been so widely publicized
and that a different
bank
agency structure
at the Federal level would not
necessarily
have prevented
any of them."
(Cited by FDIC
Chairman Xille , 1975 Compendium, 9p. 1012-13.)
Similarly,
the American 3ankers Association
tes'cified
"a
centralized
super agency is unlikely
to be more efficient
or
more effective
than the current
structure
in preventing
bank
failure."
(1976 hearings
on Federal Sank Commission,
D.
190.)
The Conference
of State Bank Sqervisors
testified:
"***the
recent widely publicized
bank failures
have
not been due to deficiencies
inherent
in our decentralized
banking structurep
nor is there reason to
believe
ttiat such failures
would not have happened
within
the framework of a centralized
bank regulatory
structure
such as contemplated
in S. 2298." (Ibid.,
p. 203.)
The Connecticut
Bank Copaissioner
stated:
"I worald
not
attribute
the
recent forced mergers of a
number of large banks to a failure
in the present
federal
regulation
system.
In fact,
comparing the
current
experience
to that of ower ten years ago when
the San Francisco
National
Bank failed,
I would say
that the federal
regulatory
agencies have come a long
way in handling
failing
banks.
The San Francisco
National
Bank was liquidated
largely
because the
- 17 -
a
,
.’
agencies could not find a merger
partner.
Today;
banks, many tames the size of San Francisco
National,
are merged into sound banks."
(Connell,
1976 hearings
on Federal Bank Commission,
p. 116.)
(The "competition
in laxity"
theme has been rejected
by
some as lacking
substance.
Others claim that,
to the extent
that there is competition
among the agenciesl
it encourages
them to improve their
operations.
These views are
discussed
in detail
on pages 41 to 43&)
Our observations
In our stl:dy of the three agencies,
we reviewed
in
detail
examination
reports
and related
correspondence
for
30 of the 42 banks that ciosed between January 1971 and
June 30, 1976. (GCG-77-1, ch. 9.) We did not find direct
evidence that the present regulatory
structure
had created
problems in dealing
with these banks. We did, however, note
a tendency by each supervisory
agency to delay formal action
until
a bank's problems had become so severe that they were
diffictilt
to correct.
Reasons given by the
more aggressive
in taking
--The public
publrcity
--Formal
regulatory
agencies for
formal actions
were:
might Learn of a formal
could hurt the bank.
actions
action
-...
.
I
and this
are cumbersome.
--Agency officials
may have been too zealous
to minimize
governmental
interference
with
decisions,
--In prior
years
and unfamiliar
not being
in seeking
management
the legal powers were relatively
to agency personnel.
new
There was no ind.!cation
from the records we reviewed that
the regulators
were reluctant
to take forceful
action against
banks for fear that they would switch regulators.
Eith respect
to idcnk!.fying
problem banksp our report
pointed
out that the three agencies use different
criteria
to identify
problems bcVlks ;ind thus they do not agree on
which banks require
special
supervision.
(OCG-77-1, ck. 8.)
While OCC has the primary
responsibility
for deaXing
wit.1 a problem national
bank, FPS may ; lso have a matelic?
- 18 I
-
.
.
interest
in its soundness, especially
if FRS has made or is
considering making a loan to the bank.
SXC! 3.ikewise has an
interest
in the bank since it is an insured bank. We
recommended that the three agencies 6welop uniform criteria
for identifying
problem banks. Obvicusly, consolidation
of
the three agencies would preclude this type of problem.
- 15s -
.’
,
2.
Increased
effectiveness
in dealing
with bank hobaing comDanbes
Backsound
---
Bank holding
companies are those which own or control
e or more banks.
They are a major element in the American
Enking
system, owning or controlling
one-fourth
of all
comnercial
banks in America and controlling
two-thirds
of
all bznkicg assets and deposits.
One observer has warneT that,
because of the growing
iilfluence
of holding
companiesp FRS may becczz "the superagency that nobody planned."
(Guttentag,
1975 Compendium,
pp. 884-85.)
A holding
company can strengthen
a bank by providing
financial
support,
di.ersification,
the benefits
of larger
operations,
or specialized
management support.
It can also
weaken a bank by directing
loans to be concentrated
in
one business or industry
or by introducing
less qualified
managers.
FRS has primary
responsibility
for
examining
bank
holding
companies,
while subsidiary
national
banks are examined by OCC and State insured nonmember banks are examined
by FDIC.
Supporting
views
Under the existing
system d holding
corqany and its
subsidiary
banks may be subject
to different
agencies'
supervision.
A single
agency would make it easier to obtain
a "more complete picture
of the entire
operazion
and
the assessmert- of the overail
risk exposure
of the bank(s)
and the holding
company."
(Cited by FDIC Chairman Wi.lle,
1975 Comcendium, p. 1016.) Furthermore,
the highly
complex
nature of holding
company arrangements
'may not be fully
appreciated
by agencies responsible
for only parts of the
onerations."
(Kaufman, 1975 hearings
on Federal Sank Commission,
p. 127.)
To illustrate
the Massachusetts
lowi;lg case:
the'problem
Commissioner
of divided
responsibilities,
of Danrts presented
the fol-
'(*** T'nis case involved
a small state-chartered
bank
(regulated
by the FDIC since
it was not a Federal ii@-serve member) which was a subsidiary
of a one-bank holding corG2any. The parent company was 'suqject
to Federal
Reserve supervision,
but not state
regulation
since the
Gassachusetts
bank holding
coc?any law generally
covers
-
1--
20
-
onlv multi-bank
concerns.
Thu-, the Federal Reserve had
jurisdiction
over the holding
company but not the bank,
and the state banking department
and the FDIC had jurisdiction
over the bank but not the holding
company.
"The holding
company raised over $6OO,OCO in funds by
selling
notes locally
, mostly to individuals
in relsMost of the proceeds from
tively
small denominations,
the note issue were used to buy from the bank a large
loan that had been classified
by our examiners and the
FDIC, thereby removing a problem from the books of the
the Federal Reserve actually
conbank. Subsequently,
ducted a special
examination
of the hoading company,
but for lack of communications
with us or the FDIC, or
investigation
of the large loan, there was no followup
or criticism
of the hulding
company's financial
position.
company had noXhen the notes became due, the holding
way of paying them off and an emergency acquisition
of
the bank had to be arranged in order to prevent
failure
of the holding
company from leading
to a run on the bank.
At the Federal level,
the problem was precipitated
by
the separation
of resp<:nsibility
for the one-bank
holding
company from responsibility
for the bank subsidiary."
1976 hearings
on Federal Bank
(Greenwalo,
Commission,
p. 128.)
Another example of the problems that can result
from the
divided
supervision
of banks and bank holding
companies was
cited by the Connecticut
Bank Commissioner.
.
a***
Likewise,
bank holding
companies,
where the
national
bank was the lead bank, with the approval
of
the Federal Reserve Board acquired mortgage banking
companies or established
REIT's.
Khen these non bank
affiliates
found.themselves
in financial
difficulty,
It was then
they often sold assets to the lead bank.
that the examiners
of the Comptroller
of the Currency
had to deal with the exposure that was previously
authorized
by another agency."
(Connell,
1976 hearings
on Federal Bi.nk Commission,
pp. 116-117.)
Objecting
views
Others do not diqute
that the s?iit
responsibility
for
regulating
holding
conpanics
and subsidiary
banks may cause
difficulties.
(Comptroller
of the Currency Saith,
'976
hearings
on Fedtral
Bank Commission,
CT. 83-84: New York
Bank Coixissianer
Heimann, 1976 hearings
on Financial
Reforn
Act, p. 475.)
A less drastic
cure has been proposed:
that
- 21 -
’
.
L
each holding
comnany be supervised
by the agency responsible
for the banks which control
most of its assets.
(Associate
Deputy Comptroller
of the Currency Roman, 1976 Rouse ROversight Bearings Into
the Effectiveness
of Federal Sank Reguproposal was made by
lation,lr
Jan. 20, 1976, p. 41; a similar
New York Bank Cozrmissioner Fieimann, 1976 hearings
on Financial
Reform Act, pp. 475-76.)
It may not ba possible
to correct
the alleged
problems
of daaling
with bank holding companjes by consolidating
the
agencies.
Holding company regulation
itself
may be the problem.
"[The]
risk of complicated
financiel
arrangements
within
bank holding
companies having a wide range
of nonhanking activities
would be difficult
for
even the best trained
bank examiners
to discern,
tiould be a tborougi:
reform ot
Muzh more important
holding
company regulation.
***
"I am concerned that if nonbanking
activity
of
bank holding
coqanies
is not prohibited,
nolding
company activity
and its regulation
wilA
become
r:o r e and more complex and lead to Josses of
efficiency
as well as increasingly
immeasurable
risk
for the banking system."
(BavrileSky,
1975
hearings
on Federal Sank Ccmmission,
p. 88.)
Our observations
Xhile our study did not include
an overall
review of FRS'
supervision
and regulation
of bank holding
companies,
we did
look st the problems in our sample banks which were related
to holding
compenies.
FRS needs to strtngthen
its oversight
of bank holding
companies.
Furthermore,
procedures
for coordinating the three agencies'
supervision
of holding
ccnpanirs
and
their
subsidiary
banks are net fully
effective.
(OCG-77-1,
pp. 4-51 and 11-7.)
In spite of our limited
review of bank holding
companies
we recognize
that the alleged
supervisory
difficulties
associated
with this form of bank organization
constitute
a strong argument for some realignment
of res?onsibilLties.
This is a situation
that demands close interagency
cooperation and coordination.
If the three agencies
cannot jointly
and meaningfully
suyzrvise
holding
corr.-,anies, then a major
element or‘ the Sankang industry
will
elude then.
- 22 --
.
3.
More efficient
Supper ting
ooeration
views
Consolidating
the bank regulatory
savings in a number of areas:
agencies
could
produce
--Reduce ovethead by more efficicnr
use of regional
and headquarters
staff.
(Connecticut
Bank Commissioner
Connell,
1976 hearings
on Federal Bank Commission,
p. 116.)
--Develop
a single,
comprehensive
early warning
systems
system, rather than the three exclusive
being developed corcurrently
by the three Federal
agencies.
(Massachusetts
CornmisSioner of Sanks
Greenwald,
i976 hearings
on Federal Bank Commission,
p. 128.)
--Reduce legal and research staffs.
[Cited
by
FDIC Chairman Wille,
1975 Compendium, p. 1014.)
--Reduce senior staff
time
and keeping current
with
other agencies.
(Ibid.)
spent communicating
the activities
of the
--Increase
the use of experts
in such areas as complicated credits,
trust
activities,
international
departments
and foreign
offices
of insured banks,
data processing
and other areas of automated
activity,
and compliance
with Federal and State
consumer protection
statutes.
(Ibid.@ pp. 1014-15.)
---Eliminate
duplicate
training
and ease the development
of more advanced and specialized
training.
(Ibid.,
p. 1,715, and FRS Governor Sheehan, ibid.p
p. 1024)
--Reduce duplicate
computer facilities.
Governor J.L. Robertson,
1975 hearings
Bank Commission,
p. 74.)
(Former FRS
on Federal
--Reduce reporting
requirements
placed on banks, including costs for administering,
protessirg,
and publishing
such reoorts.
(Cited by FDIC Chairman Wille.
1975
Conlendium,
p. 1015.)
- 23 -
--Eliminate
the requirement
that each of the three agencies prepare reccmmendations
on proposed mergers.
(Former FRS Governor Y.L. Robertson,
1975 hearings
on Federal Bank Commission,
p. 74.)
Objectinc,
views
Potential
saviilgs
are (1) not proven,
(2) slight
in
relation
to overall
budgets , and (3) less than the costs
of consolidation.
The American Bankers Association
suggested that the
potential
for savings is "conjectural"
because the current
system already
"permits
a division
of labor and a degree of
specialization."
(Chisholm,
1976 hearings
on Federal Bank
Commission,
p. 186.)
A professor
has argued that the consolidated
agency
would be more efficient
only if given proper incentives,
including
congressional
oversight.
(Kaufman, 1975 hearings
on Federal Bank Commission,
p- 114.)
Due to consolidation,
there "might even be a few economies
of scale,
though any savings would be peanuts to a government
that now spends $1 billion
a day."
(R.M. Robertson,
1976
hearings
on Federal Bank Commission,
p. 160.)
Another professor
said:
"Some waste
is worth suffering
to preserve
flexibility
and competition."
(Friedman,
197576 hearings
on FINE discussion
principles,
p. 2166.)
Moreover,
efficiency
is not synonymous with ease of administration.
An all-powerful
agency "may seem efficient
simply
because conflicting
point? of view have been sup?ressad"
within
the consolidated
ayency rather
than debated publicly
among equals.
(Raywood, 1976 hearings
on Federal Bank
Commission,
pp. 149-50.)
Our obrServations
.
One of the most prevalent
comments of those who favor
some form of consolidation
of the present
regulatory
system
is that reform is needed to promote economy and efficiency
in operating
the system.
However, we have not found any
study which concludes on the basis of empirical
data that
savings wolllrl result
from consolidation
of the Federal
regulatory
agencies.
- 24 -
.
.
The principal
cost incurred
by the three agencies
for regulating
banks is attributable
to bank examinations.
The three agencies have mutually
agreed not to exercise
their
overlapping
statutory
authority
so that only one
agency will
examine each bank, that is, OCC examines all
national
banks, FRS examines all State member banks, and
FDIC ex?mfnes all insured banks that are not examined
bg either
OCC or FRS.
While thz three agencies do not duplicate
each others'
bank examinations,
in several areas they are carrying
out
similar
activities
differently
and are thus operating
inefficiently.
In many of the areas of
(9CG-77-?.
, ch. 11.1
potentisl
savings cited above and in our report,
much could
be accomplisiled
through effective
interagency
cooperation,
as well as through consolidation.
-
Also, in our report
to the Senate Committee on Banking,
Housing and Urban Affairs,
"Information
On Consolidation
Of Bank Regulatory
Agencies"
(Dec. 5, 1975, GGD-76-42), we
discussed
areas where certain
costs could be affected
by
consolidation
of the three agencies,
but we did not attempt
to estimate
whether consolidation
would result
in overall
cost savings or increases.
-
25
-
.
. .-
4.
Increased
accountability
to
the Congress and the public
Supporting
views_
In the context
of restructuring
the Feueral bank regulatory
system, increased
"accountability"
refers
to making
a single
officer
responsible
for certain
activities,
rather
than several
officials.
Senator Proxmire
officers
when he said
raised
the
issue
of accountable
"I think
it's
far easier
for this committee
which has oversight
on all of these agencies to
act if we have a single
agency on which to concentrate
rather than if we have three disparate
agencies with different
people to be confirmed
and all
doing things at different
times in different
ways.
So our oversight
would be improved,
too."
(1975
hearings
on Federal Bank Commission,
p. 133.)
A State banking commissioner
stated that,
if the
agencies were consolidated,
"Congress could place responsibility
squarely with one agency should anything
go wrong."
(seimann,
1976 hearings
on Federal Ban!: Commission,
p. 134.)
Finally,
a consolidated
agency "would provide a single
focal point for Congressional
and *** public
inquiries
on
matters
of banking and bank regulation."
(Cited by FDIC
Chairman Wilie,
1975 Compendium, p. 1013; also Heimann, ibid.)
Objecting
views
A Treasury Department
spokesman has stated that "while
the accountability
of bank regulatory
authorities
to the Congress
would be increased
[with consolidation],
I seriously
question
whether the accountability
to the public
would improve."
(Deputy Secretary
of the Treasury Gardner,
1975-76 hearings
on FINE discussion
principles,
p. 610.)
-
Senator Packwood said:
" ***
ever really
lacked for information."
sank Commission,
p. $3.)
- 26 -
I don't think Congress has
(1976 hearings
on Federal
5.
More uniform
Supporting
treatment
of all
banks
views
It is inherently
to suffer
competitive
the same market solely
inequitable
for some commercial
banks
disadvantages
relative
to others in
because cf differences
among regula-
tors.
Writing
in the mid-1960s,
the PRS General Counsel said
that the "existence
of conflicts
among the banking
agencies
*** produced competitive
inequities
among the different
classes
of federally-regulated
banks." Be noted numerous
conflicts,
including
(1) the rule by former Comptroller
Saxon that national
banks could accept savings accounts
of profit-making
business corporations,
despite
a contrary
ruling
try the Federal Reserve Board and (2) the dispute
between the Comptroller
and the Board over the authority
of member banks to underwrite
obligations
of States and
municipal
subdivisions.
(Kackley,
Virginia
Law Review, Vol.
52, pg. 598, 605, and 618.)
In 1975 a former FRS Governor cited four interagency
differences,
including
how to calculate
a bank's capital
and whether a bank can underwrite
revenue bonds.
(J.L.
Robertson,
1975 hearings
on Federal Bank Commission,
p. 5.)
A State superintendent
of banks detailed
several
conflicts
in the early 1960s between the bank merger decisions
of the
Comptroller
and the Federal Reserve.
(Root, 1963 EIouse
hearings
on "Proposed Federal Banking Commisc.ion and Federal
Deposit
and Savings Insurance
Board,r' pp. 250 ff.)
Commenting
on past attempts
at interagency
coordination
with respect
to the Bank Merger Act of 1960, a member of the Federal
Reserve Board noted in 1963 that the act had failed
to
generate
"uniform
standards"
in spite of "streams
of
.documents"
Ilowing
between the three agencies.
(J. L.
Robertson,
ibid.,
p. 175.)
Speaking on the Bank Merger
recently
noted:
Act
of 1964,
a professor
"While it is now cleartnat
the same law applies
to
all banks ***,
it is also clear that uniformity
in
application
has not resulted.
Recent studies
have shown
that different
standards
are applied
by the agencies."
(Shull,
1975 hearings
on Federal Bank Commission,
p.
111.)
- 27 -
This
of Banks,
point was supported
who stated:
by the Massachusetts
Comissioner
(I*** As is now widely recognized,
the present system
has been plagued by marked differences
among the
federal
agencies in their
policies
on bank structure decisions.
The Comptroller
of the Currency
has been the most likely
agency to approve bank
mergers and permit bank expansion
into nonbanking
actxvities.
Bankers have been quite
cognizant
of
the difference
and have strategically
structured
their
applications
to take advantage of the Comptroller's
permissive
attitude.
A bank merger
application
can be filed
with the Comptroller
to qain a
virtually
guaranteed approval.
A case in point was
the proposed merger of Connecticut
Bank and Trust
(largest
in the state)
and the Connecticut
National
Bank (number five in the state)
in 1969, filed under
the charter
of the smaller
national
bank and approved
The only plausible
reason for
by the Comptroller.
use of the smaller
bank's charter
was to obtain
federal
regulatory
approval
of the merger, which
would not have been forthcoming
from the Federal
Reserve.
Similarly,
recognizing
the difference
in
bank structure
policy
between the Comptroller
and
the Federal Reserve, holding
companies have acquired
banks by merging them into national
bank subsidiaries
in circumstances
where the Federal Reserve would
probably
have denied a direct
holding
company
acquisition,
Bankers have consciously
taken advantage of the Comptroller's
relative
disregard
for
anticompetitive
effects
in bank acquisitions.
(Greenwald,
1976 hearings
on Federal Eank
Commission,
p. 129.)
Objecting
views
While conceding that a number of interagency
disputes
have, in the words of one supporter
of the existing
regulatory
5,.?tem, "produced bothersome confusion
or serious competitive
inequities
between state and national
banks *** it must be
noted that they were not of such consequence as to affect
banking drastically."
(Golembe, Virginia
Law Review, Vol. 53,
1967, p. 1103.)
tu'hilti deploring
on oEe occasion
a "jurisdictional
tangle
that boggles the mind,"
the Chairman of the Federal Reserve
Board of Governors elsewhere noted: "Absolute
consistency
in
bank regulation
is not necessarily
a virtue."'
(Burns, 1975
- 28 -
I.-
.
.--__
Compendium,
p* 909.)
p. 1008,
and 1976 hearings
on Financial
Reform Act,
some diversity
of viewpoint
"On the contrary,
among the banking agencies can bc. healthy
for
the banking system.
***[Blanking
has benefitted
from some of the provocative
and innovative
policies"
of former Comptroller
Saxon, who figured
in much of
the jurisdictional
contlict
in the early 1960s. (1976
hearings
on Financial
Reform Act, pp. 909-10.)
Saxon's philosophy
and policies
have also been
characterized
as a "serious
attempt
*** to elir.irate
anachronistic
restrictions
and to encourage a more competitive
and
Law Review,
aggressive
banking system."
(Golembe, Virginia
Vol. 53, 1967, p. 1104.)
A Treasury Department
spokesman noted that a Federal
Bank Commission would provide
more uniform application
of
the provisions
of the Bank Merger Act, but he was "not sure
that is a total
blessing."
At any rate, since the ruling
of the Antitrust
Division
of the J?lstice Department
'takes
precedent
in all cases,“
there is "what is equivalent
to a
single
agency uniform
Frocedure."
(Gardner,
1975 hearings
on Federal Bank Commission,
p. 263.)
Office
In responding
to a FINE study questionnaire,
of the Comptroller
of the Currency stated
the
that:
"*** Although
serious
differences
of statutory
interpretation
and regulatory
approach arise in?reguently,
when divergence
does occur it adds the kind of innovation all too lacking
in many regulatory
environments.
Rather than having stultified
its constituency,
the
present system has produced a dynamic and healthy
industry.
Consistency
in regulation
is a goal which
increasingly
is coming under examination."
("Compendium
of Papers Prepared for the FINE Study,"
June 1976, p. 450.j
According
to the previous
Chairman of FDIC, "a top-level
staff
group'l at FDIC attempted
in the first
half of 1975 to
find I'*** points
of friction
within
the present
Federal bank
regulatory
structure
which might justify
recommendations
for major Congressional
reform."
The group "identified
only
two significant
and demonstrable
points of friction
within
the present structure":
one relating
to different
agency
attitudes
toward bank acquisitions,
the other relating
to
over
one-bank
holding
companies
the overlap due to FRS' auehority
in which
supervised
the
by
only
bank
OCC, cr
by FDIC and a State
1012. )
subsidiary
is either
a national
Sank,
a State
nonmember
bank,
supeI.rised
agency.
(Wille,
- 29 -
1975 Compendium,
p.
3ur observations
During our study of the Federal supervision
of banks,
agency officials
told us that in the 1960s different
classes
of banks were frequently
treated
unequally
under identical
conditions,
due to the csnflicting,views
of bank regulators.
The general philosophy
of Comptroller
Saxon differed
markedly from that of the Federal Reserve Board or the
Chairman,
FDIC, and his decisions
on many regulatory
or supervisory
matters
were often at odds with theirs.
(FRS General
Counsel Sackley,
Virginia
Law Review, Vol. 52, 1966, pp.
598-632.)
The courts later
reversed some of Saxon's interpretations.
In some cases, the other two agencies changed
their
policies
to agree with those of OCC. Finally,
Comptroller
Camp, who succeeded Saxon, apparently
reversed
some of Saxon's
rulings
in an effort
to bring the three agencies
in accord.
Agency officials
told us that the inconsistencies
of the
1960s have generally
Seen resolved.
If classes of banks receive different
treatment
in
identical
situations,
it may be done in a very subtle way.
In many of the areas where examiners attempt
to influence
the activities
of banks, they do so not through specific
policy
statemeats,
but rather
through comments in examination
reports.
In many cases these conclusions
are based on the
examiners'
professional
judgment rather
than on specific
financial
ratios
or standards.
For example, an examination
report may criticize
a bank for inadequate
capital.
There
are no hard and fast rules for determining
whether a bank's
capital
is adequate;
rather,
each bank's position
is judged
by the agency officials.
During our study we found examples of Sanks receivir.g
different
treatment:
under similar
circumstances
solely
because of differences
among regulators.
For example, the
regulators
inconsistently
evaluated
loans to foreign
governments and businesses.
(OGC-77-1, p. 4-31.)
Similarly;
shared loans to large domestic
corporations
were evaluated
differently.
(Ibid.,
p. 7-13).
- 30 -
6.
Integrated
bank supervrsion
and monetary polacy
Background
Not only is FRS one of three bank regulatory
agencies,
it
is also the Nation's
central
bank and its monetary policy
maker.
4s the central
bank, FRS manages the U.S. money supply by
influencing
the lending activity
of conrnercisl
banks, which in
turn affects
the level of spending and production
in the economy.
This is called
monetary policy.
Over the years the Congress has given FRS three major
tools for accomplishing
these objectives.
Each
tool has a distinct
im-;act
on the cost and availability
of
member bank reserves and, thus,'-on
credit
and monetary
growth.
FRS increases
or decreases reserves
in the banking
system through buying or selling
U.S. Government and Federal
agency securities
in the open market.
FRS can also
change tne percentage
of deposits
that member banks must hold
in reserve--immediately
increasing
or decreasing
commercial
banks' capacity
to extend credit.
And FRS can change
the "discount
rate,"
the interest
rate charged to member banks
that borrow from Reserve banks to beef up their
reserves.
Supporting
views
-
Bank supervision
and monetary policy
should Le integrated
because:
(1) knowledge about the banking industry,
and ability
to influence
that industry,
are essential
to the formulation
of
monetary policy
and (2) FRS has lender-of-last-resort
responsibality
fQ,r many banks it does not supervise.
!:3e Governor
state2:
"Any decision
good knowledge
as well as of
tary authorities
changes in the
apparatus
and
sasy to carry
on monetary po 'cy must be grounded on
of the state c tht: banking industry
the economy in general.
And the monemust be able to readily
effect
regulatory
DoZicy and the supervisory
action which they believe
to be necesout their
responsibilities,
"Furthermore;
tnere is an inextricable
link between the
Federal REserve System's
lending
function
and bankCng
supervision
and regulatiza.
The fmctior,
nt lending
to commercial
banks which are faced with either
temporary
liquidity
difficulties
or lonaer-term
problems necessarily
lies with the monetary authorities
***.
- 31 -
--
"The same people who are carrying
out the monetary
policy
must have firm control
over the regulation
and supervision
of the banking industry."
(Sheehan,
1975 Compendium, pp. 1029-30.)
,
I
FRS responsibility
for conducting
monetary policy,
"extends beyond the banking system to the entire
economy,
both as the nation's
monetary authority
and its lender of
last resort."'
In the case of Franklin
National
Bank, the
Governor said the bank's liguility
problems
[and possible
lend money to the
failure]
created a threat
to F,!S: either
bank "or risk a possible
trauma in national
and international
money markets with the potential
effects
on the nation's
and
world's
economies."
He was concerned that FRS has 'lenderof-last-resort
responsibility
for
some 14,000 banks whose
operations
[it does] not examine."
(Sheehan, ibid.,
pp. 1025-26.)
Objecting
,
views
Monetary policy
and bank regulation
should not be
integrated
because:
(1) information
about the banking
industry
need not come from direct
supervision:
(2) bank
supervision
takes too much of the FRS Governors'
time:
(3) there may be goal conflicts
between bank supervision
and (4) FRS need not act as lender
and other FRS activities;
of last resort.
Information
on banks may be germane to formulation
of moneta,y policy,
but the appropriate
source of such information is net from direct
supervision
of banks.
Thus,
one Governor
stated:
"Separating
the Federal Reserve from bank supervision
would not, in my opinion,
diminish
its ability
to keep
abreast of banking developments.
Information
about
banking practices
would be just as available
to the
Board if supervision
were unified
in the 'Federal
Banking Commission.'"
(Bucher, 1975 Compendium, p. 92.7.)
The previous
Chairman of the Federal Reserve BGard testified:
"I personally
do not pay too much attention"
to bank examination
reports
in formulating
monetary policy,
althcugh
some of ,lis
associates
had “different
views.n
(Martin,
1963 Rouse hearings
on "Proposed Federal Banking Commissisn and Federal Oeposit
and Savings Insurance
Boardr" p. 195.)
- 32 -
A former
Governor
said:
n **i* the supervisory
work of the Federal
Reserve
nothing whatsoever
to do with the formulation
of
monetary policy.
has
"I have never seen a single
individual
in the
Federal Reserve System who formulated
monetary policy
on the basis of his knowledge of banks gained through
examinations
only by the Federal Reserve."
(J.L. Robertson,
19?6 hearings
on Financial
Reform
Act, p. 500.)
said
A former official
that her
of the Federal
Reserve
Bank of Boston
n *** experience
of seven years as a member of the
monetary policy
group *** was that there was no input
from the examination
department
in advising
on monetary
DO1 icy.
Results
from bank examinations
played no role
In the discussions
with the President
of the Bank to
determine
the appropriate
monetary policy
goals he
would vote on at the Federal Open Market Co,mmittee ***."
(Massachusetts
Bank Commissioner
Greenwald,
1976 hearings
on Federal Bank Commission,
p. 130.)
FRS examines
bank supervision
tioned accessW to
do examine banks.
1976 hearings
cn
relatively
few banks, but if it lost its
function
it should have "clear
and unquesreports
of the agency or agencies that
(New York Bank Commissioner
Heimann,
Financial
Reform Act, pp. 494 and SOO..)
FRS should be removed from direct
supervision
because too much of the Board of Governors'
time
from monetary policy,
without
enough of it being
bank supervision.
One Governor said:
of banks
is diverted
spent on
"Supervision
is too imoortant
a function
in itself
to
be the Federal Reserveis
part-time
job.
For example,
during 1974, the Board issued 434 orders on bank
holding
company applications
alone, not to mention
numerous deliberations
on other regulatory
matters
*+* . 11 (Bucher, 1975 Compendium, pp. 925-26.)
Another
stated
that
"should be permitted
effort
to the task
the Board of Governors
to devote all of its time and
[of monetary policy],
without
diverting
- 33 -
attention
to bank supervisory
matters
that demand CORcentrated
full-time
attention
by people especially
qualified
for the job."
(Y.L. Robertson,
1975 hearings
on Federal Bank Commission,
p. 31.)
Others have echoed these sentiments,
saying that bank
supervision
is "really
a terrible
diversion
and waste of
talent
for which the governors
do not necessarily
have
comparative
advantage"
(Tobin,
1975-76 hearings
OR
FINE
diSCUSSiOR principles,
p. 2371) and
that bank SUperViSiOn
is a "poor step child”
at FRS.
(Lee Richardson,
ibid.#
p. 2475.)
Data on the governors'
participation
in aotcs on bank
regulation
upholds this view.
According
to one study,
during 1975 all seven members of the Doard were present
for only 10 percent of the votes and only four members were
present
for more than one-fourth
of the 283 decisions.
(Cong. Reuss, 1976 hearings
on Financial
Reform
Act, p. 495.)
it
FRS's dual
to sacrifice
roles under the current
one goal for the other.
system may force
A Governor said:
"***conflicts
cf objectives
may rise that result
in
contradictory
claims upon the agency.
***IDlaRk
examiners
should be always allowed
to function
in
an environment
where their
decisions
are based entirely
upon their
perception
of *** the banks for which they
have examination
responsibility
end
are not influenced
by considerations
of a broader scope.”
(Bucher,
1975 Co+andium,
p. 926.)
Similarly,
it has been argued that FRS’s “regulatory
functions
bring it into close contact
with baRksp and this
may give it an unbalanced
view of national
priorities.”
(T. Hayer, 1975-76 hearings
OR FINE discussion
principles,
D. 76; Massachusetts
Bank Com;nissioner
Greenwald,
1976
hearings
on Federal Bank Commission,
p. 130.)
Likewise,
in enforcing
consumer protection
laws,
responsibility
to the supervision
FRS's "primary
of monetary
policy
has significantly
interfered
witn its ability
to
focus on the very real needs of consumers.A
(O’keilly,
1916 hearings
on Financial
Reform Act, p. 872.)
resort
critic
That FRS has* or sees itself
as having,
lender-of-lastresponsibility
for all insure2
banks is unclear.
of this
view asserted
that the
- 34 -
A
.
"Federal
Reserve indicated
that it did not have that
responsibility
in the case of a failing
non-member
bank in south Carolina, whereupon the FDIC utilized
its own powers
of last-resort-lending
in order to lay
the ground work for a deposit assumption
transaction."
(Golembe, 1975 compendium, p. 1045.)
Our
observations
we did not review FRS monetary policymaking,
whether PRS needs to directly
examine banks to
monetary policy.
Although
we question
decide
The principal
data derived
from examinations
apparently
is communicated
to those who formulate
monetary policy
through the examination
reports,
because
formulates
and
monetary policy
does
--
the FRS staff
that
not examine banks,
--
FRS examines only a small percentage
(about 7 percent)
of the insured commercial
banks in this country and
receives examination
reports
from FDIC and OCC on
the others that it does not examine.
We saw no
recent complaints
from FRS about access to other
agencies'
reports.
If
FRS were to be removed completely
from bank examinations,
it could continue
to receive
examination
reports
from
the agency or agencies that examine banks.
To insure that
FRS access to such reports
is complete and prompt, and not
subject
to the changeable policies
of another agency or
agencies,
such
access mi+t
well
be legislated.
In addition
to relatively
sporadic
examination
reports
(not much more frequent
than once a year),
FRS gets a wealth
of current
information
on metiber banks (that is, CCC- and
FRS-examined banks) from a variety
of weekly,
monthly,
and
other reports.
These reports
are not part of the examination process.
They are designed to assist
in formulating
monetary policy
and would presumably
be continued
even if
FRS no longer examined banks.
As for FiXSS alleged
responsibility
as lender of last
resort
to all commercial
banks, FDIC apparently
has the
authority
and financial
resoul:ces to play this role.
Under
secticn
13(c) of the 1930 E'&erab Deposit Insurance
Act,
FDXC ;das given authority,
under certain
circumstances,
- 35 -
.
,
to assist
insured banks in danger of failing.
This power
was first
used to helo an operating
bank in 1971, and it
had been used three t&es
by the end of 1975. (FDIC Wmual
Report for 1975, p. 3.) In addition
to its $6.7 billion
trust
fund (as of December 31, 1975), FDIC has authority
to borrow $3 billion
from the U.S. Treasury.
- 36 -
ARGUMENTS AGAINST CONSOLIDATION
7.
Removing
a system
eopottinq
vie~5
that
works
well
Although
the regulatory
agencies have various
interagency disputes,
there is no inherent
reason why these
disputes
cannot be minimized
by better
interagency
coordination.
(R.M. Robertson,
1976 hearings
on Federal Bank Commission,
p. 59.)
Speaking of the 1961-66 period of policy
conflict
between the agencies,
one individual
has noted that "neither
the batiks nor the regulatory
agencies,
aside from some
members of the Board of Governors of the Federal Reserve,
has indicated
that the present
system is unworkable."
(Golembe,
Virginia
Law Review, Vol. 53, 1967, p. 1106.)
The recent problems of the banking industry
(for example,
real estate
investRent
trusts,
international
loans,
and
loan default
in general)
cannot be laid at the door of
any single
regulatory
agency or of the current
regulatory
structure.
Banking industry
problems "have been due
largely
to the adverse economic climate
of the past several
years during which we have experienced
an accelerating
inflation
and the most severe recession
since the 1930's."
(Faris,
p. 518; Duwe, p. 765: Deputy Secretary
of the Treasury
Dixon, p. 338; and New York Bank Commissioner
Heimann,
p. 446, all in 1976 hearings
on
Financial
Reform Act.)
Objecting
views
While conceding that the oresent regulatory
system "works,"
those who favor consolidation
heny that it P'works well."
The
FRS General Counsel said in 1966 that the Federal bank regulatory
structure
was on the "verge of C~SOS,"
involving
"gross inequities amo.19 different
classes
of banks."
(Hackley,
Virginia
Law Review, Vol. 52, 1966, T. 823.)
The Chairman of the Federal Reserve Board described
the present regulatory
system as a "jurisdictional
tangle that
boggles the mind, *** conducive
to subtle competition
anon5
regulatory
authorities,
sometimes to relax constraints,
sometimes to delay corrective
measures, *** competition
in laxity."
(Burna, 1975 CompenJium, p. 1338.)
Eowever, the
Federal Reserve Soard, as a whole, did not favor consolida'-ing the three agencies
into one. Indeed, the Chairman
alsa stated:
"Absolute
consistency
in bank regulation
is not necessarily
a viftue.ll
(3crns,
1976 hearings
on
Financial
Reform Act, pg. 909 and 916.)
- 37 --
Our observ:.tions
By its very nature this argument must take into account
all other arguments that have been made for and against
conWhile problems have
solidation
of the existing
agencies.
occurred
under the present system, the questions
which should
be considered
are:
--
Were the problems a direct
structure?
If SO,
result
of the regulatory
--
Would the advantages of consolidation
.
offset
any disadvantages?
more than
While we did not attempt to directly
answer these qwestions,
our review did not sustain
the charge that the regulatory
system is on the "verge of chaoslR if by that one
means a nearly total
inability
to function.
The agencies
did not work well together
in sharing experiences
about
innovations
in bank supervision
or undertake
certain
activities jointly
or on a reciprocal
basis.
These problems,
however, could be resolved
by better
interagency
coordination.
(OCG-77-1, ch. 11.)
- 38 -
0.
Excessive
centralization
Supporting
of power.
views
Citing
the experience
of a single
regulatory
agency in
another industry,
a Department
of Justice
official
observed
in 1973:
.
“The dual banking system
has contributed
a great deal
to the more efficient
operation
of financial
markets.
It has permitted
an element of competition
among
supervisory
authorities
which has been conducive
to
innovation
and experimentation
by financial
instit-ki
e-. m.ons.
In additi"n,
it has restrained
supervisory
authorities
from overzealously
protecting
existing
firms by restricting
entry to the field.
"The banking experience
in this respect might be contrasted
to the surface
transportation
experience,
where all modes of transportation
are under a single
regulator --the
Pnterstate
Commerce Commission.
That
Commission has restr:lcted
entry and applied
a variety
of extremely
detailed
measures which frequently
raise
ultimate
costs.
it has generally
tried
to
Moreover,
prevent one mode from using advantages--even
advanzages
based on lower cost --as a way of undercuttirg
the competitive
position
of other modes.
It is for this reason
that the Administration
recommended in 1972 substantial
deregulation
of the surface transportation
industry.
'Therefore,
we think that it is particularly
important
that
the Congress not 'reform'
financial
regulatory
structure
in
such a way as may replicate
our experience
in surface
transportation.
Having a number of regulators
who can
supervise
various
types of institutions
may look 'inefficient',
and yet be much less inefficient
in ultimate
cost
than an industry
subject
to a regulatory
straitjacket
imposed by an 'efficient'
agency.
The Hunt Commission
expressed very much the same concern when it said that a
single
agency 'may become overzealous
in pr0tectir.g
existing
firms,
with the result
that entry by new firms
is effectivsly
foreclosed.'"
(Baker, 1973 House ?-.earings
on "The Credit Crunch and Reform of Financial
Institutions,"
pp. 533-34.)
stated:
Former
Ccmptroller
of the Currency
- 35 t-b
James E. Smith
"It should also be noted that consolidation
would be
centralizing
some rather
significant
functions
in
one almost omnipotent
agency.
Bank regulation
is
simply too important
tc leave to a single
regulator
from whom, for all practical
purposes,
there is no
appeal.
The now famous phrase of 'competition
in
laxity'
may be no more than a description
of the
healthy
flexibility
which presently
exists.
It would
be ironic,
given the recent discussion
of the nonbanking agencies'
ability
to stultify
their
industries,
for us to now move to similar
control
of
banking."
(1975 i3oiise hearings
on H.R. 8024, *sank
Failures,
Regulatory
Reform, Financial
Privacy,"
p. 878.)
An OCC staff
paper
on regulatory
structure
asserted:
"There are many examples in our economy of industries
regulated
by a single
monolithic
federal
agency becoming moribund and unresponsive
to a
changing environment
(i.e.
railroads,
pipelines).
There is a tendency for a monolithic
agency to be
captured by its industry
and to turn its attention
toward protection
of the members of that industry.
Usually
such protection
is inconsistent
&ith competition
an2 innovation.
But our society
is premised upon competition
as the most efficient
way
of allocating
resources."
At
a broader level,
it bar; been argued that c0mbinir.g
regulatory
agencies would affect
the structuie
of the
banking industry.
Consolidation
of the industry
into a
few large banks would inevitably
follow
consolidation
at
the Government level.
Law Review,
(Golembe, Virginia
Vol. 53, 1967, pp- 1113-14.)
Objectin?
views
The Congress can deal directly
with any problems of
excessive
power without
recourse to several
regulatory
agencies.
(Greenbaum, 1975 hearings
on Federal Bank Commission
p. 90.) Furthermore,
an analogy betwee,. the present
system and the constitutional
principle
of separation
of powers is false because the three agencies perform the
same functions.
One agency does not "check" or veto the
actions
of another.
(FRS General Counsel Backley,
Virginia
Law Review, ~01. 52, 1966, pp. 819-20; dormer
FRS Governor J.L. Rc;ertson,
1975 hearings
on Federal Rank
Commission,
pS 6.)
- 40 -
9.
Restricting
innovativeness
Background
The banking industry
is undergoing
rapid and pervasive
transformation
in response to forces both within
and outside
the
industry.
Changes include
the expansion of bank holding
companies,
the advent of asset-liability
management, an increase
in
international
operations,
economic fluctuations,
and innovations
in electronic
funds transfer
and other payments
mechanisms.
This section
discusses
whether,
under the current
system,
there is competition
among the regulators
which may
create an atmosphere conducive
to experimentation
and innovation
on the part of the banking community as well as on the part of
the regulators.
Supporting
views
Competition
between State and Fedaral regulatory
agencies
is conducive
to experimentation
and innovation
among bank
regulators.
"All too often single-bodied
regulators
are
too conservative
and short-sighted
to facilitate
or even
to allow their
industries
to adopt new technology."
(Ferguson,
1975 hearings
on Federal Bank Commission,
p. 218.)
A State
banking supervisor
has noted that multiple
regulation
has prevented
one regulator
from blocking
innovations
in bank
regulation.
Under the dual State-Federal
system, State
authorities
have rttaken the lead" in authorizing
NOW accounts
and fostering
experiments
in electronic
funds transfer.
(Heimann, 1976 hearings
on Financial
Reform Act, p. 447.)
According
to the American
Bankers
Association:
"'Competition(
among bank regulatory
agencies has
often led to better
administrative
and examining
techniques,
improved financial
services
for the
public,
and a more competitive
banking system.
An
excellent
example of this is some cf the recent
efforts
that have been undertaken
by the Comptroller
of the Currency."
(Chisholm,
3.976 hearings
on
Federal Rank Commission,
p. 189.)
Similarly,
the previous
Comptroller
of the Currency
stated:
"There is right
now a vital
competition
among the
agencies:
a competition
in creativity
to devise the
best and most effective
mode of examination
and
follow-sup
grocec?ures.
To consolidate
the agencies
now into one commission is;ould destroy
%his healthy
competition."
(Smith,
1976 hearings
on Federal
Bank Ccmnission,
0. 111.)
- 41 -
.-
Objecting
views
Those who concede that banking and regulatory
innovation have taken place deny that such innovation
is the logical consequence of the current
regulatory
structure.
Regulatory
"divisiveness"
does not necessarily
breed innovation.
(Havrilesky,
1975 hearings
on Federal Bank Commission,
p. 90.)
As one individual
noted, "The rush into new banking
activities
was strongly
motivated
by market forces;
and it
would have found a way around antiquated
bank regulations***."
He described
the one-bank holding
company as a device to get
when they developed into a
around "adverse court decisions
barrier,"
(Shull,
1975 hearings
on Federal Bank Commission,
pp. 112-13.)
Some who support consolidation
of the system point
' other situations
where a single
regulator
of an industry
did not stifle
innovation.
For example, a State bank
commissioner
sz.id:
ko
"Some have argued that a single federal
bank regulator
would have a stultifying
influence
on banking that
innovation
and progressive
regulations
would be
inhibited
under the heavy hand of a single
agency.
Yet, within
the financial
sector,
the existence
of
consolidated
federal
regulation
of the savings and
1OSZ
and credit
union systems should logically
demonstrate
the viability
0% a dual state and
fe.;:ral
system with a single
federal
agency.”
17 eenwald, 1976 hearings
on Federal Eank Commission,
p. 130.)
According
to the FRS General
Counsel:
II*** if the three agencies construe
the same *** law
in different
ways *** the end result
may not be progress
but *** a 'race in laxity'
that could threaten
the
soundness of the banking-system."
(Hackley,
Virginia
Law Review, p. 821.)
A reoresentative
porting
iegislation
0% a public
to consolidate
interest
grou?, in supthe three agencies,
stated:
"The most significant
impact of the bill
is that it
will
eliminate
or tend to eliminate
unhealthy
competition
among the existing
regulators;
in particular,
cc:>etition
between the Federal Reserve and the
CC,? troller
over allowing
banks within
their
spheres
0% influence
to move into new permissible
banking
- 42 -
activities
or those deemed to be closer related to
banking.
This competition
between
regulators
is
widely held to lead to an unhealthy overextension
of banking activities.
Given that the regulatory
agencies will in general attempt to enlarge thair
spheres of influence,
one would expect the bank
regulators would seek to attract
more banks into
their fold generating the natural competition between
the two regulatory
agencies.
Over time, these two
bodies have slowly but steadily enlarged the list of
permissible activities
which they allow to the banks
under their control.
Perhaps as a consequence of
this competition between them some questionable
extensions of bank activities
have been permitted."
(Ferguson, 1975 hearings on Federal Bank Commission,
pp. 223-24.)
w
A single Federal banking agency “may be in better
position to comma,,d the technical an3 specialized
resources
and to exercise the administrative
flexibility
necessary
to cope" with such change. (Cited by FDIC Chairman Wille,
1975 Compendium, pp. 1017-18.)
Our observations
We do not know, of course, whether a single agency would
creative than the existing agencies in developing new
methods and tools for supervising banks. We note, however,
that many executive departments have an office for program
evaluation,
development, or experimentation.
Such an office
can determine weaknesses in existing programs, design strategies to remedy such problems, and implement pilot projects
and experimental designs to test these strategies
on a
limited basis before implementing them system-wide.
be
more
Assertions that competition among the agencies to
enlarge their constituencies
by increasing the range of
permissible activities
dL2
related to the "competition
in laxity"
issue discussed on pages 27 to 30.
- 43 b
1
,
10.
Weakening
the dual
banking
system
Background
The term “dual banking”
has been used to refer
aspects of the current
system of bank regulation:
--choice
of one of three
supervises
a different
--choice
banks.
of either
to two
Federal agencies,
each of which
group of banks, and
Federal
or State
Although
States can charter
banks,
deposit
insurance0
which virtually
to operate a commercial
bank.
chartering
of
they cannot grant Federal
has become necessary
Federal involvement
in banking has increased
over time.
From 1863 until
1913, there were, in essence,
two parallel
bank systems--one
national,
one State--for
chartering
and
supervising
banks.
In 1913 Federal supervision
was extended
to State banks which were accepted into the Federal Reserve
System.
In 1933 Federal supervision
was extended to virtually
all commercial
banks with the establishment
of FDIC.
At
the end of 1976, only 286 State-chartered
banks did not have
Federal deposit
insurance,
in contrast
to ever 14,000 banks
with national
or State charters
which did have such
insurance.
Supporting
views
Consolidation
would destroy
the dual banking system.
Law Review, Vol. 53, 1967, p. 1109.)
(Golembe . Virginia
Dual banking 15 important
because it functions
as a “safety
valve, n affording
“protection
against
a rigid
or arbitrary
regulatory
policy. n (New York Bank Commissioner
Heimann,
1976 hearings
on Federal Bank Commission.
p. 134.)
This protection,
one Federal agency.
to some, comes from having more than
As a State bank regulator
said:
“It is difficult
to imagine,
for example, that a
centralized
Commission,
which had looked at and
rejected
a federal
charter
application,
would look
favorably
upon a request for federal
insurance
when
the same applicant
sought it under a state-charter
approved by state authorities.
This second look is
preserved
under the present tcipartite
system* and
banks have come into existence
over the years because
of this feature
and have played useful
roles as
viable
financial
outlets.”
(Faris,
1975-76 hearings
on FINE discussion
principles,
7. 1234.
- 44 -
Another State bank commissioner
said that "At the
heart of the dual banking system is the fact that no single
Federal agency holds veto power over an applicant
for a new
state bank charter."
(Greenwald,
1976 hearings
on Federal
Bank Commission,
p. 132,)
(These
centralization
arguments relate
to the question
of "excessi\-of powerm discussed
on pp. 39 and 40.)
To preserwe the States'
abil
iy to effectively
relulate banks, it has been proposed that,
if th* precent
Federal agencies are consolidated,
there be:
"a provision
requiring
automatic
Federa'
!*E.urance for
State-chartered
banks.
***The FDIC should really
not
object
to that very much because over the last 10 yeais
they have only disapproved
3 percent of all State applications.
However, if the committee
is reluctant
to
make the insurance
automatic,
then I think
it should be
structured
in such a way that the burden of proof of
disapproval
would be on the Federal agency: thnt it
would be wery clear
that disapproval
was an exception
to a general
rule and that even in that case its disthat there would be some
e approval was not absolute,
administrative
or legal recourse to test the reasonableness of the Federal agency's
decision."
(Massachusetts Bank Commissioner
Greenwald,
ibid.,
p. 127.)
Another
State
bank commissioner
What I would most like
a genuine simple choice
federal
charter.***
said:
to see is dual chartering
as
between state charter
and
"It is critical
that the machinery
be established
for
qualifying
state banking departments
to take over to
the maximum extent possible
the supervisory
roles
of
the FDIC *** with respect to State-chartered
institutions.
One of the most important
elements
in that
regard is the granting
to the qualified
state banking
departments
the right
to certify
newly chartered
institutions
for deposit
insur&.ce
by the Federal
insurance
agency.
"A healthy
availabili
viable
duality
depends critically
on the
ty of cenuine 03: ions for entering
banking.
The grar.ting
of i:.surance
is so necessary
to a new
entrant
in bankiz;
that,
absent a grant of certification power by staze banking deparzxnts,
the FDIC in
- 45 -
1
.
effect
could control
entry into banking.
Indeed the
duality
which exists
today with respect
to entry is
grounded significantly
in the requirements
that the
FDIC grant insu*:ance to any bank chartered
by the
Comptroller
of the Currency or any bank admitted
to
membership by the Federal Reserve.
For an effectrve
duality
to continue
to exist,
the same authority
should be granted to cualified
state banking departments."
(tieimann,
ibid.,
p. 135.)
Objecting-views
Consolidation
would not destroy dual banking in the
sense of having both Federal and State regulation
but wclllld
eliminate
choice among Federal reaulators,
according
to a
State bank commissioner,
because “it is simply bad government to have three different
agencies interpreting
the same
laws three different
ways."
(This line cf reasoning
relates
to the issue of uniformity
discussed
on pp. 27 to
30. )
She continued:
"Sor~e commercial
bankers
have opposed consolidation
of the federal
bank supervisors
as a threat
to the
dual banking system.
The dual banking system in
this context
is defined
as the existence
of alternative entry routes into banking,
and a corresponding
choice of supervisors.
iiowever, since every bank
with federal
deposit
insurance
is subject
to supervision by at least one of the federal
banking agencies,
the concept,
in practice,
inlies
a choice among
different
federal
supervisors.
For this choice to be
meaningful,
the dual banking system concept must rely
on different
federal
regulators
administering
idenfical statutes
in unequal zanner.
In other words, some
effective
competition
rn laxity
is reguired
on the
part of the federal
nank supervisors
for choice to be
meaningful.
The Federal Bank Comnission
is not a threat
to the duel banking system from a state regulator's
point of view.
The main change is that
it eliminates
the opportunity
for banks to play one federal
regulator
off against
anoeher."
(Greenwsld,
ibid.,
p. 130.)
A recent discussion
between Senator Proxnire
previous
Con:;>troller
of the Currency illustrates
lack of uniformity
.?mo:rg t.L;e Federal agencies.
-
and the
the alleged
46 -
--
‘6
I’,
*** Don't these figures
confirm
that
The Chairman.
your office
is more lenient
as far as capital
adequacy
is concerned?
Mr. Smith.
Our office
has never estatlished
a flat
percentage
number on capital
a1.d the fact is that the
8 percent number that you quote from the Federal
Reserve is not applied as an inflexible
standard by
Indeed, one of the finest
bankthe Federal Reserve.
ing institutions
in the L'nited States,
probably
the
pride of the Federal Re:erve System, has a ratio
below that 8 percent level.
The Chairman.
Isn't
it true that your Policies
on
capital
give national
banks a competitive
advantage
with respect
to other banks?
Mr. Smith.
No, I don't believe
so.
The Chairman.
Do they have more leverage?
Mr. Smith.
I don't believe
so.
Mr. Chairman.
Of course,
they do.
tir. Smith.
Leverage is a matter of competent management.
Every banking institution
is going to try and
leverage
its capital
and long-term
debt to the highI think it is probably
true
est reasonable
degree.
that as a group national
banks tend to be more aggressive banks in their zommunities
than is typical
of the
generality
of 0thG.r banks.
And they have that advantage in
The Chairman.
aggressiveness
because you have followed
a plicy
of
permissiveness
in capital
adequacy.
ivlr . Smith.
And that aggressiveness
has also produced
some very significant
community results
in terms of
banks that are willing
to lend and willing
to accept
risks.
(Ibid.,
p. 72.)
With respect
to the argument that
are needed tcr provide
a "safety
valve,*
multiple
regulators
a Congressman asked:
"Why have only three agencies of Government,
why not
have six agencies and let the group or the individual
. or the bank go to six different
agencies and present
his application
each time until
he finally
gets one
of the six who will
grant his application?"
(Cong.
PIulter,
1963 House hearings
on "Proposed Federal
Banking Commission and Federal Deposit and Savings
Jnsurance Doard," p. 275.)
- 47 -
.
.
Finally,
a former FRS Governor sugoested,
and sponsors
of several
bills
claim,
that consolidation
would, in fact,
strengthen
the dual banking system since State supervisors
would have to deal with only one Federal agency, not two-FRS and FDIC.
The Governor envisioned
t-hat examining
State
banks could in time become the responsibility
of State
banking department
subjec t to oversight
by a new Federal
agency.
(9.L. Robertson,
1975 hearings on Federal Bank
Commission,
p. 75.)
Our observations
The argument in favor of dual banking--in
either
sense-rests upon the assumption
that two or more agencies will
not,
in all cases, reach the same conclusion
from the sane set
of facts and the same critieria,
Such disparity
is said ts exist in ?!zr ‘three Federal
agencies'
merger decisions
and may exist
in other areas as
well.
Khether this disparity
is a strength
or a weakness
of the current
system depends upon individual
perspective:
some view it as a "safety
valve,"
while others belleve
it
leads to "competition
in laxity."
Given the critical
importance
of Federal deposit
insurance,
meaningful
choice ar=ong regulators
would exist
under a consolidated
Federal agency if States had authority
to grant Federal deposit
insurance
to banks they charter
and to be the sole supervisor
of those banks.
CHAPTER 4
A FEDERAL BANK EXAMfE;IATION COUlXl~
A bill
to establish
a Federal Bank Examiration
Council
(5. 3494) was introduced
to the 94th Congress by Senator
Adlai Stevenson-- according to the Federal Reserve, on its
behalf.
The bill
was reintroduced
to the 95th Congress as
s. 711. This bill
wollld establish
a Council composed
of one representative
from each of the three bank regulatory
agencies and chaired by the FRS representative.
The
expenses of the Council would be shared equally
by the
agencies.
The Council would establish
uniform bank examination
standards and procedures;
make recommendations
for standardizing other supervisory
matters;
conduct schools for Federal
and State bank examiners;
and develop uniform reporting
systems for banks, bank holding companies, ?nd ncnbank
subsidiaries.
Its sponsor said such a Co~.~cil is needed because the
three Federal regulatory
agencies'
bank examination
forms
and procedures lack uniformity
and, thus:
--
--
complicate
the collection
of data on the banking
system and add to the reporting
burden on banks,
especially
those wilich are subsidiaries
of multibank
holding companies and one Federal agency is not
responsible
for regulating
all of the subsidiaries,
produce discrepancies
in identifying
vising
problem or failing
banks.
To correct
-- establish
standards
these
problems,
the proposed
uniform Federal
and procedures;
Council
is to:
bank examination
--
work out a cooperative
agencies for identifying
failing
banks;
--
better articulate
the relationship
and Federal bank supervision:
and
- 49 -
and super-
arrangement between the
an5 supervising
problem
between State
and
and
--
standardize
examination
forms and pbocedures,
jointly
train bank examiners, and certify
State bank supervisory
agencies to examine banks
instead of Federal examiners.
Uhile the proposed lzgisiation
does not discuss the
present interagency
Cocrdinating
Committee on Eank Regulation,
Governor Holland of the bederal Reserve had previously
stated that an interegency
councii:
"*** would not suoplant the present Interagency
Coordinating
Committee, which ought to continue
to provide a forum for consultation
on regulatory
. .
and policy
questicns
affecting
not only_ banKF
but nonbank thrift
instituticns
as well. The
distinctive
features
of a ner Examination
Council
would be that its members would be assigned
responsibility
for particular
areas of bank
examination
procedures,
given decision-making
power in those areas, and held accountable
by
their agencies for the development of suitable
standards and practices
in such areas.'
The following
section presents some of the Frincipal
arguments given by Senator Stevenson for a Federai Bank
Examination
Counril and our commants on these arguments.
Sen. Stevenson's
arguments
GAO observations
Uniform standards and procedures would prcduce mare consistent
bank supervision
by
standardizing
information
available
to regulators.
- 50 -
Our report confirms
the weaknesses implied by Sen. Stevenson.
.
The three bank re,-ulatory
agenties’
primary influence
on bank
operations
is not throuyh detailed
rules and regulations
but
through the examiners'
comments
in the examination
reoorts.
Until
recently
few objective
criterid
had been established
to assist
examiners in reaching
an overall
contusion
and criticizing the condition
of the bank and
the quality
of its management.
T‘ne new OCC handbook and pro
forma working
pa?ers should
provide mere uniformity
in
collecting,
assemsling,
and
evaluating
data d-rri1.g the
examinations.
(See OCG-77-1, p?.
4-4, 7-7, 7-8, and 7-24.)
.
*
arguments,--- Sen. Stevenson's
A "***standing
mechanism for joint
supervisory
fol!.owup***"
of problem
or failing
banks might be more
effective
than the current
fragmented arrangement.
Because
a bank's condition
can change
rapidly,
the agencies must be
able to act jointly
and speedily.
GAO observations
Our report contains some support
for Sen. Stevenson's
argument.
The agencies
have not used tksir
formal
enforcement
tools frequently enough to force banks to
correct
their
problems.
Further,
the egtincies lack common criteria
for determining
which banks
have &evere problems requiring
close supervision.
Thus,
their lists
of "problem banks"-those requiring
close
supervision
--are different,
even though
all three agencies have an
interest
in the soundness of
many of the same banks. (See
OCG-77-1, pp. 8-18 and 8-48.)
Once uniform Federal standards
are established,
State agencies
could be certified
to examine
banks and duplicate
examinations could be reduced or
eliminated.
Uniform Federal standards
are not a necessary condition
to this approach, but such
standards could help States
in upgrading their capabilities as well as assist FDIC
and FRS in evaluating
the
reliability
of State agencies'
examinations,
which could be
substituted
for Federal
examinations.
(See OCG-77-1,
pp. 4-13 and 4-14.)
The Council could effect
cost
savings by standardizing
forms
and procedures,
jointly
training examiners,
and certifying
State examiners.
Standardizing
forms and procedures, by itself,
may save
sl ightly
on printing
costs,
but such an amount is negligible in relation
to total
costs.
In our report we
recommended that, where
feasible,
OCC, FRS, and FDIC
combine their examiner schools
and standardize
their curriCUlKlS.
(See OCG-77-1,
2. 10-6.)
- 51 -
Federal
Rtserve
System
Fcrmer Governor Holland,
testifying
on behalf of the
Board of Covernors Ln July 1975 , endorsed establishment
of a
Federal Bank Examination
Council as "***an experimental
and
evolutionary
idea***."
Each of the three agencies would
"***delegate
some specific
decision-making
authority
in the field
of examination
procedures ***a to a representative
on the Council.
The members of the Council:
1( ***
areas
making
their
dards
This
Council
would be assigned responsibility
for particular
of bank examination
procedures,
given decisionpower in those areas , and held accountable
by
agencies for the development of suitable
stanand practices
in such areas."
would:
" *** foster greater uniformity
and consistency
in
the modernization
of numerous bank examination
and
enforcement
activities
without most of the disadvantages feared from complete consolidation.
In
addition,
it would permit undertaking
a limited
and
circumscribed
consolidation
effort
promptly,
on an
experimental
basis, with flexibility
to allow for
revisions
that prove desireable."
Office
of the Comptroller
cf the Currencv
Former Comptroller
Smith “***approved
in general the concept
of a Federal Bank Examination
Council to coordinata
matters of
pol5cy***."
Bowever, he objected to giving the council
binding
authority,
rather than an advisory role, because "***policy
questions
should be finally
decided according
to the principles
of th? agencies involved"
and because the "***possibility
to
innovate,
which is the genius of the American bank regulatory
system,
wouid thus be seriously
impeded."
He also objected
to vesting permanent chairmanship
In FFS, preferring
to have
a rotating
chairmanship.
He suggested a more direct
role for
State
agencies,
including
representation
on the Council.
(Letter
to Sen. Proxmire,
July 29, 1976.)
Federal
Deposit
Insurance
Corporation
Chairman Barnett said:
“Xhile
we heartily
endorse the
bill's
objective
*** we have serious reservations
as to the
need for nationally
uniform
examination
standares
and procedures.”
- 52 -
.
The current diversity
of responsibility--three
Federal
agencies and the States--leads
to a greater "***possibility
of usef ul innovation
and improvement***.'
Such changes
as those being implemented by OCC, "should not, however,
require the approval and commitment of each of the other
(Speech, Now. 11,
Federal bank regulatory
agencies.'
1975, to Missouri
Bankers Association.)
OUR ORSERVATION~
The extent of interagency
cooperation
and coordination
The
is discussed
in our recent report (KG-77-1,
ch. 11.).
only formal mechanism for coordination
is the Coordinating
Committee on Bank Regulation
which was established
in 1965.
Other less formal exchanges of information
also occur, but
the full
extent of coordination
between the agensies was not
determinable
because it was not well documented.
Ke noted several areas where closer cooperation
was
needed among the three Federal bank regulatory
agencies.
We recommended that, to achieve such cooperaticn,
the
agencies or the Congress establish
a committee of agency
representatives
to identify
areas where interagency
cooperation
would be beneficial.
In March 1977 the Chairman
"he establishment
of
of FDIC testified
about
*a top level staff
subcommittee made up of the
senior examination
staff officials
of the FDIC,
the Comptroller's
Office,
the Federal Reserve,
and the Federal Home Loan Bank Board to coordinate
matters relating
to bank examination
and supervision.
The function
of ti:is Committee, which will
meet
on a continuing,
periodic
basis,
is to provide
a clearinghouse
for ideas, policies
and procedures L, the area of examination
and supervision."
Another means of furthering
cooperation
would be to
establish
an independent council
or corzission
such as
envisioned
by S. 711. If the Congress decides to establish
a Council we believe the following
revisions
to S. '731
should be considered.
a
.
--Expand the membership of the Council to include
representatives
from other regulators
of financial
institutions
such as the Federal Borne Loan Bank
Board, National
Credit Union Administration,
Farm
Credit Administration,
and State bank supervisory
agencies.
--Finance
the operations
of the Council through
appropriations
rather than from contributions
from
its members to allow the Congress to provide adequate resouroet
for this activity
as well! as congressional
o-.e:sight.
--Authorize
the Council to hire its own stafi
so that
it will
not be Dependent on the member agencies.
--Rotate
chairmanship
of the Council
among the Councxl members.
periodically
--Sroaden the sccse of the Council's
authority.
S. 711 provides that the Council (1) establish
uniform Federal bank examination
standards and
Frocedures,
and (2) may make recommendaticns
for
uniformity
in 0th er supervisory
matters.
In
addition,
the Council wou:d conduct schooi.s for
Federal and State bank examiners ?nd develcp uniform reporting
systems for banks,
bank holding
companies, and non-bank subsidiaries.
With respect to the requirement
that the Council
conduct schools for bank examiners,
the Council
might better serve as a vehicle
for seeing that an
adequate training
program is provided and assuring
effective
cooperation
and coordination
between the
various bank regulatory
agencies and leave the actual
training
to the agencies.
The wording of S. 711 that the Council scmaymake
recommendations
for uniformity
in other supervisory
matters"
leaves much to tne discretion
of the
Council.
Thus, there is no assurance that the
Council would leak into such areas as the supervision of bank holding
companies, Edge Act and "agreement" corporaticns:
or the handling
of a$plicJtions
for structural
changes in the bankin? system such
as applications
for new branches or to merge
existing
banks.
The Congress may w<sh to specify
the areas of b:ank supervision
that the Council
should deal with.
- 54 -
-
- ..-_
Also, it is not clear whether the standards,
procedures,
and recommendations of the Council would be binding
If they are not intended to be bindon the agencies;
ing , the Congress may wish to consider adopting one
of the following
alternatives.
Choice Number One
When a recommendation of the Council is found unacceptable by a Federal banking agency, the agency shall
submit to the Council,
within
a time period specified
by the Council,
a written
statement of the reasons
that th3 recommendation is unacceptable.
Choice Number Two
Khen a recommendation of the Council is found unacceptable by a Federal banking agency, the agency shall
submit to the Council and to both Houses of Congress,
within
a time period specified
by the Council,
a
written
statement of the reasons that the recommenJation is unacceptable.
Choice Number Three
When a recommendation of the Council is found unacceptable
by a Federal banking agency, the agency shall submit
to the Council,
within
a time period specified
by the Council,
a written
statement of the reasons
that the recommendation is unaecentable.
The Council
shall reconsider
such recommendations
in light
of
All such recommendations
that
agency objections.
are not withdrawn by the Council in light
of agency
objections
shall be applied by the banking agencies.
- 55 -
CHAPTER 5
HOWBANKERS VIEW PSGULATORYSTRUCTURC
Part of our recent study (OCG-77-l) was a survey of
commercial bankers.
We asked senior bank managers whether
they supported or opposed the current regulatory
structure
consisting
of 3 Federal and 50 State regulatory
agencies.
OVERALL RESULTS
While a majority
of the bankers (58 percent)
indicated
they supported the current structure,
this endorsement
is not as overwhelming
as one night expect, considering
their
responses to questions
about bank examiners and examination.
For example, senior Federc;l bank examiners'
knowledge
in 10 areas of bank operations
covered by an examination
was rated adequate or betker by a much higher percentage-often as high as 90 percent.
(See OCG-77-1, p. IV-$.)
Bankers were also asked to give their opinion on
Two of
three possible
alternatives
to the present system.
the alternatives
would have abolished
the dual banking system
These two
by retaining
only Federal regulatory
involvement.
alternatives
were ovetwhelmingly
rejected
by the bankers.
The third,
and most favored, alternative
would have
consolidated
Federal involvement
in one agency while
About an equal percentage of
retaining
State supervision.
bankers opposed (44 percent] as supported (42 percent)
the alternative.
The remaining 14 percent were undecided.
GROUP RESULTS
We also grouped the bankc;s in several ways, such as
by their Federal regulator , their
bank's deposit size, their
bank's management rating,
and their status with their Federal
In terms
of
regulator
as a "problem" or "nonproblem"
bank.
these groupings,
sources of support for the current
system
can be summarized as follows:
Retain
the present
system
-- State nonmember banks were
present system (45 percent
-- Support for the present
size increased.
the least
indicated
supportive
support).
system increased
- 56 -
of the
as deposit
--
Problem
system
we
system
declined
supper t for the present
5~s trend
management
rating
declined.
with
the responses
from problem
banks.
EiO
group
alternatives
banks were less
supportive
than nonproblem
banks.
of bankers
which
would
supported
eliminate
of
the
present
as
is
a bank’s
congruent
either
of the two
system.
the dual
banking
Federal
supervision
4Consolidated
in one agency
2nd retarn
State
involvement
The
together
responses
with
State
to
the alternative
involvement
can
-.-
State
nonmember
this
choice
in
of bankers.
--
Support
for this
size
increased.
--
Problem
alternative
u-
Banks with
alternative
.
banks
bankers
comparison
were more supportive
with
the other
two
alternative
were slightly
than
nonproblem
the poorest
the greatest
of one federal
agency
be summarized
as follows:
declined
as deposit
more supportive
banks.
management
support.
of
types
rating
of
gave
this
this
CONCLUSIONS
The present
system
regardless
of how they
than
half
(48 percent)
and bankers
from “problem
present
system.
I+?e did
in terms
of some other
rating.
In
highlighting
our
was endorsed
bY a majority
of bankers,
Less
are grouped,
with
two exceptions.
of State
nonmember
bankers
(FDIC-examined)
banks”
(49 percent)
supported the
not attempt
to further
isolate
this
group
category
such as deposit
size 0:: management
study
we concluded
that:
“Our data
revealed
a seemingly
contradictory
pattern
-t:hi.le
i
bankers
from small
banks tended
to be more suDporti;e
of Federal
bank examiners
and the examination
nroce&s
than
bankers
from large
banks,
these
same small
bankers
were
less
inclined
to support
the present
structure
of bank
snpervisiqn
. Bankers
from small
banks swear
to strongly
support
what is being
done , but they are-somewhat
am,Sivalent
about
who does it so long as the dual
FederalState
involvement
is preserved.”
(OCG-77-:a,
p. 55)
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@FedFRASER