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For release on delivery
10 00 am EST
March 2, 1994
Testimony by
Alan Greenspan
Chairman, Board of Governors of the Federal Reserve System
before the
Committee on Banking, Housing, and Urban Affairs
United States Senate
March 2, 1994
Mr Chairman, I am pleased to appear today before the Senate Banking
Committee to give the views of the Federal Reserve Board on proposals to consolidate
the banking regulators into a single agency We have prepared a detailed analysis of
such proposals, which I have attached to my statement My remarks this morning will
highlight that analysis
The proposals to create one federal bank regulator have the clearly stated
objectives of reducing the government's costs of regulating and supervising banks, of
reducing bankers' costs and burdens from duphcative examination and overlapping
supervision, and in general making the supervisory process more efficient and more
accountable The Federal Reserve Board shares these goals, but disagrees with the
approach of one regulator for achieving these objectives However, the Board believes
that it is possible to achieve virtually all of these proposals' objectives without creating
the risks of one regulator that so trouble us
In reaching this conclusion, the Board tested various proposals against
the fundamental principle that the purpose of regulation is to enhance the capability of
the regulated entity to contribute effectively to the nation's long term economic growth
and stability We have concluded that for this to be accomplished four subsidiary
principles must be achieved
•
First, there should not be a single monolithic federal regulator
•
Second, every bank should have a choice of federal regulator
•
Third, there should be only one federal regulator for all of the
depository institutions in any single banking organization.
•
Fourth, the U S central bank should continue to have its essential
hands-on involvement in supervision and regulation
A consolidated single regulator would deprive our regulatory structure of
what the Board considers to be the current invaluable restraint on any one regulator
conducting inflexible, excessively rigid policies Laws on bank regulation and
supervision must be drawn very generally leaving the specifics to agency rulemaking.
This vests the agencies with a broad mandate and a not inconsiderable amount of
discretionary power Hence, a safety valve is vitally needed to avoid the exercise of
arbitrary actions A denial of, or severe limitation of, charter choice closes off a safety
valve inevitably leading to greater micromanagement of banks and a lessened market
for bank credit We must avoid a regulatory structure that inhibits economic growth
The present structure provides banks with a method—albeit one neither
easily accomplished nor often taken—of shifting their regulator, an effective test that
provides a limit on the arbitrary position or excessively rigid posture of any one
regulator The pressure of a potential loss of institutions has inhibited excessive
regulation and acted as a countervailing force to the bias of a regulatory agency to
overregulate
The dual banking system and multiple federal regulators have facilitated
diversity, inventiveness, and flexibility in our banking system, so important to a market
economy subject to rapid change A single federal regulator would effectively end the
dual banking system it would become an empty shell if a state-chartered entity had no
choice of federal regulator or—reflecting a recent FDICIA provision—different asset
powers The dual banking system cannot survive consolidation at the federal level I,
as well as my colleagues on the Board, believe that would be a tragic loss
In addition to the effective loss of the dual banking system, the single
regulator contemplated in current proposals would be disconnected from broad
economic policy issues This is a problem because a regulator that does not have
macroeconomic responsibility for its actions is likely to inhibit prudent risk-taking by
banks, thus limiting economic growth and stability The central historic purpose of
banking is to take risks through the extension of loans to businesses and others.
Economic growth in our system could not occur without risk-taking by entrepreneurs
and small and large businesses Risk-taking requires financing Thus, either an
unwillingness or an inability of lenders to take risks would slow the expansion of our
nation's employment and income This fact creates a significant policy tradeoff in
banking regulation, especially because of the government guarantee of bank deposits
On the one hand, regulators are concerned about bank failures and their effects on the
economy, as well as their cost to the insurance fund On the other hand, banks need
to take risks to finance growth Tradeoffs are required, and a swing in either direction
can create both short- and long-term problems
Indeed, a single regulator with a narrow view of safety and soundness
and with no responsibility for the macroeconomic implications of its decisions would
inevitably have a long-term bias against risk-taking and innovation. It receives no
plaudits for contributing to economic growth through facilitating prudent risk-taking, but
it is severely criticized for too many bank failures The incentives are clear
The Federal Reserve's stabilization objectives cause us to seek to avoid
either excessive tightness or ease in our supervisory posture The former leads
inevitably to credit crunches, and the latter to credit policies that contribute, with a lag,
to bank losses and failures This is not to say, as some have advocated, that the Fed
itself should be the only regulator A single regulator Fed would be prone to arbitrary
and capricious behavior as would any other single bank regulator We would thus
oppose such an initiative, since as a single regulator we would inevitably drift to
increasing day-by-day control of banking institutions who would soon become less
innovative and competitive—a severe loss to the nation
Not only is it important that one of our regulators have macroeconomic
responsibility in order to carry out the regulatory function properly, but also our central
bank must continue to have hands-on involvement in supervision and regulation in
order effectively to carry out its macroeconomic responsibilities Joint responsibilities
make for better supervisory and monetary policy than would result from either a
supervisor divorced from economic responsibilities or a macroeconomic policymaker
with no involvement in the review of individual bank's operations Without the
hands-on experience of regulation and supervision, and the exposure to the operations
of banks and markets provided by such experience, the Federal Reserve's essential
knowledge base would atrophy Its deliberations would become increasingly academic
and the nation's central bank would soon resemble an ivory tower rather than an
institution necessarily involved with the day-to-day activities of our economic and
financial system It is our knowledgeable examiners and supervisors—knowledgeable
about banks, financial markets, and the payment systems that connect them—that
provide the expertise the Fed needs And the fact is that we simply could not retain
such staff if they were not actively involved in the process, reading reports or joining as
junior participants in a handful of examinations would not be sufficient
Some have argued that most foreign central banks are not involved in
bank supervision and regulation In fact, as described in more detail in the attachment,
central banks in all but one G-7 country (Canada), in most cases de jure but always de
facto, are closely involved with the supervision of banks in their countries and
internationally More broadly, the central bank has either total or shared responsibility
for bank supervision in three quarters of the nations in the OECD One example that is
frequently used by those that believe that central banks in foreign countries are not
involved in supervision is the Bundesbank The facts are quite the contrary the
Bundesbank has more supervisory staff than the German Federal Banking Supervisory
Office, reviews the auditors' reports before the Banking Supervisory Office receives
them, and has veto power over certain liquidity and capital regulations of that office In
all industrial countries, either central banks or finance ministries, or both, are involved
with supervision because nations have come to understand that bank supervision has
economic consequences that are important for stability and economic growth
Removing the Federal Reserve from supervision and regulation would
greatly reduce our ability to forestall financial crises and to manage a crisis once it
occurs In a crisis, the Fed could always flood the market with liquidity through open
market operations and discount window loans But while rapid liquidity creation is often
a necessary response to a crisis, supervision and regulation responsibilities give the
Fed insight and the authority to use less blunt and more precisely calibrated techniques
to manage such crises and, more importantly, to avoid them The use of such
techniques requires both the clout that comes with supervision and regulation and the
understanding of the linkages between supervision and regulation and macroeconomic
growth and stability
The Fed is required to play the key role when systemic breakdown
threatens The attachment to my statement provides some detail about Federal
Reserve involvement in financial crises over the last decade As you review it, I request
that you consider certain key questions
Could the Fed without supervisory responsibilities have successfully
managed the Mexican debt crisis of 1982, the 1985 collapse of Ohio and Maryland
privately insured thrifts, the stock market crash of 1987, or the Drexel failure of 1990?
Would the banking community have been persuaded to respond as they
did in each of these cases by a central bank with much more limited authorities to affect
events? Would the Fed have been able to play a role in persuading many of the banks
to complete the payments necessary to prevent payments gridlock without supervisory
knowledge and authority?
Finally, would a single bank regulator with no macroeconomic stabilization
responsibilities have given the proper weights to financial market stability and economic
growth? Without market expertise, would such a regulator have recognized early
enough many of the problems central to resolution of these crises?
In my judgment, the nsk that the answer to all of these questions is "no" is
too great to take
There are ways, short of the creation of a single agency, to address the
problems in the current regulatory structure and reduce the costs of regulations The
crux of the issue is duplicative examinations of banks. This problem could be
eliminated by a regulatory system that maintained two federal regulators, but provided
that in general only one of those regulators supervised all the depository institutions in
any banking organization
While there are many ways to achieve an improved regulatory structure,
one such approach supported by the Federal Reserve Board that could be
implemented with a relatively modest series of reforms would contain the following
provisions
•
Merge the OCC and the OTS This organization would become the
Federal Banking Commission
•
Remove the FDIC from examining healthy institutions
•
Put all independent national banks, all lead national banks that are
part of a holding company, and all thrifts under the purview of the
Federal Banking Commission, and put all independent state banks,
and all lead state banks in a holding company under the purview of
the Federal Reserve
•
Provide that the supervisor of the lead depository in a banking
organization also be the supervisor and regulator of all the
depository institutions in the organization regardless of the charter
class of those affiliates.
•
Finally, treat all U S activities of foreign banks as now, with
adjustments where necessary to reflect the changes in the
regulatory structure described above
The Board has not yet adopted a position on the supervision and
regulation of bank holding companies and their nonbank affiliates There are two broad
options, and a strong case can be made for each
•
Under the first option, all holding companies and their nonbank
affiliates could remain under the Fed's jurisdiction, continuing to
provide uniform rulemaking for competitive equity and a substantial
role for the Fed in shaping the financial structure, so useful for
stabilization and systemic risk purposes
•
Under the second option, the jurisdiction of virtually all holding
companies could be split between the Fed and the FBC on the
basis of the charter class of the lead bank However, for systemic
risk reasons, jurisdiction over the holding companies and nonbank
affiliates of a modest number of banking organizations that meet
certain criteria—such as large size and payment and foreign
activity—would be retained by the Fed, even if the lead bank of the
organization had a national charter organization
Under either option, the number of banking organizations subject to multiple regulators
would drop sharply
Whichever holding company option is selected, the general proposal
would have the Fed supervise and regulate state nonmembers, with these banks being
a significant addition to our existing regulatory load. This expansion of the Fed's
supervisory functions rests solely on the notion that in a two agency structure, it is
desirable to have supervision and regulation responsibility defined clearly by charter
class in order to preserve the dual banking system The Board makes no case that
responsibility for such banks— that account for almost one-quarter of bank assets—is
needed for financial stability and monetary policy purposes However, responsibility
over banks of various sizes and locations, as under our existing authorities, is required
if the Fed is to perform its functions effectively
The Board's approach would achieve essentially all of the benefits of one
consolidated regulator while incurring virtually none of its risks It eliminates duplicate
supervision of depositories in a single banking organization and greatly reduces
overlapping regulation It maintains the dual banking system and permits any bank to
change federal regulator by changing charter, thus ensuring a set of checks and
balances on the arbitrariness of a single regulator It maintains the healthy process of
dynamic tension in bank rulemaking It maintains the practical knowledge and skill, and
the influence and authority, of the central bank, so critical for crisis prevention, crisis
management, and monetary policy It maintains the valuable perspective the central
bank brings to supervision In short, the proposal would avoid an inflexible, single
regulator, preserve the dual banking system, assure that an economic perspective is
brought to supervision and regulation, and maintain a strong central bank
The Views
of the
Board of Governors of the Federal Reserve System
on the
Consolidation of Bank Supervision and Regulation
March 1994
Table of Contents
Page
Introduction and S u m m ary..............................................................................
1
Central Banking and Supervision and R e g u la tio n ..........................................
5
C risis M an ag e m e n t..............................................................................
Monetary P o lic y .................. .................................................................
Payment S y s te m ............................. ...................................................
Foreign E xp e rie n ce ..............................................................................
8
18
20
22
A Single Bank R e g u la to r................................................................................
24
An Alternative P r o p o s a l.................................................................................. 28
Statistical Appendix: The Current and An Alternative Supervisory
Structure of Banking Organizations in the United States ............................ A-1
tMTOOOUCIION AMD SUMMARY
The Board of Governors of the Federal Reserve System agrees that the
Congress should take steps to reduce dupicative bank examinations and overlapping
regulation. But it is concerned diet d ie single regulator proposals do so by removing
the benefits of the existing system and creating new problems and risks, without
addressing the need tor fundamental modernization of permissible banking activities.
Moreover, the Board notes dud mast of the e xcess burden banks now la ce reflects
legislative and regulatory reaction to stresses in the banking system that becam e
evident after the m id-1980s. M ost of these burdens would remain or, at best, be only
marginally reduced by reforms of the regulatory structure that would leave untouched
the supervisory micro-m anagem ent required by recent legislation.
Nonetheless, the Congress could reduce regulatory burden and improve
government efficiency by addressing regulatory overlap and duplicative examinations.
In doing so, the Board urges the Congress to balance the benefits of regulatory reform
with the need to preserve both the special and unique nature of the U.S. banking
system and the ability of the central bank to perform effectively its stabilization
functions.
The single regulator proposals seek to resolve the problems in the
regulatory structure by creating a single federal bank and thrift regulator that would take
over the current regulatory roles of the Office of the Comptroller of the Currency (OCC),
the Federal Deposit Insurance Corporation (FDIC), and the Office of Thrift Supervision
(OTS), and most of those of the Federal Reserve (FR). While such an approach would
deal with duplication, inconsistency, and overlap, it would create problems and run risks
that are far more serious. In short, the Board believes these proposals are poor public
i
policy because they are Adverse to three principles which the Board believes are basic
to any bank regulatory structure:
1.
To avoid the risks associated with the^uhdue concentration of
regulatory power, there should be at (easf two federal regulators,
one ojf which should have macroeconomic responsibilities; Any
single regulator would be prone to arbitrary actions because*«t ;
would not have the checks and balances provided by two or more
agencies.
A single regulator would th ijsb e more likely to make
sudden and, perhaps, dramatic changes ip policy that would add .
uncertainties and instability to the banking system. A single
regulator without macroeconomic responsibilities would also have
a tendency to inhibit prudent risk taking by banks, thus limiting
econom ic growth.
2.
The dual banking system— in which banks can be chartered by
either the states or the federal government— should be preserved.
It has served this nation well. Without a choice of federal regulator,
such a system cannot survive. Choice of both charter and federal
regulator facilitates the diversity of approach that has made the
U.S. banking system the most innovative in the world.
3.
A s the nation’s central bank, the Federal Reserve System should
continue to have direct hands-on involvement in supervision and
regulation of a broad cross-section of banking organizations in
order to carry out its core central bank responsibilities to insure the
stability of the financial system, manage the payment system, act
as a lender of last resort, arid formulate and implement a sound
monetary policy. Without such involvement, the central bank would
not be able to maintain either its knowledge of markets and
banking or the influence of a regulator so necessary for both
macroeconomic policy development and crisis management. It
would pose unnecessary risks to remove the Federal Reserve from
supervision and regulation at a time when the continuing evolution
of new financial instruments, increasing globalization of financial
markets, the implementation of more active financial management
strategies, and the speed of electronic technology may make
system ic risk containment more difficult.
The Board believes that it is possible to achieve virtually all of the public policy benefits of
the single regulator proposals without violating any of these principles.
The critical impairment of the Federal Reserve’s hands-on authority over,
and involvement in, the activities and operations of banks, as called for by all of the
current proposals, would significantly undermine the effectiveness of the Federal
Reserve in carrying out its public policy responsibilities. The Federal Reserve must
know in a practical detailed way how the banking system works, where the
vulnerabilities lie, and have the ability and authority to influence banking organizations’
actions. Reports from another agency— or Fed representation on another agency’s
board— would not provide such experience. A ccess to written supervisory reports at
another agency might be useful for assessing a specific problem in a specific bank. It
would add little to the Fed’s capabilities in addressing financial crises. A s Gerald
Corrigan, the former President of the Federal Reserve Bank of New York, recently
noted, the hands-on intimate knowledge from supervisory responsibilities “. .. cannot
be taken out of the closet only when needed and it certainly cannot be realized by
reading another agency’s exam report."
3
A single regulator without the responsibility for the economic
consequences of its actions would inevitably result in a regulatory stance with a
long-term bias against risk taking— and, hence, econom ic growth— and with likely
shorter-run policy shifts between excess laxity and restraint. Any single regulator, even
if it were the Federal Reserve, would also have a bias toward arbitrary actions and
would eliminate the beneficial diversity and pluralism of our dual banking system.
There is little reason to believe that such a regulator would be any more efficient in an
economic or managerial sense, and it would certainly be less flexible than our current
structure with its checks and balances. Indeed, most of the prospective regulatory cost
savings that are likely to result initially from the creation of a single bank regulator
would also accrue to a regulatory system which included the Federal Reserve.
Moreover, such cost savings, if there were only one regulator, would likely be dissipated
over time as the bureaucratic inefficiencies of a monopoly regulator took hold. In
addition, a single regulator is likely to impose costs on the economy from slower
economic growth, more variable supervisory policy, and reduced effectiveness of the
macroeconomic stabilization policies of the Federal Reserve, all of which could easily
swamp any dollar cost savings to the government from combining the regulatory
agencies into a single agency.
Essentially all of the benefits of a single regulator can be obtained with
less disruption and risk while still retaining the formidable benefits of the present
system. Elimination of duplicate examinations and adoption of a single supervisor for
virtually all banking and thrift organizations can be accom plished with two banking
agencies, each of which would be given clearly defined supervisory responsibilities.
Such an approach would preserve the dual banking system by permitting real choice of
4
federal regulators, and maintain the ability of our central bank to fulfill its
responsibilities.
CENTRAL BANKING AND SUPERVISION AND REGULATION
Since its inception the Federal Reserve has been at the nexus of
monetary policy, the payment system, and bank supervision and regulation. Indeed,
the importance of supervision as a fundamental responsibility of the central bank was
emphasized in the 1913 preamble of the Federal Reserve Act, which called on the
Federal Reserve “. . . to establish a more effective supervision of banking
the United
States.” Over the years, it has become clear that the Fed is a better supervisor
because it has economic stabilization responsibilities. Such responsibilities require it to
evaluate the econom ic implications of its and other agencies' supervisory stance, in
effect recognizing that safety and soundness goals include concerns about the stability
and growth of the economy. These joint responsibilities, the Board believes, make for
better supervisory and monetary policy than would result from either a supervisor
divorced from economic responsibilities or a macroeconomic policymaker with no
practical experience in the review of individual bank’s operations.
To carry out its responsibilities, the Fed has been required over the
decades to build up extensive, detailed knowledge of the intricacies of the U.S., and
indeed the world, financial system. That expertise is the result of dealing constantly,
and in detail, with changing financial markets and institutions and their relationships
with each other and with the economy, and from exercising supervisory responsibilities.
It comes as well from ongoing interactions with central banks and financial institutions
abroad.
5
Federal Reserve supervisory and regulatory activities have been an
integral and indispensable aspect of this process. Continuing interactions with banking
organizations, both large and small, are one of the key ways that the Fed has acquired
detailed insights into how our system functions. This view is not simply one held by the
current Board. At least since the Roosevelt Administration, Federal Reserve Boards
and their chairmen have felt the necessity for the central bank to be involved actively in
the formulation and execution of supervisory policy, and have made that point to the
large number of private and public groups and com missions that have reviewed the
issue.
To meet the public policy objectives given to it, the Federal Reserve must
maintain a staff of skilled supervisors. It would not be able to attract and maintain such
a staff with the limited functions outlined in the single regulator proposals. Even with a
knowledgeable staff, it would be virtually impossible to get an operationally effective
sense for developments by reading reports or having discussions with the staff of a new
single regulator. The Fed would not be in a position to evaluate requests for discount
window loans to problem banks and thrifts because it would not have either timely
knowledge of the financial condition of these banks or highly competent supervisors to
evaluate the position of another agency’s examiners. The authority to examine for
discount window purposes would be meaningless because it would come into play
much too late if it were exercised only at the time of the loan request. To be
meaningful, such authority would require full periodic examination and review of a
significant number of banks so that the Fed would be able to know the condition of the
banking system, as well as the condition of the institution to which it is lending, and
have the on-going supervisory expertise to evaluate the new agency’s view of the
potential borrowing entity. Indeed, Congress recognized in FD ICIAthe need for
6
independent Federal Reserve evaluation of depositories to which the Fed extends
credit. The sample of banks subject to Federal Reserve examination in the current
proposals falls far short of our view of what is required.
Similarly, examination for payment system purposes (as is advocated in
some reform proposals) cannot simply be a review of controls, procedures, and
systems, as important as that is. What is most relevant is the risk exposure that
domestic and foreign participants in the dollar clearing and payment system s create on
fedwire to the Fed (and hence to the public) or to banks on private systems. The
day-to-day evaluation of these risk exposures requires prudential examination and
supervision authority of a general nature or a cadre of skilled examiners that can
evaluate another agency’s exam. Anything less may give the Fed apparent
responsibility without the necessary expertise or authority.
Eliminating the U.S. central bank from adequate hands-on supervision
and regulation would remove the accumulated human capital built up over 80 years of
experience with a wide spectrum of banking organizations. Such capital cannot—
without linkage to economic policymaking—-be duplicated in the short run or
transplanted. Moreover, without the hands-on experience of regulation arid
supervision, the Federal Reserve’s essential knowledge base would atrophy.
Consequently, its deliberations would become increasingly academic and the nation’s
central bank would soon resemble an ivory tower rather than an institution necessarily
involved with the day-to-day activities of our economic and financial system. There is
regrettably a view in some circles that monetary policy can be Conducted by a central
bank with no practical knowledge of banking or responsibility for bank operations.
Indeed, some observers argue that monetary policy would be improved if the Federal
Reserve’s attention were not diverted to supervisory and regulatory issues. The Board,
7
recognizing that banks and the financial system are the interface between monetary
policy and the economy, disagrees strongly with this point of view. It believes that such
an academ ic approach would be likely to lead to seriously deficient policymaking by
reducing the F ed ’s practical understanding of markets, credit conditions, and
institutions.
Removing the Federal Reserve from supervision and regulation would
greatly /educe its ability to forestall financial crises and to manage a crisis once it
occurs. In a crisis, the Fed, to be sure, could always flood the market with liquidity
through open market operations and discount window loans; at tim es it has stood ready
to do so, and it does not need supervision and regulation responsibilities to exercise
that power. But while often a necessary response to a crisis, such an approach may be
costly, destabilizing, and distortive to economic incentives, as well as being insufficient.
Supervision and regulation responsibilities give the Fed insight and the authority to use
less blunt and more precisely calibrated techniques to manage such crises and, more
importantly, to avoid them. The use of such techniques requires both the clout that
com es with supervision and regulation and the understanding of the linkages among
supervision and regulation, prudential standards, risk taking, relationships among
banks and other financial market participants, and macrostability.
Crisis Management
,
Our financial system— market oriented and characterized by innovation
and rapid change— imparts significant benefits to our economy. But one of the
consequences of such a dynamic system is that it is subject to episodes of stress.
Recent examples include a series of international debt crises, a major stock market
crash, the collapse of the most important player in the junk bond market, the virtual
8
collapse of the S& L industry, and extensive losses at many banking institutions. In such
situations the Federal Reserve provides liquidity, if necessary, and monitors
continuously the condition of depository institutions to contain the secondary
consequences of the problem. The objectives of the central bank in crisis management
are to contain financial losses and prevent a contagious loss of confidence so that
difficulties at one institution do not spread more widely to others. The focus of its
concern is not to avoid the failure of entities that have made poor decisions or have had
bad luck, but rather to see that such failures— o r threats of failures— do not have broad
and serious impacts on financial markets and the national, and indeed the global,
economy.
- The types of financial crises that arise from time to time are rarely
predictable, and almost always different. The Fed’s ability to respond expeditiously to
any particular incident depends on the experience and expertise that it has
accumulated over the years about the specifics of our system and its authority to act on
that knowledge. In responding to a crisis or heading off potential crises, the Federal
Reserve continuously relates its supervisor-based knowledge of how individual banks
work with its understanding of the financial system and the economy as a whole.
This does not necessitate comprehensive information on each individual
banking institution, but it does require that the Fed know in depth how institutions of
various sizes and other characteristics are likely to behave and what resources are
available to them in the event of severe financial stress. It currently gains this insight by
having a broad sample of banks subject to its supervision and through its authority over
bank holding companies.
9
The Federal Reserve employs its accumulated experience and expertise
in large measure to work with other regulators here and abroad and with private parties
to build strong institutional structures resilient to the inevitable strains that hit financial
systems. For example, in consultation with the other agencies, the Fed uses its
comprehensive econom ic knowledge to ensure that the econom ic consequences of
proposed rules are considered. In addition, the Fed’s leadership with G -1 0 central
banks has led to higher and more consistent capital standards and vastly improved
criteria for payment system management.
The Fed plays the key role when system ic breakdown threatens. Such
episodes invariably create fear and uncertainty in the financial markets. Fear of
counterparty risk escalates, and the threat of paralysis in financial markets and the
breakdown of payment and credit arrangements that underpin them become all too
real. It is important that a regulatory authority fully familiar with the dynamic
international economic and financial forces in play be available to counsel and urge
rational responses— and, a s a last resort, provide liquidity. If regulatory authority is
vested in a single agency and little in the central bank, our nation’s ability to forestall or
to respond efficiently and effectively to a crisis would surely be impaired.
Perhaps a few examples of Federal Reserve involvement in past crisis
management would help illustrate and clarify these points.
In early 1990, the parent of the leading dealer in junk bonds, Drexel
Burnham, failed, with potential significant impacts on financial markets. The Fed's
concern was not for the failure of a particular securities firm, but rather the impact that
failure might have on other financial institutions and on the functioning of capital
markets essential to economic growth and. job creation.
to
From the central bank’s perspective, the greatest threat w as potential
gridlock in the system of paying for, and delivering, securities. Orderly liquidation of
Drexel’s substantial holdings, especially of mortgage-backed securities, was nearly
stymied by the fears of market participants who became exceedingly reluctant to deliver
securities or make payments to Drexel or finance its securities position. This caution,
while entirely understandable, could have brought the liquidation process to a standstill.
Had this occurred, capital markets would have been disrupted and the financial system
would have become more vulnerable in the future to the slightest whiff of problems at
any major market player.
The key to preventing gridlock was the cooperation of clearing banks,
through whose books most of the payments and securities flowed, and who are the
back-up source of credit to the securities markets. Because of its ongoing supervisory
relationships and knowledge of the payment system’s infrastructure, the Federal
Reserve Bank of New York had the access, contacts, and in-depth knowledge of these
institutions that enabled it to address this complex problem. The Fed understood the
potential problems of Drexel’s counterparties and clearing banks and had established
close working relationships with key personnel. The Fed was able to use its knowledge
and relationships to work with the banks and securities firms to identify developing
problems, and fashion procedures that enabled securities to be transferred and credit
to be extended to facilitate an orderly winding down of Drexel without adverse effects
on innocent bystanders or adding to the overall fragility of the financial markets.
Another example of Federal Reserve involvement in crisis management is
the record stock market break of October 19,1987, a drop paralleled by similar price
declines in all major stock markets of the world. These events represented a serious
threat to the stability of the global financial system. Formulating and carrying out
11
actions to maintain the integrity of the banking system, and thus limit the damage
inflicted by the drop in stock prices, required a variety of skills and powers. Particularly
crucial were the Federal Reserve's knowledge of financial markets, its contacts with
foreign central banks and with U.S. securities and commodities regulators, and its
experience with supervising and regulating banking institutions and the payment
system, all working hand-in-hand with its monetary policy.
Perhaps most visibly, early on October 20, the Federal Reserve issued a
statement indicating that it stood ready to provide liquidity to the economy and financial
markets. In support of that policy, the Federal Reserve conspicuously and aggressively
added reserves to the banking system on a daily basis through the end of the month.
These actions were taken as a central bank and could have been taken without
supervisory and regulatory authority.
However, the Fed’s actions went far beyond the provision of reserves.
The System took a number of other steps that drew on its expertise in the operation of
markets and the payment system and in assessing the financial strength of important
participants. These included increased surveillance of the U.S. government securities
market, and more frequent contact with participants and regulators at the Treasury and
elsewhere. But a focal point of these actions was the banking system. Drawing on its
supervisory experience, the Fed immediately assessed the funding and risk
characteristics of major banking organizations to help identify any emerging problems.
Federal Reserve examiners on-site in major banking institutions obtained information
rapidly on potentially significant lending losses and emerging liquidity pressures.
Examiners were also sent into firms directly affected by an options dealer that had
suffered large losses. To detect the development of any bank runs, the Federal
Reserve monitored currency shipments to. all depository institutions. Frequent contact
12
with counterparts in other major financial centers kept both the Fed and foreign
authorities informed about developments in markets and at international banks and
other financial firms.
The credit relationships between banks and securities firms received
particular attention. To obtain information about securities credit, the Federal Reserve,
through its examiners, was in frequent contact with both banks and securities firms
regarding the liquidity and funding of broker/dealers. Securities dealers' need for credit
was expected to rise, but with substantial losses likely from the large drop in stock
prices both firms and their customers would have less collateral to secure borrowing.
In its discussions, the Fed recognized that banks needed to make sound credit
judgments in the circumstances, but it also stressed the systemic problems that would
develop if the credit needs of solvent, but illiquid, firms were not met.
Problems in the futures and options markets, in particular, illustrated the
relationship between the banks and the securities firms, as concern grew that gridlock
was being approached in the settlement systems of the Chicago exchanges after large
margin calls on October 19 and 20. At the time, margin calls were collected through
four settlement banks in Chicago. Clearinghouse members were unable to fund their
accounts at the settlement banks in time to meet the margin calls. Owing to the
unusual size of the margin calls to certain large clearing members, the settlement
banks were unwilling to confirm those members’ payments to the clearinghouse until
they could verify that funds had been received to cover the payments from the New
York banks at which the relevant clearing firms maintained their principal banking and
credit relationships.
At the same time, the New York bankers were already concerned
about rumors regarding the creditworthiness of their customers and had little time to
fully understand the exposures that the securities firms had across other lines of activity
13
such as foreign exchange, risk arbitrage, and block trading. Telephone calls placed by
officials of the Federal Reserve Bank of New York to senior management of the major
New York City banks helped to assure a continuing supply of credit to the clearinghouse
members, which enabled those members to make the necessary margin payments.
While it is difficult to determine how the situation would have evolved in
the absence of these actions, it seem s reasonable that the risk of even more disruptive
developments would have increased. The Federal Reserve’s ability to reach judgments
about what actions were necessary depended critically on both its supervisory and its
economic knowledge of financial markets, banking institutions, and payment system s
and the Fed’s credibility with market participants accumulated through many years of
operating in the markets and supervising banks.
The collapse of state chartered, privately insured thrift systems in the
states of Ohio and Maryland in the m id-1980s were other incidents in which the
Federal Reserve drew heavily on its supervisory resources and experience in carrying
out its crisis management responsibilities. When the largest of 71 privately insured
institutions in Ohio was reported to have suffered heavy losses due to fraudulent
securities transactions, depositor runs were triggered at the affected institution and
confidence in the viability of the insurance fund was undermined. These developments
led to runs at many other institutions insured by the fund. Within two weeks, the
Governor of Ohio had closed all of these institutions, and a law was then enacted that
permitted their reopening only if they were able to obtain federal deposit insurance.
Maryland’s problems followed within months, as the collapse of the Ohio
system raised concerns about the ability of the private insurer of 101 state-chartered
savings institutions in Maryland to cover losses if they were to arise. Those concerns
14
received confirmation when the two largest of these institutions were found to be
insolvent due to fraud and other abusive practices. Once again, depositor runs at the
insolvent institutions and at other institutions insured by the fund forced the closing of
all, with their reopening conditioned on their being found eligible to access the Federal
Reserve's discount window. Additionally, the state promptly enacted legislation that
required these institutions to obtain federal insurance, be merged with an insured
institution, or to be liquidated.
Responding to requests for assistance from the governors of each of
these states, the Federal Reserve assembled examiners from throughout the System
— with a sizable contingent of examiners from the O C C and FDIC joining in the case of
Maryland— to help resolve the crises. Under the Federal Reserve’s general direction,
examiners entered virtually all affected institutions in both states to evaluate assets that
might serve as collateral for discount window loans, to monitor deposit outflows and
currency drains from the institutions, and to assess their financial condition.
Simultaneously, the Federal Reserve took steps to ensure that currency was
strategically placed in selected areas of each state to permit quick delivery to
institutions experiencing heavy cash withdrawals. Because of these efforts, the System
was able to extend discount window loans expeditiously when institutions encountered
serious liquidity problems, to process checks, A C H payments and the wire transfers of
the institutions prudently and effectively, and to meet all requests for currency.
The Federal Reserve also served as advisor to state authorities and a
facilitator of discussions with major depositories that sought to find solutions to these
problem situations. In short, the Federal Reserve’s broad mandate for economic
stability, coupled with its operational experience in markets and supervision, played an
instrumental role in resolving each crisis in as orderly a manner as possible, and
15
effectively contained the potential for spillover effects on federally insured depositories
and other financial institutions.
A final example is the Mexican debt crisis of 1982, which marked the
beginning of a generalized debt problem in the less developed countries in the 1980s
that threatened the world's financial system and econom ic growth. The Federal
Reserve recognized the potential for problems because of both its expertise and its
intimate role in banking supervision. Bank and bank holding company supervisory
reports and the judgment of Federal Reserve examiners provided vital information
regarding the fact that exposures to countries that were susceptible to payments
difficulties were well in excess of the capital of many banks. Not just the largest U.S.
banks, but also many smaller banks were significantly involved; in total, more than 150
U.S. banks had exposure to Mexico. When the Latin American debt crisis broke
publicly in 1982 with a potential default by Mexico on more than $50 billion in claims
held by international commercial banks, the Fed was positioned to act quickly to
organize the international provision of liquidity support while a more permanent solution
was worked out. The Fed could respond quickly and comprehensively because of the
practical knowledge gained from hands-on examination of banks, its deep involvement
in the country-risk examination process, and its extensive contacts with foreign central
banks.
After the initial phase of the debt crisis, tension developed between two
seemingly conflicting considerations. On the one hand, the financial strength of the
banking system needed to be protected and restored in light of the potential losses by
banks on their exposures to developing countries. On the other hand, if at least
conditional access by developing countries to funding from hundreds of U.S. and
foreign banks were not maintained, those countries would not have been able to work
16
out their problems in an orderly fashion. The collapse of those countries’ ability to
renegotiate their debts would have increased the likelihood of widespread bank failures
in the United States and around the world, threatened the stability of the global financial
and trading system, and worsened the already tenuous growth prospects of the
industrial countries.
The Federal Reserve, by virtue of its combined responsibilities for
oversight of the financial and the dollar payment systems on the one hand, and
maintenance of macroeconomic stability on the other, was in a unique position to
recognize these complex interactions and incorporate these considerations effectively
in its supervisory actions. Through its active involvement in the daily supervisory
process of a broad cross-section of U.S. banks, the Fed had the perspective and the
knowledge to ensure that general supervisory policies, which often were initiated to
deal with other concerns, did not impair overall efforts to resolve the LD C debt problem.
Working with the Treasury and foreign central banks, the Federal Reserve understood
that over an appropriate time horizon considerations of financial prudence and
macroeconomic stability were not, in fact, conflicting but rather required the same
patient responses. Indeed, the Fed took the lead in coordinating a response by the
U.S. bank supervisory agencies that avoided overaction to the Mexican crisis. In
particular, U.S. commercial banks were not penalized for their participation in a
constructive solution to the systemic threat posed by that crisis.
This last experience illustrates a point anticipated earlier. An agency with
the sole or primary goal of prudential supervision and regulation, and without
responsibility for the economic consequences of its own actions, will of necessity tend
to focus almost entirely on a narrow view of safety and soundness. It will be severely
criticized by the Congress and others if a bank fails on its watch; it will not receive credit
17
for avoiding other failures in unusual circumstances by being flexible. It will not have
the market experts— the economists and other specialists who spend their careers
understanding evolving institutions and instruments and how they react during adversity
and crisis. It is the combining of the Fed's supervisory knowledge with that of these
other experts and its broad macroeconomic responsibilities that facilitates— indeed,
requires— the balancing of the prudential supervision of banks against the broader
econom ic implications that surround a crisis.
Monetary Policy
While crises arise only sporadically, the Federal Reserve is involved in
monetary policy on an ongoing basis. In this area, too, the Fed’s role in supervision
and regulation provides an important perspective to the policy process. Monetary
policy works through financial markets to affect the economy, and depository institutions
remain a key element in those markets. Indeed, banks and thrifts are more important in
this regard than might be suggested by a simple arithmetic calculation of their share of
total credit flows. While securities markets of different types handle the lion's share of
credit flows these days, banks are the backup source of liquidity to many of the
securities firms and large borrowers participating in these markets. Moreover, banks at
all times are the most important source of credit to most sm all- and interm ediate-sized
firms that do not have ready access to securities markets. These firms are the catalyst
for U.S. econom ic growth and the prime source of new employment opportunities for
our citizens. The Federal Reserve must make its monetary policy with a view to how
banks are responding to the economic environment.
Factors affecting banks, quite apart from monetary policy, can have major
implications for their behavior and for the-economy. Important among these factors are
18
elements of the supervision and regulation of depositories. A s Chairman Volcker noted
in his testimony on the 1985 Bush Commission proposals for reform:
Policies such as those affecting capital and liquidity
standards, the “toughness” of examinations, loan-loss
provisioning, and information disclosure can have great
significance for the effectiveness of monetary policy as well
as for the stability of the entire financial system. Conflicts
will inevitably arise in these areas as they are approached
from different perspectives. Those conflicts need to be
resolved, and I believe the perspective of the central bank is
one essential part of a satisfactory resolution.
An example of such a central bank perspective is the development of the
rules the banking agencies impose on banks to implement federal legislation and/or to
further prudential supervisory goals. In the interagency development of such rules, the
Fed brings to the table its unique concerns for the impact of the proposed rules on
credit availability and the resultant consequences for the economy. Recent examples
include the Fed’s role in modifying the real estate appraisal and minimum
loan-to-value regulations and the implementing rules of the non-capital “tripwires” in
FDICIA. The Fed would not be able to exert sufficient influence to assure that
economic consequences were properly considered if it had just a minority vote on a
commission. It is the healthy tension of independent agencies coordinating their rules
which permits the Fed to bring the economic implications of rulemaking into the
process.
The crucial nature of economic considerations in the development of
supervisory policy was illustrated most recently in the credit crunch. Banks realizing
losses on commercial real estate and other credits were pulling back from all types of
lending; their impulse to do so interacted in complex ways with the policies of regulators
and supervisors responding to the situation. Certainly, a major factor in the Fed’s
decision to ease interest rates from 1989 on was its increasing awareness, importantly
19
gained through the examination process, that banks were rapidly tightening their
lending terms and standards. The Federal Reserve was never able to offset fully the
lending trauma that led to the “credit crunch” of the early 1990s, but it clearly contained
its deleterious effects in a significant way. Without the Fed’s hands-on bank
supervisory activities, it might not have been aware of the seriousness of this problem
until later, with doubtless unnecessary strain on the economy.
The “credit crunch” experience also illustrates how Federal Reserve
involvement in supervision and regulation can improve those functions as well. Its own
experience in the banking system and the knowledge of its exam iners were key
elements in enabling the Fed to analyze this phenomenon and work closely with other
agencies to adjust supervisory policies to alleviate the crunch while preserving safety
and soundness. A central bank brings a unique and invaluable perspective to
regulation; it is far better situated than a narrowly focused regulatory agency to see how
bank regulation and supervision relate to the strength of the payment system, the
stability of financial markets, and the health of the economy.
Payment System
The Administration's proposal for a single regulator recognizes the
important role that the Federal Reserve plays in the payment mechanism. A s noted
earlier, however, the authority proposed for the Federal Reserve would be insufficient
for the Fed to ensure a safe and sound payment system. To do so requires an ability to
evaluate the fundamental strength of the banks that lie at the heart of the payment
system and to retain personnel with the necessary broad perspective.
To understand the importance of the payment mechanism, one must
realize that the dollar interbank payment system is the nation's backbone for clearing
20
and settling transactions in the fed funds, government securities, and corporate
securities markets, as well as transactions generated by nonfinancia! businesses and
consumers. In addition, the dollar payment system is the linchpin of the international
system of payments that relies on the dollar as the major international currency for
trade and finance. Consequently, the foreign exchange and related markets rely
heavily on settlements involving the U.S. dollar payment system. The key large dollar
electronic payment systems, Fedwire and CH IPS, transfer nearly $2 trillion per day and
thus these systems, as well as specialized depositories and clearinghouses for
securities and other financial instruments, are crucial to the integrity and stability of our
financial markets and our economy. In all these payment and settlement systems,
commercial banks play a central role, both as participants and as providers of credit to
nonbank participants. Day in and day out, the settlement of payment obligations and
securities trades requires significant amounts of bank credit.
Moreover, in periods of stress, such credit demands surge and, if unmet,
could produce gridlock in payment and settlement systems and bring a halt to activity in
financial markets. As indicated in the 1990 Drexel failure, the 1987 stock market crash,
and the 1982 Mexican debt crisis, ensuring the continued operation of the payment
system often requires broad and complex knowledge of banking and markets, as well
as detailed knowledge and authority with respect to the payments and settlement
arrangements and their linkages to banking operations. This type of understanding and
authority— as well as knowledge about the behavior of key participants— cannot be
created on an ad hoc basis. It requires broad and sustained involvement in both the
payment infrastructure and the operation of the banking system.
21
Foreign Experience
Central banks in all but one G -7 country, in most cases de jure but always
de facto, are closely involved with the supervision of banks in their countries and
internationally.
More broadly, the central bank has either total or shared responsibility
for bank supervision in three quarters of the nations in the O E C D . In all industrial
countries, either central banks or Finance Ministries, or both, are involved with
supervision because nations have come to understand that bank supervision has
econom ic consequences that are important for stability and econom ic growth. Of
course, the specifics of each central bank’s role vary from country to country,
depending importantly on cultural and historical features, the institutional structure, and
the degree of concentration of the financial system.
For example, bank supervision in London and Tokyo— the major
international financial centers, along with New York— is quite different. The Bank of
England, after a long history in which it supervised banks informally, is now the sole
statutory supervisor of all institutions engaged in banking activities in the United
Kingdom. The Bank’s mode of supervision, with less reliance than in some other
countries on on-site examinations, reflects the highly concentrated nature of the British
banking system. The five largest banks account for nearly two-thirds of the sterling
assets of the domestic offices of all British banks, far greater concentration than exists
in the United States. In Japan both the Ministry of Finance and the Bank of Japan
conduct regular on-site examinations of banks (in alternate years) and, more generally,
share responsibilities for bank monitoring, analysis, and supervision. W hereas the
Ministry’s role is statutory, the Bank's role is contractual and is based on an individual
agreement with each bank that uses its services. Interestingly, the Bank of Japan
employs more bank examiners than the Ministry of Finance.
22
Germany provides still another model. The Federal Banking Supervisory
Office (FBSO) is the primary banking supervisory body, but it exercises its authority in
close coordination with the Bundesbank. Both the F B S O and the Bundesbank are
authorized to conduct on-site examinations of banks, although both rely heavily in
practice on reports of external auditors. These reports are submitted to the appropriate
branch of the Bundesbank (or Landeszentralbank, analogous to a Federal Reserve
Bank), which reviews them, pursues any follow-up issues with either the bank or its
auditors, and prepares summaries. (As in Japan, the central bank in Germany employs
more supervisors than the supervisory agency.) This information is then given to the
Bundesbank in Frankfurt, which does a further review and, in turn, provides the reports
and summaries to the FBSO . In addition, the Bundesbank has veto power over certain
liquidity and capital regulations of the FBSO . Thus, as in the United Kingdom, in
Germany, where the banking system is highly concentrated (the largest three German
banks account for nearly 40 percent of total bank assets) and where close contact with
only the largest banks might seem to be sufficient for many purposes, the central bank
in fact is substantively involved with the entire banking system.
None of these models of supervisory structure can be applied readily to
the United States, where there is a dual banking system (with both Federal and state
authority) with over 11,000 commercial banks in some 8,500 separate organizations,
and with banking assets distributed across a vast country. The large number of small
banks is unique to the United States and has characterized our nation almost from its
founding. The em phasis of small banks on community lending— especially to small
businesses that have been the engine of growth in the United States— has become
embedded in our culture. It has been an important factor in our development as a
nation. The associated em phasis on innovation and diversity that accom panies such a
23
large number of banks has contributed to an economy that has given the nation the
highest standard of living and the most diverse, innovative, competitive and among the
best capitalized banking system in the world. The diversity in banking is reflected in,
and supported by, the dual banking system and the decentralized regulatory structure
that encourages it to Nourish.
But whatever the national model, it is clear that central banks are
importantly involved in the hands-on supervision of their own banks at home and
abroad and also of the operations of foreign banks in their countries. This involvement
derives directly from the fact that, because central banks are the ultimate source of
liquidity, central banks are inevitably responsible for solving or containing systemic
threats. Thus, what is at stake in the current debate is how the U.S. central bank in the
future will be able effectively and efficiently to do its job.
A SINGLE BANK REGULATOR
In our economic system, banks necessarily must take credit risks to
finance their customers. Such risk-taking is a critical ingredient for econom ic growth,
but creates the necessity to balance regulation to limit deposit insurance exposure with
the economic function of banks. Tradeoffs are required and a zero bank failure rate
implies that banks are not performing their proper role. We have recently seen how
banks’ reduction in their risk appetite as a result of FDICIA, new regulations, weakened
capital, and large loan write-offs, contributed to a credit crunch and slower econom ic
growth. Tradeoffs are tricky and a swing in either direction can create both short- and
long-term problems.
In balancing such tradeoffs, consider the position of a single supervisory
agency required by law to promote a narrow view of bank safety and soundness
24
without any responsibility for the macroeconomic implications of its decisions. The
examination and regulation of banks is an inexact science and open to quite a wide
range of outcomes. But, significantly, examiners will be severely criticized if they have
responsibility for a bank that subsequently fails, while receiving no applause for the high
profits of banks under their purview. Such incentives and missions will inexorably lead
to a bias against bank risk taking. A s a practical matter, instructions to examiners are
not easily drawn. It is easy to write a rule to avoid all risk, but it is difficult to instruct an
examiner to encourage “some" risk.
The Fed knows that too extreme a supervisory posture can lead to a
credit crunch, with attendant growth constraints. In the early 1990s it played a critical
role in recognizing early what was occurring in the banking system and persuading the
other agencies to modify their examination standards. But the Fed also knows the
future cost of lax examination standards and avoided some of the examination policies
of the early 1980s that contributed to the bank failures and deposit insurance fund
losses of the late 1980s and early 1990s. Indeed, the Federal Reserve Board notes
with some pride that a 1991 Staff Report of the House Banking Committee found that
from 1986 through mid-1991 state member banks had paid more insurance premiums
than the gross losses to the fund from failures of state member banks, and concluded
that banks supervised by the other agencies were “ . . . less effectively supervised than
the F R B supervised banks." The report added that,
. . the F R B demonstrated the
best supervisory performance by a substantial margin" in the Southwest, where most
losses occurred.
This record suggests another potential problem of a single regulator with
a narrow focus on safety and soundness. A s noted above, such an agency has a
long-term bias towards excessively tight supervision. But, it also would be likely to go
25
through phases that shift too far in the other direction. This could occur either in
response to the econom ic effects of its tight posture, a kind of oversteering, or in
political response to the natural desire of the regulated to operate in the most
unfettered way possible. Such pressures, as history suggests, are difficult to resist,
especially by an agency in which the decisionm akers are appointed with some
frequency. The Federal Reserve's successful record cited above reflects its far more
consistent supervisory policy, regardless of fashions, fads, and cyclical developments.
A consolidated single regulator would deprive our present regulatory
structure of what the Board considers to be an invaluable restraint on any one regulator
conducting an inflexible, excessively rigid policy. The present structure provides banks
with a method of shifting their regulator, an effective test that provides a limit on the
arbitrary position or excessively rigid posture of any one regulator. Clearly, the
pressure of a potential loss of institutions has inhibited excessive regulation and acted
as a countervailing force to the bias of a regulatory agency to overregulate.
The dual banking system and multiple federal regulators have facilitated
diversity, inventiveness, and flexibility in our banking system, so important to a market
economy subject to rapid change and challenge. The dual banking system has also
provided a safety valve for inflexible federal positions. In an understandable response
to some excesses at the state level, especially for thrifts, the Congress in FDICIA called
for restrictions on the ability of the states to provide expanded bank and thrift activities.
But a single federal regulator would— especially with the FDICIA provision— effectively
end the dual banking system: it would become an empty shell if a state-chartered
entity had no choice of federal regulator or different asset powers. The dual banking
system cannot survive consolidation at the federal level. The Federal Reserve Board
believes that would be a serious loss.
26
To be sure, the existence of more than one regulator raises the concern
that, on occasion, banks will shop for benign regulators, leading to the “competition in
laxity” that Chairman Burns warned about in the 1970s. This is a legitimate concern.
However, the Federal Reserve's record as the most consistent regulator-—one that
focuses on the long-run econom ic consequences of its actions— is inconsistent with an
agency that would promote and encourage competition in laxity; quite the contrary. In
addition, any effort by either agency to weaken its long-run supervisory stance would
be mitigated by statutory floors on the level of supervision and regulation. Moreover,
because depository institutions perceived as lacking safety and soundness have
elevated funding costs, tough, but reasonable, supervision is often considered an asset
by banks and thrifts.
In addition to the option a bank now has to change its regulator by
changing charter or Federal Reserve membership status, another equally important
check and balance would be lost if the current regulatory structure were replaced by a
single regulator. Through the Federal Financial Institutions Examinations Council
(FFIEC), the agencies endeavor to adopt consistent rules and regulations. That
process of sharing points of view and expertise has demonstrably improved the final
product, tending to eliminate the extreme and unworkable positions, and assuring that
the Fed’s concerns about system ic and economic problems are considered. A
consolidated single regulator would not benefit from this exercise and might well tend to
be less receptive to modifications of a preliminary, and even more so, of an adopted
final rule. In short, there is a kind of a built-in arbitrariness that com es with a single
regulator.
Som e have suggested that other parts of the financial system have single
regulators. The Board would note, however, that neither the Securities and Exchange
27
Commission (SEC) nor the Commodities Futures Trading Com m ission (CFTC) are
monolithic regulators of their industries. Both oversee numerous self-regulatory
organizations, including the organized exchanges, the National Association of
Securities Dealers, and the National Futures Association, that, in fact, do all of the
supervision and much of the regulation under S E C and C F T C oversight. Indeed, since
the cash and derivatives markets are parts of one integrated financial market, that
market can be thought of as subject to two federal regulators— the S E C and the CFTC .
In fact, most of the position-taking firms in this market are both registered
broker/dealers and futures commission merchants, and thus subject to the rules and
regulations of both federal regulators.
AN ALTERNATIVE PROPOSAL
If a single regulator is preferred, the best candidate would be the Federal
Reserve. It is independent. It has experience and expertise. It currently has a broader
regulatory and supervisory scope than any of the other banking agencies. It deals with
large banks and small, with bank holding companies, foreign banks, foreign operations
of U.S. banks, other central banks, securities dealers, and with financial markets
broadly. The Congress also has assigned it responsibilities for a broad array of
consumer protection regulations. In short, the Fed has responsibilities for, and
experience and expertise in, a wide range of financial institutions and markets. But,
the Board would strongly oppose the Federal Reserve becoming a single regulator, just
as it opposes any other agent of government in that role. W hile a monopoly bank
regulatory agency could enforce uniformity in bank examination and regulation, it would
do so at great cost to the broader efficiency and flexibility of our financial system, and
run the risk of unnecessarily creating an arbitrary and capricious federal bureaucracy.
Banking supervision and regulation can benefit from the variety of viewpoints and
28
checks and balances of a system of more than one federal regulatory authority— a
structure that preserves real meaning for the dual banking system. A system in which
banks have choices and in which regulations result from the give and take involving
more than one agency stands a better chance of avoiding the extremes of supervision
and of finding a w ell-balanced consistent policy over time.
There are other ways, short of the creation of a single agency, to address
the problems in the current system. The crux of the issue is duplicative examinations of
banks. This problem could be eliminated by a regulatory system that maintained two
federal regulators, but provided that in general only one of those regulators supervised
all of the depository entities in any banking organization. Undoubtedly there are
several approaches that preserve choice and retain a major role for the central bank.
One approach that the Board supports has three parts:
•
Reduction of the number of agencies with supervisory and
regulatory power from four to two— a Federal Banking Comm ission
and the Federal Reserve.
•
Elimination of duplicative examinations.
•
Establishment of one federal supervisor for all the depository
institutions in any single banking organization, regardless of the
charter class of the individual entities.
Under this approach, the O C C and O T S would be merged and renamed
the Federal Banking Commission (FBC). The FDIC would no longer examine healthy
institutions, but would join in the examination of problem entities. The Fed would, as
now, promulgate rules for the establishment of U.S. offices of foreign banks and foreign
offices of U.S. banks. The F B C would determine permissible activities for national
banks and federal savings associations. The F B C would also be the supervisor for (1)
29
all independent national banks and thrifts and (2) all depository institutions in any
banking organization whose lead depository institution is a national bank or a thrift.
The Fed would be the supervisor for (1) all independent state banks and (2) all
depository institutions in any banking organization whose lead depository institution is a
state chartered bank.
The supervisor of depository institutions would examine, take
enforcement actions, establish operational rules, and act on applications for all the
depository institutions under its jurisdiction, regardless of the banks’ charter class. The
statistical appendix provides data on the redistribution of banking organizations and
assets that would occur under this alternative.
The Board has not yet adopted a position on the supervision and
regulation of bank holding com panies and their nonbank affiliates. There are two broad
options, and a strong case can be made for each:
•
Under the first option, all holding companies and their nonbank
affiliates could remain under the Fed’s jurisdiction, continuing to
provide uniform rulemaking for competitive equity and a substantial
role for the Fed in shaping the financial structure, so useful for
stabilization and systemic risk purposes. This option would result
in two regulators for about 1,650 banking organizations, because
the lead bank has a national charter, of which 92 percent would be
subject to very light Fed supervision because the latter entities
have no nonbank activities.
•
Under the second option, the jurisdiction of virtually all holding
com panies could be split between the Fed and the F B C on the
basis of the charter class of the lead bank. However, for system ic
risk reasons, jurisdiction over those holding com panies and
30
nonbank affiliates of banking organizations that meet certain
criteria— such as size and payments and foreign activity— would
be retained by the Fed, even if the lead bank of the organization
had a national charter. Under this variant, only about 25 to 30
organizations with lead national banks would have two supervisors,
depending on the criteria established. All other organizations
would have only one supervisor/regulator for the entire
organization.
A variant of the second option might retain Fed authority over permissible activities of
all holding companies, in order to retain some of the benefits of option one. All other
authority over holding com panies under the second option would be exercised by the
regulator of the lead bank except for the 25 or 30 large organizations with national lead
banks. Under either option, the number of banking organizations subject to multiple
regulators would drop sharply.
Whatever option may be adopted for holding companies, under the
proposal, the Fed would retain supervision and regulation of (1) all foreign banks that
operate a bank, branch, agency, or commercial lending affiliate in the United States,
and (2) all U.S. nonbanking operations of these foreign banks. A s with domestic bank
holding companies, all U.S. banks, branches and agencies of foreign banks would be
supervised and regulated according to the charter of the largest depository operation.
Of the almost 300 foreign banking organizations operating a banking business in the
United States, most engage in banking through state chartered entities and thus would
have only one U.S. supervisor (the Fed) for its entire operation. Almost 60, however,
would have their U.S. banking operations supervised by the F B C because their
principal banking operation is conducted through a federally chartered entity or entities.
31
The criteria used by the Board in developing its alternative approach are:
(1) to avoid a single monolithic federal regulator; (2) to assure that banks have a choice
of regulator; (3) to reduce or eliminate overlap and duplication; and (4) to maintain a
hands-on role in banking supervision for the Federal Reserve. A s discussed earlier,
the Board believes that the Fed needs a presence sufficient to be able to meet its
responsibilities for preventing crises and managing those that it cannot prevent That
requires knowledge from broad based, hands-on supervision and regulation and the
ability to affect events— that is, to have authority.
The Board also believes it needs a window into banks of all sizes and in
all geographic regions. This is a large country with diverse sets of banks to service the
complex structure of our economy. Each set responds in a different way to econom ic
developments; each set provides somewhat different information about the nature of its
region or its customer base. A cross-section of banks of all sizes and locations
provides important intelligence to the central bank about evolving econom ic trends and
responses to shocks and policy changes. The global nature of our financial markets
means that internationally active banking organizations are of particular importance to
the central bank. Internationally active banks almost by definition create the potential
for systemic risk. Disruptions or difficulties at one of these institutions could well have a
significant impact on a wide range of other financial institutions, both domestic and
international, and through them on the U.S. economy. This potential for system ic risk
arises from the nature of internationally active banks: they are generally large and
have subsidiaries or branches overseas; the U.S. branches of foreign banks, for
example, are major participants in U.S. financial markets. The banks and their
branches fund them selves actively in international money markets, where creditors are
relatively quick to restrict funding to banks thought to be in trouble, and where the
32
problems of one bank can easily affect funding to other banks from the same country.
They are almost universally used by their customers and by other banks for clearing
and settlement purposes, so that they are substantial participants in the payment
system.
In order to meet its responsibilities, the Board believes that it must have
an important role in the interface between banks and the financial system, a role that
gives it information and influence backed up by enforcement authority. The Board thus
proposes that it should continue to promulgate rules for the establishment of all U.S.
offices of foreign banks and foreign offices of U.S. banks and supervise and regulate
the holding companies and nonbank affiliates of all foreign banks; supervise and
regulate either all holding companies and their nonbank affiliates or at least those
whose lead subsidiary bank is state chartered plus those of a small number of large
and financially active banking organizations whose lead banks have a national charter;
and supervise and regulate state member banks and, if the lead bank in a holding
company is a state member, all their depository affiliates. The proposal also calls for
the Fed to supervise and regulate state nonmembers and, if the lead bank in a holding
company is a state nonmember, all their depository affiliates, with these banks being a
significant addition to its regulatory load. This expansion of the Fed’s supervisory
functions results solely from the view that in a two agency structure it is desirable that
there should be a clear delineation of supervision and regulation responsibility by
charter class in order to preserve the dual banking system. The Board makes no case
that responsibility for such banks— that account for almost one-quarter of bank
assets— is needed for financial stability and monetary policy purposes. However, some
critical mass of banks of various sizes and locations is required if the Fed is to perform
its functions effectively.
33
In sum, this proposal would achieve essentially all of the benefits of one
consolidated regulator while incurring virtually none of its risks. It eliminates duplicate
supervision at all depository institutions, and greatly reduces overlapping regulation. It
provides for one supervisor for all depository institutions in any banking organization—
even though there are two supervising agencies. It maintains the dual banking system
by providing for a separate federal supervisor for state banks and permits any bank to
change federal regulator by changing charter, thus ensuring a set of checks and
balances on the arbitrariness of a single regulator. It maintains the healthy process of
dynamic tension in bank rulemaking. It maintains the practical knowledge and skill, and
the influence and authority, of the central bank, so critical for crisis prevention, crisis
management, and monetary policy, as well as the valuable perspective the central bank
brings to supervision. In short, the proposal would avoid an inflexible, single regulator,
preserve the dual banking system, assure that an economic perspective is brought to
supervision and regulation, and maintain a strong central bank.
********************
34
Statistical Appendix:
The Current and an Alternative Supervisory Structure of
Banking Organizations in the United States
Table 1 (all tables follow page A - 7 ) displays the current organizational
structure of the11,000 commercial banks in the United States. Only about 3,000 of the
commercial banks— somewhat over one-fourth— are independent, i.e., are not owned
by a bank holding company (BHC).
About one-third of the banks are subsidiaries of
one bank H C s that have no nondepository assets, i.e., B H C s that have no subsidiary
other than that one bank. These “shell" H C s use the HC form mainly for tax and
funding purposes. A s can be seen in rows 2 and 4, the independents and one bank
H C s tend to be relatively small, accounting between them for over two-thirds of the
banks, but only one-fourth of aggregate commercial bank assets.
Almost three-fourths of the bank assets are held by almost 500 multibank
H C s (M BHCs) that own more than one bank and also own nondepository subsidiaries.
About 340 M BH C organizations do not have any nondepository affiliates and hence
their H Cs are “shells;" these banks hold about 2 percent of bank assets.
A s shown in the last two rows of table 1, most of the B H C s— about
two-thirds— are shell one bank HCs. A s noted, the relatively small number of
non-shell M B H C s (next-to-the-last column) account for the largest volume of bank
assets. The holdings of nondepository assets by B H C s (not shown in the table) are
also quite concentrated. Two-thirds of the nondepository assets of B H C s are held by
10 M BH Cs; 80 percent by the top 20; 88 percent by the top 100. About 1,000 one bank
H C s and M B H C s own the $237 billion of nondepository assets of BHCs.
Tables 2 and 3 provide more detail on commercial banks and BHCs, by
focusing on the charter class of the commercial bank and thrift subsidiaries,
A -l
cross-classified (in the case of commercial banks) by the charter class of the lead
(largest) bank. For example, as shown in the last two columns of table 2, the 301
M B H C s in which the lead bank is a national bank have 1,304 affiliated banks, 684 of
which also have national charters and 620 of which have state charters; 536 of the
latter banks are not members of the Federal Reserve and 84 are. A s shown in the
lower panel, these 301 M B H C s (there is only one lead per organization) own 44 thrift
affiliates. Table 3 indicates that the 301 M B H C s with national lead banks have $1.8
trillion of bank assets ($1,092 billion plus $663 billion), or almost half of the $3.6 trillion
of bank assets shown in the first column of that table. These M B H C s have thrift assets
of $39 billion.
The federal regulation of each corporate component of a banking
organization is determined under current law by the charter class of that component, as
shown in table 4.1 Excluding the S E C , there are four federal regulators of depository
institutions (excluding credit unions): the Office of the Comptroller of the Currency
(OCC); the Federal Reserve (FR); the Federal Deposit Insurance Corporation (FDIC),
and the Office of Thrift Supervision (OTS). For commercial banks alone, the memo
columns at the far right of table 4 indicate that the FDIC currently regulates the largest
number of banks, the O C C the largest proportion of bank assets, and the F R the
smallest proportion of banks and bank assets. However, the F R regulates and
supervises all B H C s shown in table 1 and most foreign banking operations in the United
States, shown in table 5. All of the international operations shown in the first panel of
table 5 are included in tables 1 through 3; they are consolidated into the U.S. banking
statistics. The middle panel contains data on U.S. branches and agencies of foreign
i
banks not included in the consolidated worldwide assets of U.S. banks. Currently, the
1.
State-chartered entities are also regulated and supervised by the state granting the charter.
FR supervises the vast majority of the number and assets of such entities. Even
though significant international banking operations in forms other than U.S. branches
and agencies of foreign banks are currently supervised by other agencies, the
Congress has directed the Federal Reserve to determine the rules for the
establishment of U.S. bank operations abroad, all the rules for Edge Corporations,
and— in FDICIA— required the Federal Reserve to approve all entry of foreign banking
operations into the United States.
The existing regulatory structure means that a banking organization is
now subject to one federal banking supervisor only if it is (1) a single independent entity
with no holding company; or (2) a B H C in which all the subsidiary banks are statechartered members of the FR; or (3) a thrift HC with only thrift subsidiaries other than
cooperative or industrial banks. A M BH C organization (whose parent is regulated by
the FR) could be subject to four federal regulators if the M B H C had national bank
(OCC), state nonmember bank (FDIC), and thrift (OTS) subsidiaries.
While each component of a HC is subject to only one regulator, table 6
shows one measure of the degree of multiple regulation of banking and thrift
organizations. The first two columns of the table reproduce the statistics used by the
Treasury in November 1993, which show that 42 percent of U.S. depository institutions
have one regulator, about the same proportion have two regulators, and 15 percent
have three or four regulators. These data overstate the problem for the 4,200 shell one
bank HCs, which are included with those having two regulators: (1) the FR was
apparently counted in error by the Treasury as the second regulator for the 359 B H C s
with only state member subsidiaries; and (2) the FR on-site supervision of shell parents
is far short of an examination. Since for shell H C s the bank subsidiary is the only entity
of strong regulatory concern, most of these HC parents are inspected on-site only once
every few years, with some com panies going five to ten years between inspections,
depending on their previous rating, asset size, and volume of outstanding debt to the
public. These inspections are also typically quite brief, requiring one or two individuals
for one or two days on-site.
The last two columns of table 6 adjust the Treasury data by excluding the
FR as a regulator for shell H C s and also by adjusting for minor definitional differences.
These modifications suggest that in fact three-fourths of depository organizations— with
37.5 percent of aggregate depository institution assets— are effectively subject to only
one regulator. While these adjustments may understate the overlap, to the extent of
the minimal inspection time of shell HCs, the resultant statistics more accurately reflect
the effective level of multiple regulation than do the Treasury data. Even these
adjustments, however, do not change the fact that more than 15 percent of
organizations, with over 45 percent of aggregate depository assets, are subject to three
or more regulators.
To address this problem, the Federal R eserve’s alternative would sharply
reduce multiple supervision and produce one supervisor for all the depository
institutions in any banking organization, while reducing the number of regulators from
four to two and keeping the FR active in supervision. The rest of this appendix is a
statistical summary of regulatory coverage under that approach— which is offered as an
example of an option that meets the Federal R eserve’s principles.
Two agencies— the FR and the Federal Banking Com m ission
(FBC)— would divide between them the supervision (examining, enforcing, establishing
operational rules and considering applications) for all depository entities. The
jurisdiction of each agency would be determined by the charter class of the lead
commercial bank: the F B C would supervise (1) independent national banks and thrifts,
and (2) all bank and thrift affiliates (regardless of charter) of organizations with lead
national banks; the FR would supervise (1) independent state banks and (2) all bank
and thrift affiliates (regardless of charter) of organizations with lead state banks. The
FR would also supervise U.S. banks, branches, and agencies of those individual
foreign banks in which the dominant volume of assets was at state-chartered entities,
and the F B C would supervise all U.S. banks, branches, and agencies of those
individual foreign banks in which the largest share of assets w as held at federally
chartered entities (see memo to table 5).
If the Fed retained supervision and regulation of all holding companies,
about 1,650 banking organizations— the about 1,350 national one bank bank holding
companies and the about 300 multibank holding companies whose lead bank has a
national charter— would have two regulators: the Fed for the 1,650 holding companies
and the F B C for the almost 3,000 bank subsidiaries. However, 92 percent of these
holding companies are “shells” and hence subject to only minimal supervision by the
Federal Reserve. If the supervision and regulation of holding com panies were split
between the Fed and the F B C on the basis of the charter class of the lead bank, with
the Fed also retaining authority over the holding companies of certain large and active
national bank holding companies, only the latter banking organization would be subject
to dual supervision and regulation. The number of organizations subject to dual
supervision would vary between 25 and 30 depending on the criteria used. Under
either approach, the number of banking organizations subject to more than one
regulator would be reduced sharply and none would have more than two.
Table 7 provides more detail on the commercial banks that would be
regulated by the F B C either because the bank was (1) an independent national bank,
or (2) a national bank subsidiary of a one-bank HC, or (3) in a M B H C in which the lead
bank was a national bank.2 Of the 3,745 banks that would be supervised by the FBC,
620 are state-chartered bank affiliates of M B H C s in which the lead is a national
bank— 536 state nonmembers and 84 state members. The banks that would be
supervised by the F B C accounted for more than one-third of all insured commercial
banks and 57.5 percent of all bank assets as of September 30,1993.
Table 8 provides similar data for the commercial banks that would be
supervised by the F R either because the bank was (1) an independent state bank, or
(2) a state bank subsidiary of a one-bank BHC, or (3) in a M B H C in which the lead bank
was a state member or nonmember bank.3 Of the almost 7,300 banks that would be
supervised by the FR, 261 are national banks (117 in M B H C s in which the lead is a
state member and 144 in M B H C s in which the lead is a state nonmember). The banks
that would be supervised by the FR accounted for two-thirds of all insured commercial
banks and 42.5 percent of all bank assets as of September 30,1993.
About 85 percent of the banks that would be subject to FR supervision
under the alternative proposal are allocated to the Fed because the Fed would be
responsible for state nonmembers— state nonmember independents, state
nonmembers in one bank HCs, and all banks in M B H C s where the lead bank is a state
nonmember. A s shown in table 9— which sum marizes the allocation of supervisory
authority over all entities under the Fed alternative— only 10 percent of the universe of
banks (with less than one-fourth of all U.S. bank assets) are at independent state
members, state member one bank HCs, or are banks in M B H C s in which a state
member is the lead bank (see “State Member Lead” column, "Total Com m ercial Banks”
2. The F B C would also supervise 43 thrifts that were affiliates of banks under their jurisdiction— in
addition to the thrifts that are independent or in thrift H C s.
3.
The F R would also supervise 102 thrift affiliates of H C s in which the lead bank is state chartered.
row). The alternative proposal allocates all state banks to the Fed, rather than just
member banks, because of the desirability of defining clearly federal supervisory
responsibility by charter class to preserve the dual banking system. The Fed, as noted
in the text, makes no claim that nonmember banks are needed for stabilization or crisis
management purposes. A s a supplement to the large and financially active BH Cs, the
current Fed supervision of state member banks— large and small— provide a sufficient
knowledge base for Fed policy purposes.
Table 1
Organizational Structure
of
Federally Insured Commercial Banks
(As of September 30,1993)
Structure
-
One Bank
Holding Company
Entity Types
Multibank Holding
Company
Total
Independent
(No HC)
Sh ell1
Other
Sh ell1
Other
Number
2,980
3,618
1,012
865
2,530
11,005
Percent
27.1
32.9
92
7.9
23.0
100.0
Level (billions of dollars)
297
270
359
69
2,626
3.621
Percent
8.2
7.5
9.9
1.9
72.5
100.0
3,619
1,011
341
494
5,465
66.2
18.5
62
9.0
100.0
Commercial Banks
Commercial Bank Assets 2
Bank Holding Companies
Number 3
% • *^ %
.
%%
iT
' '
" V A VW
Percent
w
NOTE: May not add to 100.0% due to rounding.
1.
A shell HC owns no nondepository assets.
2.
Consolidated worldwide assets. Excludes U.S. branches and agencies of foreign banks. Includes U.S. bank subsidiaries
of foreign banks (which are treated just like any other U.S. bank); foreign branches, agencies, and subsidiaries of U.S.
banks; and Edge subsidiaries of U.S. banks.
3.
HCs measured as 'Hop tier” and excludes 632 intermediate HCs that are subsidiaries of other HCs.
A-8
T able 2
N u m b e r o f In s u re d D e p o sito ry I n s titu tio n s in th e U .S .1
That are Independent Insured Commercial Banks or are in Bank Holding Companies1
234
as of September 30,1993
1
Multi-Bank BHQi
Onei i
Total
Bank
BHQr1
State Bank Lead
Total State
and National
Lead |1 Affiliate
Lead 1|Affiliate
|| Affiliate
Lead
National
Bank Lead
Lead || Affiliate
Nomnember Lead
Member Lead
Total State
Lead | Affiliate
Co«nmerriai Banks
7,619 2,194
970
283
6,649 1,911
786
3,386
11,005 . 2,980
Slate
Member
Nonmember
National
Tout
3,276
362
2,914
1,354
4,630
534
86
448
301
835
534
86
448
1,615
239
1,376
945
2,560
995
155
840
261
1,256
534
256
86
86
448
111
448
145
117 I f t e t
448
373
■<
86
739
44
695
144
883
301
301
620
84
536
684
1,304
Thrifts
19
7 .........
12
129
"s
52
v#%
77 %*
6
154
Savings 4k loans
Federal
State
Savings banks
Federal
Stale
Other thrifts^
Total
Otawi Total
||
4
2
2
71
11
60
4
79
11,1391 2,9801| 6,7091
3
3
3
«*||
15
5
10 ' ' ;
55
3
41 3 w 14
3
4
72
3
2,6321
L d
1
8
•Y :
1
7 ......... SxY^I
20
13
7
28
w *l
2
2
3
5
4i
3
1
- lllf llt a
7
3
86
1
380
451]
1
6
1
5
15
9
6
yppi&lllip
: iP t l§ l
liia i
mrnmm
21
904
1
»i|
7
4
3
35
28
7
2
44
1348
1. Includes insured Institutions in the 50 suites of the United States snd the District of Columbia as well as those in the U.S. territories and possessions.
2. Any organization with a banking subsidiary will be included in this table.
3. Based on number of insured commercial banks. If, for example, a BHC owm one Insured commercial bank and one or mote thrifts, it is considered to be a one bank holding
company. BHCs that own state chartered savings banks and no commercial banks are considered to be BHCs under Regulation Y.
4. All thrifts in the leaser panel Me affiliated with BHCs. The charter class of the thrift determines its mw. The charter class of the lead bank of the BHC that owns the thrift determines
the cohmm to which the thrill is allocated. There are two exceptions to column allocation by lead bank: (1) three multi-bank HCs are each composed of a savings bank lead entity, each
with one savings bank affiliate and no commercial bank affiliates (none of which are organ bat ion* listed in Table 8); and (2) the thrifts affiliated with the 79 one-bank holding companies
are not allocated by charter data of the lead bank. The six "other thrifts" are federally insured cooperative and industrial banks.
Table 3
Total Assets of Insured Depository Institutions in the U.S.1,2
That are Independent Insured Commercial Banks or are in Bank Holding Companies3
as of September 30,1993
($ buttons; may not add to totals doe to rounding)
Total
Notin
BHCs
Multi-Bank BHCs
State Bank Lead
OneBank
BHCs
Total State
and National
Lead Affiliate
Lead || Affiliate
National
Bank Lead
Lead |1 Affiliate
Nonmember Lead
Member Lead
Total State
Lead || Affiliate
Lead |{Affiliate
OT-V
Cotnmenaal Banka
1,561
710
851
2,060
3,621
State
Member
Nonmember
National
Tout
237
34
203
60
297
363
81
282
266
629
650
513
137
1,092
1,742
311
82
229
642
953
650
513
137
• •V.*
650
148
38
110
142
290
513
513
513
66
2
64
16
82
137
82
n
m
m
36
137
46
126 Wtmmm
137
208
1,092
1,092
163
44
119
500
663
Thrifts4
Savings A loans
Federal
Slate
Savings banks
Federal
State
Other Thrifts^1
Total
Grand Total
17
14
3
88
20
69
1
107
]
3J28]| -
» |r ®
1
1
• ; .
58
1
1
1
57
1 * 's
59
i
45
1
3
1
2
4
1
2
6
| [ 1,7«|
998
651
296
17
14
3
29
1
18 •
11
1
• iiii|
•
• , ;
'' '■ :
• ■; ^ .v; |
1
1
•
WMK
•
1
1
513|
2
1
2
3
1
2
6
209 |
1
138|
L
wm m M
A' '
J\;
s.j
4s ' \
• J*•
■
........
W'
|
1,092|[
14
13
1
25
17
8
•
39
702
J
• Lett than $500 million.1234
1. Indudet insured institutions in the 50 states of the United States and the District of Columbia as well as those in the U.S. territories and possessions.
2. Assets are worldwide consolidated depository Institution assets, although only assets in the U.S. were used for U.S. banks owned by foreign banking organizations.
3. Any organization with a banking subsidiary will be bdudefi m this table.
4. All thrifts In the lower panel arc affiliated with BHCs. 11ns charter chss of the M ft defermiwr, its mw. The charter dais of the bod bank of the BHC that owns the thrift determines
the column to which the thrift is allocated. There are two cscepiiori* to column allocation by lead bank; (I) three multi-bank HCS are each composed of a savings bank lead entity, each
with one savings bnnk affiliate and no commercial bank affilhte (none of which are organizations listed in Table 8); and (2) the thrifts affiliated with the 79 one-bank holding companies
are not allocated by charter daas of the lead bank. Th* i v
*u fedbrntht ti”mred cooperative and Industrial banks.
Table 4
Federal Regulator
of
Corporate Components of U.S. Banking Organizations
Memo: Percent of aggre
gate commercial banks
Regulator
Number
Assets
occ
30.8
56.9
Members
FR
8.8
19.6
Nonmembers
FDIC
60.4
23.5
Entity
National Banks
State Banks
Savings Banks
OTS/FDIC/FR
Savings and Loan Associations
OTS
Cooperative Banks
FDIC/FR
Industrial Banks
FDIC (if insured)
Section 20 Affiliates
SEC/FR
BHCs
FR
Thrift HCs
OTS
N
8^8181^8
A*
!
-
Memo: Foreign Operations
FR
:
*+
State Charter
FR
.
^
National Charter
OCC/FR (residual)
Edge Corporations
v
U.S. Offices of Foreign Banks
Representative Offices of Foreign Banks
FR
A-ll
%
’ ^
; \'
'
A
>.
>
.
^
s
Table 5
Foreign Bank Operations in the United States
and
U.S. Bank Operations Abroad
(As of September 30,1993)
Supervised B y
ENTITY
FDIC
occ
FR
TOTAL
61
25
8
94
74.1
67.5
20.4
162.0
Included in U.S. Consolidated Worldwide Assets
U.S. Bank Subsidiaries of Foreign Banks
Number
Assets (billions of dollars)
Edge Subsidiaries of U.S. Banks
Number 1
70
Assets (billions of dollars)2
115.4
Foreign Branches and Agencies of U.S. Banks
Number
37
261
93
391
11.6
141.6
77.9
231.0
1
5
20
26
0.1
1.3
22.1
23.5
Number
34
71
464
569
U.S. Assets (billions of dollars)
7.4
44.3
632.2
683.9
Assets (billions of dollars)3
Foreign Bank Subsidiaries of U.S. Banks
Number
Assets (billions of dollars)3
Excluded from U.S. Consolidated Worldwide Assets
U.S. Branches and Agencies of Foreign Banks
Supervised By
TOTAL
MEMO:
U.S. Branches and Agencies of F oreign Banks
Calculated as in Alternate Proposal *
Number
U.S. Assets (billions of dollars)
1. Represents the number of Edge corporations that are (1) engaged in banking and owned by U.S. banks; and, (2)
engaged in investment activities through the majority ownership of foreign subsidiaries. (Number of Edges owning
foreign subsidiaries is as of 12/31/92.)
2. Represents (1) aggregate claims on non-affiliates of Edge corporations engaged in banking and directly owned by a
U.S. bank and (2) aggregate claims on non-related Organizations of foreign subsidiaries of Edge corporations.
(Foreign subsidiaries of Edge corporations are as of 12/31/92.)
3. Represents claims on non-related organizations as of 12/31/92.
4. Agency that supervises the largest share of the assets of the U.S. branches, agencies or banks of an individual foreign
bank would supervise all of such offices of that bank.
A-12
Table 6
Number of Federal Regulators
for
Consolidated l l i . Depository Organizations 1
Number of
Regulators
Originally Reported by
U.S. Treasury 2
Adjusted to Exclude
Shell BHCs 3
Percent of
Percent of
Institutions
AggregateDepository
Assets
Institutions
AggregateDepository
Assets
1
42.0
27.0
74.1
37.5
2
43.0 4
26.0 4
10.4
17.1
3
13.0
27.0
12.6
23.9
4
2.0
20.0
2.9
21.5
1. An organization is an independent commercial, savings, cooperative, or industrial bank; an independent
savings and loan association; or a “family” of banks and/or thrifts and their HC.
2. As reported in “Consolidating the Federal Bank Regulatory Agencies,” U.S. Treasury, November 23,1993.
3. A BHC with no non-depository subsidiaries. Minor adjustments for other definitional reasons.
4. Apparently includes in error 359 BHCs with only member bank subs, raising the insitutional coverage by 2.6
percentage points and the assets by 1.3 percentage points.
A-13
Table 7
Alternative Proposal
Commercial Banks that Would be Supervised by the
Federal Banking Commission
(As of September 30,1993)
Percent of Total Insured
Commercial Banks
Entity
National Banks not in BHCs
National Banks in one bank BHC
Number
of
Banks
Assets
(billions of
dollars)
Number
of
Banks
Assets
786
60
7.1
1.7
1,354
266
12.3
7.3
301
1,092
2.7
30.2
536
119
4.9
3.3
84
44
0.8
1.2
684
500
62
13.8
1,605
1,755
14.6
48.5
3,745
2,081
34.0
57.5
National Bank is Lead in MBHC
National Bank Lead
Affiliated Banks
State Nonmember
State Member
National
Total
TOTAL
A -1 4
Table 8
Alternative Proposal
Commercial Banks that Would be Supervised by the
Federal Reserve
(As of September 30,1993)
Percent of Total Insured
Commercial Banks
Number
of
Banks
Assets
(billions of
dollars)
Number
of
Banks
283
34
2.6
0.9
1,911
203
17.4
5.6
2,194
237
20.0
6.5
362
81
33
2.2
2,914
282
26.5
7.8
3,276
363
29.8
10.0
448
137
4.1
3.8
695
64
63
44
2
0.4
1.8
*—
144
16
13
1331
219
12.1
6.0
86
513
0.8
143
State Nonmember
145
46
13
1.3
State Member
111
36
1.0
1.0
National
117
126
1.1
3.5
Total
459
721
4.2
20.0
7360
1,540
66.0
42.5
Entity
Assets
Not in BHC
State Member
State Nonmember
Total
In One Bank BHC
State Member
State Nonmember
Total
State Nonmember is Lead in MBHC
State Nonmember Lead
Affiliated Banks
State Nonmember
State Members
°
l
Total
%
National
State Member is Lead in MBHC
State Member Lead
Affiliated Banks
TOTAL
A-15
Table 9
Alternative Proposal
Summary of Coverage of Examination, Enforcement, and
Applications by Agency
(As of September 30,1993)
FR
FBC
(National
Bank
Lead)
Entity
State
Non
member
Lead
State
Member
Lead
Total
(Percent Distribution o Number)
National Banks
92.3
4.3
3.5
100.0
State Nonmember Banks
8.1
89.8
2.2
100.0
State Member Banks
8.7
4.5
86.8
100.0
34.0
55.9
10.0
100.0
98.7
L0
0.3
100.0
Total Commercial Banks
Thrifts (includes Industrial and Cooperative
Battles)
(Percent Distribution of Assets)
National Banks
93.1
0.8
6.1
100.0
State Nonmember Banks
i
14.0
80.6
5.4
100.0
State Member Banks '
t
6.2
0.3
93.5
100.0
57.5
19.4
23.1 1
100.0
99.3
0.1
Total Commercial Banks
%
■ t ___ __
.5?
Thrifts (includes lndijstrial andCooperative
Batiks)
l
fj
§
A -1 6
0.6
roo.o
@FedFRASER