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FDI€ N E W S R E LE A SE P f M I A l M * O U 1 IMMMAMCt C O tfO C A IN X t PR-58 (7-21-75) FOR RELEASE UPON DELIVERY COM M ENTS ON BANK R E G U L A T O R Y R E F O R M Subm itted byF ran k W ille , C hairm an F e d e r a l D ep osit In su ra n ce C o rp o ra tio n to the S u b com m ittee on F in a n cia l Institutions, S u p e rv isio n , R egu lation and Insu ran ce C o m m itte e on Banking, C u rre n cy and H ousing H ouse o f R e p re se n ta tiv e s July 21, 1975 FEDERAL DEPOSIT INSURANCE CORPORATION, 550 Seventeenth St, N.W ., Washington, D. C, 20429 • 202-389*4221 F o r the p ast six m on th s, a t o p -le v e l staff grou p within the F e d e r a l D ep osit Insu ran ce C o rp o ra tio n has been attem pting to id en tify sig n ifica n t and d e m o n stra b le points o f fr ic t io n within the p re se n t F e d e r a l bank re g u la to ry stru ctu re w h ich m ight ju s tify re co m m e n d a tio n s f o r m a jo r C o n g re ssio n a l r e fo r m . That g rou p has a ls o re v ie w e d the F e d e r a l s u p e r v is o r y e x p e r ie n ce o v e r the p ast fiv e y e a r s in dealing with la rg e p r o b le m banks and a num ber o f la rg e bank fa ilu r e s to d e te rm in e if that e x p e r ie n ce m ight ju s tify s im ila r re co m m e n d a tio n s. F in a lly , the g rou p has attem pted to a n alyze the p oten tial advantages and d isadvan tages o f a sin gle F e d e r a l bank re g u la to ry agen cy w hich m igh t e x e r c is e a ll o f the p o w e rs w h ich a re today v e ste d in the C o m p tr o lle r o f the C u rre n cy and the FDIC as w e ll as the exam in ation and s u p e r v is o r y p o w e rs p re s e n tly v e ste d in the F e d e ra l R e s e r v e S ystem . Stated s u c c in c tly , the grou p has id e n tifie d only two sig n ifica n t and d em on stra b le points o f fr ic t io n w ithin the p re se n t stru c tu re : one relatin g to d iffe re n t a g en cy attitudes tow a rd bank a cq u isitio n s under the F e d e r a l Bank M e r g e r A ct, the oth er rela tin g to the o v erla p p in g authority of the F e d e ra l R e s e r v e S y stem in co n n e ctio n with o n e-b a n k holding com p a n ies in w hich the only bank su b sid ia ry is e ith e r a national bank s u p e rv ise d by the C o m p tr o lle r o f the C u rre n cy o r a n on m em b er bank su p e rv ise d by som e State banking d epartm en t at the State le v e l and the FDIC at the F e d e r a l le v e l. A s the S u b com m ittee w ill r e c o g n iz e , n eith er o f th ese ite m s had anything to do with the fa ilu r e o r n ea r fa ilu r e o f United States N ational Bank, F ra n k lin National Bank o r S e cu rity N ational Bank. The grou p fu rth er found that the existin g -2 - a g en cy stru ctu re was not a sig n ifica n t fa c t o r in any o f the re ce n t fa ilu re s w hich have been so w id ely p u b liciz e d and that a d iffe re n t bank a gen cy stru ctu re at the F e d e r a l le v e l w ould not n e c e s s a r ily have p rev en ted any o f them . T his finding r e f le c t s , I am su r e , the tru is m that no a g en cy w ill be any b e tte r than its le a d e rs h ip o r the m en and w om en who sta ff it. If re c e n t bank fa ilu r e s p ro v id e no ju s tific a tio n in fa ct fo r m a jo r bank a g en cy r e fo r m at the F e d e r a l le v e l, the c a s e fo r a co n s o lid a te d , a ll-p o w e r fu l bank a g en cy m u st r is e o r fa ll on the w eigh t w hich C o n g re ss attach es to its r e s p e c tiv e advantages and d isa d v a n ta ges. The c r e a tio n o f such an a g en cy w ould be such a fa r -r e a c h in g and d ra m a tic change in the e x istin g o r d e r o f things that I b e lie v e the S u bcom m ittee m igh t find u sefu l ou r s t a ff's su m m a ry o f the p r o s and co n s o f such an a g en cy . ARGUM ENTS IN F A V O R O F A SINGLE, A L L -P O W E R F U L F E D E R A L BANK REGULATORY AGEN CY; 1. S im p lifica tio n o f A d m in istra tio n ; Im p ro v e d Internal and E xtern a l C om m u n ica tio n . A sin gle a g en cy w ould p ro v id e a sin gle fo c a l point fo r C o n g r e s s io n a l and A d m in istra tio n co n ta ct on m a tte rs o f bank reg u la tion and su p e rv is io n . A d d itio n a lly , sill p u b lic in q u irie s on m a tte rs o f banking and bank reg u la tion cou ld be a d d re s s e d to the sin gle a g e n cy . A ll a g en cy a ction s and d e c is io n s w ould o rig in a te , p re su m a b ly , fr o m a sin gle A d m in is tra to r o r a sin gle B o a rd . Instead o f 14 FDIC r e g io n s , 14 N ational bank re g io n s and 12 F e d e r a l R e s e r v e D is tr ic ts (few o f w hich a re today id en tical) a m uch s im p le r re g io n a l setup co u ld be a ch ie v e d - 3 - 2. E lim in a tion o f C on flictin g G o a ls. The fa c t that the s co p e o f r e s p o n s ib ilitie s d iffe r s am ong the th re e F e d e r a l banking a g e n cie s re su lts in a nu m ber o f in tern al c o n flic t s with r e s p e c t to the handling of s u p e r v is o r y p r o b le m s . T his is thought by m any to be a p a r tic u la r p r o b le m f o r the F e d e r a l R e s e r v e S ystem w h ose p rin cip a l fu n ction is the fo rm u la tio n and im p lem en ta tion o f m o n e ta ry p o lic y . T h ese o b s e r v e r s b e lie v e that w h ere the im p lem en ta tion o f m o n e ta ry p o lic y g o a ls is co m b in e d with re g u la r bank exam in ation and su p e rv isio n , the fo r m e r "will alw ays be v iew ed as m o r e im porta n t than the la tte r and w ill p re v e n t a c o n s is te n t, evenhanded a p p roa ch to m a tte rs o f bank su p e rv isio n . This p oten tia l p r o b le m w ould be re d u ce d by setting up a sin gle bank re g u la to ry a g en cy d iv o r c e d fr o m m o n e ta ry p o lic y r e s p o n s ib ilit ie s . 3. E con om y and E ffic ie n c y o f O p era tion . C o n sid e ra b le e co n o m y cou ld be a ch ie v e d by com b in in g the le g a l, r e s e a r c h , trainin g and oth er W ashington O ffic e fu n ction s o f the th ree e x istin g bank re g u la to ry a g e n cie s . T h e re w ould be a red u ction in s e n io r agen cy staff tim e spent com m u n icatin g with and keepin g cu r re n t with the a ctiv itie s o f oth er a g e n cie s . M o re e ffic ie n t u se cou ld be m ade o f e x a m in er tim e , train in g and s p e c ia liz e d c a p a b ilitie s . A sin gle a g en cy w ould elim in a te d iffe r e n c e s in the fo r m and su bstan ce o f r e p o r ts o f exam in ation and w ould be a ble to is s u e u n ifo rm in s tru ctio n s to a ll e x a m in e rs . T r a v e l tim e o f e x a m in e rs cou ld be red u ced , and in m any in sta n ce s w h ere it has not h e r e t o fo r e been fe a s ib le , a ll banks within a p a r tic u la r com m u n ity cou ld be exam in ed sim u lta n eou sly . A sin g le a g en cy cou ld m ake m o r e e fficie n t u se o f s p e c ia liz e d e x p e r tis e to - 4 - handle c o m p lic a te d c r e d it s and to co n ce n tra te on such a re a s as tru st a ctiv itie s, in tern ation al d ep a rtm en ts and fo r e ig n o f fic e s o f in su re d banks, ce rta in data p r o c e s s in g and oth er a re a s o f autom ated a ctiv ity , and co m p lia n ce with F e d e r a l and State statutes in the co n s u m e r p r o te c tio n a re a . E co n o m y cou ld b e a ch ie v e d through a sin g le train in g p r o g r a m w h ich w ould not on ly red u ce ex istin g d u p lica tion , but fa c ilita te the d evelop m en t o f m o r e advan ced and s p e c ia liz e d tra in in g. A sin gle a g e n cy w ould elim in a te d iffe r e n c e s in r e p o r ts file d by in su re d banks, th e re b y elim in a tin g so m e d u p lica tion o r redundant e ffo r t in a d m in iste rin g and p r o c e s s in g such r e p o r t s , in co m p u te r c o s t s and in p u b lica tion c o s t s . 4 . E lim in a tion o f A ctu a l o r P o ten tia l P o lic y C o n flic ts . A sin gle a g en cy would b rin g u n ifo rm trea tm en t to a ll in su re d banks in such m a tte rs as r u le s , r e g u la tio n s , standards and p r o c e d u r e s . F o r e x a m p le, a sin g le , ra th er than th ree sep a ra te g u id elin es on a su b je ct, such as in s id e r tra n s a ctio n s , cou ld be e ffe c te d . A ls o , u n ifo rm a p p lica tio n o f statu tory p o w e r s , such as c e a s e and d e s is t p o w e r s , w ould re s u lt. Banks w ould a ls o be su b je ct to g re a te r un iform ity with r e s p e c t to loa n c la s s ific a t io n s , p o lic ie s on ca p ita l adequacy and oth er a r e a s re la te d to bank ex a m in a tion s. C on solid a tion w ould re su lt in a sin g le p o lic y on ch a rte rin g , branching */ and m e r g e r s . * / The C o m p tr o lle r is the on ly F e d e r a l banking a g en cy having ch a rterin g and b ra n ch in g au th ority, but the FDIC and to a l e s s e r extent the F e d e r a l R e s e r v e ea ch p lay an im p orta n t r o le in the esta b lish m en t and b ra n ch expan sion o f State banks. - 5 - 5. F a cilita tin g the Handling of F a ilin g B anks. It has b een a lle g e d that the in v olv em en t o f th re e F e d e r a l banking a g e n cie s in the handling o f so m e fa ilin g banks p ro lo n g s and o v e r ly c o m p lic a te s an a p p ro p ria te re so lu tio n o f the p r o b le m . A sin g le a g en cy p ro b a b ly cou ld re d u ce the tim e in v o lv e d . Under p re se n t a rra n g e m e n ts, it is d ifficu lt to c o n s id e r a ll a lte rn a tiv e s m o r e o r le s s sim u lta n eo u sly , b e ca u se the th ree a g e n cie s have som ew h at d iffe re n t p o w e rs re la te d to solv in g th ese p r o b le m s (e. g. , the C o m p tr o lle r has som ew h at m o r e fle x ib ilit y in a rra n g in g a N ational bank m e r g e r w hich does not re q u ir e s p e c ia l G overn m en t fin a n cia l a s s is ta n c e o r g u a ra n ties, w hile the F e d e r a l R e s e r v e can p ro v id e liq u id ity a s s is ta n c e and the FDIC can p ro v id e oth er types o f fin a n cia l a s s is ta n c e to in su re d banks r e g a r d le s s o f c h a r te r ). 6. Im p rov e d R egu lation o f Bank H olding C om p a n ies, -T h eir A ffilia te s , and C erta in O ther Bank R e la tio n sh ip s. A sin g le F e d e r a l bank agen cy w ould have r e s p o n s ib ility f o r exam in ing banks and th e ir holding com pan y a ffilia te s , th ereb y fa cilita tin g a m o r e co m p le te p ictu re o f the en tire o p e ra tio n and the a s s e s s m e n t o f the o v e r a ll r is k e x p o su re of the bank(s) and the holding com p an y. Under p re se n t a rra n g e m e n ts the F e d e r a l R e s e r v e has ce rta in re g u la to ry a u th ority o v e r the a c tiv itie s of holding co m p a n ie s w h ose p rin cip a l a s s e ts m ay b e banks su b je ct to the reg u la tion of the oth er two F e d e r a l banking a g e n c ie s . When C o n g re ss a d d re s s e d the bank holding com pany is s u e in 1970 and co n ce n tra te d re g u la to ry authority within the F e d e ra l R e s e r v e , C o n g re ss w as p r im a r ily co n c e r n e d with the range of p e r m is s ib le nonbank but b an kre la te d a ctiv itie s to be m ade a v a ila b le to such holding co m p a n ie s. In m o r e - 6 - r e c e n t y e a r s is s u e s re la te d to fin a n cia l a rra n g e m e n ts of holding co m p a n ies and th e ir im p a ct on bank r is k have b e c o m e m o r e im p orta n t than p e r m is s ib le a c t iv it ie s , and the p r e s e n t re g u la to ry a rra n g e m e n t d oes not se e m to be w ell suited to d eal with th e se is s u e s . E ven apa rt f r o m the holding com p an y fr a m e w o rk , th e re e x is t in to d a y 's banking sy ste m m any co m p lica te d fin a n cia l a rra n g e m e n ts a s s o c ia t e d with jo in t v en tu res and sh a red c r e d its w h ere the p r e s e n t F e d e r a l re g u la to ry stru ctu re m a k es it d ifficu lt to get a co m p le te p ictu re o f a b a n k 's r is k e x p o s u re in a p a r tic u la r tra n sa ctio n . A sin gle a g en cy co u ld a m e lio r a te this situation. 7. Gains to Banks and Bank C u sto m e rs fr o m a Single F e d e r a l A g e n cy . D iffe r e n c e s in re g u la tio n s , in exam in ation standards and re p o rtin g r e q u ir e m en ts am ong the F e d e r a l banking a g e n cie s m ay re su lt in d iffe re n t trea tm en t o f s im ila r situations and, as a re s u lt, in so m e in e q u itie s . In addition, th ere a r e c o s t s im p o s e d on the banks and the p u b lic in having to w o rk with and u n derstan d th ese d iffe r e n c e s . 8. A dju stin g to a R apidly Changing E n viron m en t. R apid chan ges have been o c c u r r in g in banking in re ce n t y e a r s - - fo r e x a m p le , in such d evelop m en ts as the grow th o f b a n k -re la te d a ctiv itie s a c r o s s State lin e s through holding co m p a n ie s , in n ovation s in the paym ent sy ste m and the grow in g im p o rta n ce o f in tern ation al o p e ra tio n s in the a c tiv itie s o f la r g e banks - - and th e re is no re a s o n to a ssu m e that this p r o c e s s w ill d e c e le r a t e . A sin gle F e d e ra l banking a g en cy m ay be in b e tte r p o sitio n to com m an d the te ch n ica l and s p e c ia liz e d - 7 - r e s o u r c e s and to e x e r c is e the a d m in istra tiv e fle x ib ility n e c e s s a r y to co p e with this changing en viron m en t. ARG U M EN TS AGAINST A SINGLE, A L L -P O W E R F U L F E D E R A L BANK REGULATORY AG EN CY: 1. The P r e s e n t S y stem Has W ork ed R eason a b ly W ell. D espite what ap p ea rs to be a cu m b e r s o m e stru ctu re on p a p e r, the p re se n t sy ste m , f o r the m o s t p a rt, has w o rk e d w e ll. In co n s id e r in g the substantial r e v is io n n e c e s s a r y to b rin g about a sin gle a ll-p o w e r fu l a g en cy , it is im p orta n t to r e a liz e that this w ould in v o lv e a c o n s id e r a b le d isru p tion in o r d e r ly o p e ra tio n s and that it m ight take y e a r s fo r a sm ooth -ru n n in g a g en cy to be e sta b lish e d . The c o s t o f this d isru p tio n should b e w eigh ed again st the a ssu m e d b en efits o f such a sin gle a g en cy . 2. Such an A g e n cy W ill Not be a P a n a cea . A sin gle a ll-p o w e r fu l a g en cy w ill not a s s u r e u n ifo rm and quality p e r fo r m a n c e in a ll exam in ation s and in a ll s u p e r v is o r y a c t iv itie s . Q uality d iffe r e n c e s w ill p e r s is t . Our own study of the exam in ation p r o c e s s su g g ests that th ere a re re g io n a l and quality d if fe r e n c e s within each a g en cy w hich m ay e x ce e d in te ra g e n cy d iffe r e n c e s . With r e s p e c t to im p ro v in g the flo w o f in fo rm a tio n , g re a te r in te ra g e n cy co o rd in a tio n , even within the p re se n t sy ste m , m ight a c c o m p lis h m uch o f what cou ld be a c c o m p lis h e d through a sin gle a g en cy . Under the p re se n t sy s te m th e re m a y be c o n s id e r a b le ro o m fo r im p ro v in g exam in ation tech n iqu es and im p rov in g the a llo ca tio n o f s u p e rv is o r y r e s o u r c e s , and we have been - 8 - d evotin g c o n s id e r a b le e ffo r t in this d ir e c tio n at the FD IC . H o w e v e r, a sin g le a g en cy w ill not, by it s e lf, b rin g about such im p r o v e m e n ts . 3. C on cen tra tion o f P o w e r and the E lim in a tion o f R eg u la tory C h o ice . C reatin g a sin g le , a ll-p o w e r fu l a g en cy w ould co n ce n tra te an e x tra o rd in a ry am ount o f p o w e r w ithin a sin gle unit o f g ov ern m en t. Banks and the pu blic cou ld b e su b je ct to r e la tiv e ly a r b itr a r y o r r e la tiv e ly in fle x ib le b e h a v io r. One advantage o f the p re se n t sy s te m o r one containing m o r e than a sin gle a g en cy is that such a sy ste m p r o v id e s C o n g re ss and the a g e n cie s th e m se lv e s with an in fo r m e d g rou p o f p oten tia l c r i t ic s w hich have no v e ste d fin a n cia l in te r e s t in the o u tco m e o f a p a r tic u la r c o u r s e o f a ctio n . T his is a lu xu ry that has not alw ays b een a v a ila b le in the c a s e of oth er G overn m en t re g u la to ry a g e n c ie s , w h ose c r it ic s g e n e ra lly have co m e fr o m the in d u stry being regulated. W hile the e x istin g F e d e r a l and State a g e n cie s have at tim e s appeared to be com p etin g in th e ir attem pts to a cco m m o d a te banks under th e ir im m ediate s u p e rv is io n , d iffe r e n c e s in a g e n cy p o lic y , so m e tim e s in flu en ced by the threat o f a shift in s u p e r v is o r (s ), have a ls o p e r fo r m e d a p o s itiv e r o le in lim itin g u n re a so n a b le , in fle x ib le o r a r b itr a r y b e h a v io r on the p a rt of one o r m o r e of th e se a g e n c ie s . in te r e s t. Not a ll "a g e n cy sh op p in g" has b een co n tra ry to the pu b lic Indeed, th e re a re n u m erou s in sta n ce s w h ere the o p p o site has o c c u r r e d , w h ere the in itia l a g en cy w as not s u fficie n tly r e ce p tiv e to pu b lic need o r changing p r a c t ic e o r w h ere it w as too stro n g ly in flu en ced by the ex istin g banking e sta b lish m e n t, as f o r ex a m p le in its ch a rte rin g o r branch ing p o lic ie s . In such in sta n ce s a change o f s u p e r v is o r y authority by the d issa tisfie d 9 - - bank o r its o r g a n iz e r s m a y w e ll have b een in the p u b lic in te re s t. The a v a ila b ility o f a c h o ic e am ong s u p e r v is o r y a u th o ritie s h a s, o f c o u r s e , been the life b lo o d o f the s o - c a lle d dual banking sy ste m in this cou n try . 4. B en efits o f D iv e r s ity . W hile a sin g le , a ll-p o w e r fu l a g en cy cou ld m o r e r e a d ily su p p ort s p e c ia liz e d train in g and r e s e a r c h , this m ay be outw eighed by the p oten tia l b e n e fits fr o m the d iv e r s ifie d and som ew h at independent e ffo r ts o f th re e se p a ra te F e d e r a l a g e n c ie s , ju st as it is by the d iv e r s ifie d and independent e ffo r ts o f so m e State banking d ep a rtm en ts. T h e re m ay be a g r e a te r ten d en cy to e x p e rim e n t and to be r e ce p tiv e to change with th re e such a g e n cie s than with on ly on e, sin ce the odds a re high that at le a s t one o f the th re e m igh t be r e c e p tiv e to ex p erim en ta tion and change at any point in tim e . T h is is lik e ly to b e the c a s e not on ly fr o m the standpoint o f developin g exam in ation and s u p e r v is o r y tech n iq u e s, but a ls o fr o m the standpoint o f a cce p tin g and e n cou ra g in g inn ovation in banking p r a c t ic e s . In the p ast this p oten tia l f o r fle x ib ilit y and ex p erim en ta tion has p ro d u ce d substantial pu b lic b e n e fit, and it is lik e ly to do so in the fu tu re. * * * * * */ D ir e c t o r L e M a is tre and I b e lie v e it w ould be a g ra v e m ista k e to co n s o lid a te the ex istin g p o w e rs o f a ll th re e F e d e ra l bank a g e n cie s into one sin g le , a ll-p o w e r fu l a g e n cy o f the type d e s c r ib e d , la r g e ly b e ca u se we b e lie v e # / The C o m p tr o lle r o f the C u rre n cy , who s e r v e s ex o ffic io as the third m e m b e r o f the FDIC B o a rd o f D ir e c t o r s , has p re v io u s ly e x p r e s s e d to the S u b com m ittee h is v ie w s on the g e n e ra l su b je ct o f bank re g u la to ry r e fo r m , and r e fe r e n c e is m ade to p ages 1-5 o f his statem ent o f July 17, 1975, f o r an a ccu r a te statem ent o f h is p o s itio n . 10 - it w ou ld elim in a te any m ea n in gfu l c h o ic e betw een the re g u la to ry op tion s now a v a ila b le to the n a tio n 's in s u re d banks. We b e lie v e that o v e r the y e a r s the banking p u b lic has b en efitted fr o m the fle x ib ilit y in ch a rte rin g and s u p e r v i sion w h ich that c h o ic e entails and that it should not be lig h tly d is ca rd e d . Such a co n s o lid a tio n r e p r e s e n ts one e x tre m e , h o w e v e r, o f the b roa d sp e ctru m o f p r o p o s a ls w h ich m igh t a p p ro p ria te ly be c o n s id e r e d by the C ongress if it d e te rm in e s that sig n ifica n t change should be m ade in the e x istin g structu re o f bank reg u la tion at the F e d e r a l le v e l. We b e lie v e , f o r ex a m p le, that it m ay be p o s s ib le to a ch ie v e m any o f the advantages o f g r e a te r ce n tra liz a tio n without givin g up the m ean in gfu l re g u la to ry c h o ic e to w hich we have r e fe r r e d . We have no s p e c ific p r o p o s a l to la y b e fo r e you today that w ould, in o u r judgm ent, a c c o m p lis h this in te rm e d ia te re s u lt, but w e have a sk ed ou r sta ff to continue th e ir e ffo r t s to se e if a fe a s ib le and d eta iled p r o p o s a l can b e d e v e lo p e d that w ou ld m e e t ou r two o b je c tiv e s as w e ll as the n eeds o f other le g itim a te re g u la to ry in t e r e s ts , such as the fo rm a tio n and im plem en ta tion o f m o n e ta ry p o lic y . Should th o se e ffo r ts p r o v e s u c c e s s fu l, you m ay be su re that the re su lts w ill be brou gh t to the S u b co m m itte e 's attention. I w ould co n clu d e by stating that the FDIC is not w edded to the existing bank re g u la to ry s tru c tu re . It is quite p re p a re d to se e its own p o w e rs and r e s p o n s ib ilit ie s sig n ifica n tly changed if the C o n g re ss b e lie v e s such changes a r e lik e ly to le a d to a m o r e ra tion a l sy ste m o f bank reg u la tion in b eh a lf o f the A m e r ic a n p u b lic. T h is is a c o m p le x a re a , h o w e v e r, f o r le g is la tiv e r e fo r m , and I w ould u rg e the g re a te s t c a r e and d e lib e ra tio n on the p art o f the S u b com m ittee as it p r o c e e d s .
@FedFRASER