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N EW S RELEASE
Vn S m ) 5

FOR RELEASE UPON DELIVERY

cv
f

r e l^ e PR-79-77 (9-16-77)^

o
Statem ent on

F e d e r a l Bank C o m m is s io n A c t of 1977
and
F e d e r a l Bank E xam ination C ou n cil A c t .

‘^ P resen ted to
^

C om m ittee on Banking, H ousing and Urban A ffa ir s
U n ite d S t a t e s S e n a te

by
0

G e o r g e A , L e M a is tr e , C hairm an
F e d e r a l D ep osit In su ra n ce C o rp o r a tio n

S ep tem b er 16, 1977,

FEDERAL DEPOSIT INSURANCE CORPORATION, 550 Su e n tu n th St. N.W ., Wuhlngton, D .C . 20429



202-319-4221

M r. C h airm an , I w e lc o m e the op portu n ity to te s tify with r e s p e c t
to the F e d e r a l Bank C o m m is s io n A c t o f 1977 (S. 684) and the F e d e ra l Bank
E xam ination C ou n cil A c t (S. 711).
I should e m p h a siz e at the ou tse t that the FDIC is not w edded to the
existing re g u la to ry stru c tu re .

We a r e quite p re p a re d to s e e the p o w e rs and

r e s p o n s ib ilitie s o f the a g e n cy changed sig n ifica n tly .

It is o u r b e lie f that w e

should w o rk to c o n s tr u c t a fr a m e w o r k o f s u p e rv isio n and reg u la tion w hich
w ill a s s u r e the health and sta b ility o f the fin a n cia l sy ste m , fa c ilita te fin a n ­
c ia l in n ovation and a ffo rd a p p ro p ria te p r o te c tio n f o r in v e s to r s and c o n s u m e rs
with the m in im u m n e c e s s a r y g o v e rn m e n ta l in te rv e n tio n .

Such a fr a m e w o r k

m ust take into a cco u n t the d ra m a tic ch a n ges that have o c c u r r e d in re ce n t
y e a r s and m u st a n ticip a te and a cco m m o d a te the ch an ges w h ich a r e lik e ly
to o c c u r during the next q u a rte r ce n tu ry .
N e e d le s s to sa y, the su b je c t o f bank a g e n cy re o rg a n iz a tio n is not
a new on e.

Indeed, the F e d e r a l Bank C o m m is s io n A c t is e s s e n tia lly the

p ro p o s a l m a de b y the B ro o k in g s Institution in 1937 and again by fo r m e r
F e d e ra l R e s e r v e B o a rd G o v e rn o r R o b e r ts o n in 1962.

M o r e o v e r , it is

one am ong m any p r o p o s a ls d e v e lo p e d o v e r the p ast fo r t y y e a r s a im ed
at c o m p r e h e n s iv e re o rg a n iz a tio n o f the bank re g u la to ry and s u p e r v is o r y
fra m e w o rk .

Taken to g e th e r, th e se p r o p o s a ls w ou ld se e m to h ave r a is e d

e v ery im a g in a b le p o s s ib ilit y f o r re a rra n g in g the fu n ction s o f the th re e
fe d e r a l banking a g e n c ie s .
Throughout the sp irite d and often quite h eated deba tes that th ese
p ro p o s a ls have a ro u s e d , two q u estion s have b e e n c e n tr a l:

F ir s t , should

the fu n ction s o f fe d e r a l bank su p e rv is io n and reg u la tion b e co n s o lid a te d




-

2

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in a sin g le a g e n cy o r re m a in d is p e r s e d ?

S econ d, what is the a p p rop ria te

rela tion sh ip b etw een the fo rm u la tio n and im p lem en ta tion o f m o n e ta ry p o licy
and bank s u p e rv is io n and re g u la tio n ?

It should b e noted that th e se questions

a re independen t and ca n be c o n s id e r e d se p a ra te ly .

W hile the F e d e r a l Bank

C o m m is s io n A c t w ou ld c e n t r a liz e bank s u p e r v is o r y and re g u la to ry fu n ction s,
the Hunt C o m m is s io n w ould have m aintained a d is p e r s e d s y s te m at the fed era l
le v e l.

M o r e o v e r , f o r m e r FDIC C h airm an F ra n k W ille d e v e lo p e d a reasonable

fr a m e w o r k w h ich c o n s o lid a te s so m e fu n ctio n s but reta in s the p o s s ib ilit y of
c h o ic e o f r e g u la to ry sy ste m s at the fe d e r a l le v e l.

A lthough th ese th ree

p r o p o s a ls w ou ld r e m o v e the bank s u p e r v is o r y r e s p o n s ib ilit ie s f r o m the
F e d e r a l R e s e r v e S y stem , it has a ls o b e e n p r o p o s e d that bank su p e rv isio n
b e co n s o lid a te d e n tire ly o r su b sta n tia lly w ithin the c e n tr a l bank.
We at the FDIC have studied th e se two q u e stio n s c a r e fu lly during
the p a st th re e y e a r s .

In m y te stim o n y I have attem pted to ou tlin e f o r you

the a rgu m en ts that have b e e n advan ced and o u r v iew as to th e ir m e r it s .
F o r m y ow n p a rt, I h ave te n ta tiv e ly co n clu d e d that bank su p e rv is io n and
reg u la tion should b e d iv o r c e d f r o m the fo rm u la tio n and ex e cu tio n o f
m o n e ta ry p o lic y as p r o p o s e d in the F e d e r a l Bank C o m m is s io n A c t, but
that, w h ile c e n tr a liz a tio n is a p p ro p ria te f o r c e r ta in fu n ctio n s, the public
in te r e s t is b e tte r s e r v e d i f c e r ta in o th e r fu n ction s a r e p e r fo r m e d by
a lte rn a tiv e s y s te m s .
N otw ithstanding the in te n s iv e a n a ly sis that has b e e n fo c u s e d upon
the two c e n tr a l is s u e s in v o lv in g the a llo c a tio n o f fu n ction s am ong the th ree
a g e n cie s w h ich re g u la te c o m m e r c ia l ban ks, I w ou ld r e co m m e n d that the




- 3 -

su b ject o f c o m p r e h e n s iv e a g e n cy re o rg a n iz a tio n b e d e fe r r e d .

My b e lie f

that such d ela y is a d v isa b le r e fle c t s the fa c t that the fin a n cia l w o rld and its
reg u la to ry en v iron m en t have chan ged ra d ic a lly sin ce the p r o p o s a l b e fo r e us
was f i r s t advanced fo u r d e ca d e s a g o. Indeed, the p a ce o f chan ge a p p ea rs
to b e q u ick en in g. F o r e x a m p le, it is no lo n g e r p o s s ib le to think o f "b an k in g "
as som ething done s o le ly b y in stitu tion s d esig n a ted " c o m m e r c ia l banks. "
In the 1 9 3 0 's , banks w e r e ban ks, th rift in stitu tion s w e r e th rift in stitu tion s
and s e c u r it ie s fir m s w e r e s e c u r itie s f ir m s .

It w as re a so n a b le then to d e v is e

d is c r e t e re g u la to ry s y s te m s , including on e f o r c o m m e r c ia l banks. S im ila rly ,
during the 1 9 3 0 's it w as c le a r that the p rim a r y m is s io n o f the bank re g u la to ry
stru ctu re w as the p ro te c tio n o f the sa fety and sou n dn ess o f the banking
sy stem and o f in d ivid u a l banks. S in ce that tim e , the a g e n cie s h a v e b e e n
a ssig n ed an in c r e a s in g ly d iv e r s e and s o m e tim e s p oten tia lly c o n flictin g set
o f m is s io n s , in clu d in g the a d m in istra tio n o f c iv il righ ts and co n s u m e r
p ro te ctio n law s and g r e a t e r em p h a sis on p o licin g d is c lo s u r e u n der the
s e c u r itie s la w s.

That the sim p le w o r ld o f the 1 9 3 0 's no lo n g e r e x is ts m ean s

that the fr a m e w o r k con tem p la ted b y the F e d e r a l Bank C o m m is s io n A c t m ay
not b e s u fficie n tly b ro a d to p e rm it u s to s u p e rv is e and reg u la te d e p o s ito r y
in stitu tion s in a c o h e r e n t and e ffe c tiv e fa sh io n .
A c c o r d in g ly , I b e lie v e that p r io r to e ffe ctin g any c o m p re h e n s iv e
re o rg a n iz a tio n o f the bank re g u la to ry fu n ction s C o n g r e s s , the A d m in is ­
tra tion and the a g e n cie s m u st a d d re s s in d is c ip lin e d fa sh io n a s e r ie s o f
fu rth e r q u estion s w hich should b e a n sw e re d i f w e a r e to d e v is e a bank
s u p e r v is o r y and re g u la to ry fr a m e w o r k su ita b le f o r the next q u a rte r




- 4 -

cen tu ry .

In the d is c u s s io n w h ich fo llo w s , I su g g est s o m e o f th e se qu estion s,

a n a ly ze the two q u estion s ce n tra l to the F e d e r a l Bank C o m m is s io n A c t and
sp e ll out two re co m m e n d a tio n s f o r im m e d ia te a ctio n .

B e ca u se the fr a g m e n ­

tation o f ju r is d ic t io n with r e s p e c t to the s u p e rv is io n and reg u la tion o f bank
h oldin g com p a n y s y s te m s r e p r e s e n ts a s e r io u s p r o b le m w h ich should b e
r e s o lv e d p ro m p tly , I w ould p la c e s u p e r v is o r y r e s p o n s ib ility f o r the en tire
h oldin g com p an y with the a g en cy w hich has p r im a r y ju r is d ic t io n o v e r its
lea d bank.

S e co n d ly , I re co m m e n d en actm en t o f a m o d ifie d v e r s io n o f

S. 711 w h ich w ou ld in clu d e the F e d e r a l H om e L oan Bank B oa rd and the
N ational C re d it Union A d m in istra tio n .
A lthough I su g g e st d e fe r r a l o f c o m p r e h e n s iv e re o rg a n iz a tio n at
this tim e , I hope to m a k e it quite c le a r that I b e lie v e that th e re is a profound
n eed to p r o c e e d s e r io u s ly and with so m e d isp a tch .

Indeed, the q u estion s

w hich I r a is e su g g e st a s ig n ifica n tly m o r e d ra m a tic re s tru ctu rin g o f bank
r e g u la to ry fu n ctio n s than that en v ision ed b y the F e d e r a l Bank C o m m is s io n
A ct.

I.

Q u estion s W hich Ought to b e A d d r e s s e d b y a C o m p re h e n siv e R e o rg a n iza tion o f Bank S u p e rv isio n and R egu lation at the F e d e r a l L e v e l________
A.

The im p lic a tio n s o f fin a n cia l in stitu tion r e fo r m

A lthough c o m p r e h e n s iv e fin a n cia l in stitu tion r e fo r m at the fe d e r a l
le v e l has fa ile d in the p o lit ic a l a ren a , te c h n o lo g ic a l in n ova tion s, d e v e lo p ­
m en ts in the m a rk e tp la c e and a ctio n at the state le v e l h ave tended to take
us slo w ly but s u r e ly tow a rd the w o r ld that the Hunt C o m m is s io n en v ision ed .
M utual savin gs banks took the lea d in this re g a rd with the d evelop m en t of




- 5 -

the NOW a ccou n ts and with such in n ovation s as teleph on e t r a n s fe r s .

The

range o f co n s u m e r and in v e stm e n t p o w e rs w hich the m utual savings bank
industry has sought is a lre a d y a v a ila b le to savin gs banks and th e ir c u s to m e r s
in m any o f the 17 states in w hich savin gs banks co m p e te .

In so m e sta tes,

p re se n t m utual savin gs bank p o w e r s , in clu d in g in te re s t-p a y in g NOW a cco u n ts ,
actu ally e x c e e d the p o w e rs re co m m e n d e d by the Hunt C o m m is s io n R e p o rt.
M o r e o v e r , p a s s a g e o f pending le g is la tio n p rov id in g f o r NOW a cco u n ts on a
nationw ide b a s is , if it should o c c u r , w ou ld change d ra m a tica lly the se p a ra tion
o f fu n ction s am ong fin a n c ia l in stitu tion s.
O ther in stitu tion s a re a ls o pushing v ig o r o u s ly at the tra d itio n a l
b ou n d a ries o f th e ir in d u strie s so that d istin ctio n s am ong fin a n cia l in stitu tion s
a re in c r e a s in g ly b lu r r e d .

F o r e x a m p le , the expan sion o f c r e d it union

a ctiv ity is having an in c r e a s in g ly im p orta n t im p a ct on the banking in d u stry .
The re la tiv e gains o f c r e d it unions in fin a n cia l m a rk e ts a r e lik e ly to in c r e a s e
in the fu tu re as c r e d it unions a cq u ire im p o rta n t new p o w e r s . One o f the m o s t
im porta n t in itia tiv e s is the expanding sh a re d ra ft p r o g r a m , although on ly
4 p e rce n t o f fe d e r a l c r e d it unions c u r r e n tly o p e ra te such p r o g r a m s , with
$200 m illio n in sh a re a ccou n t lia b ilit ie s .

A n oth er new p o w e r is the re ce n tly

le g isla te d in c r e a s e in the p e r m is s ib le t e r m to m a tu rity f o r loan s f r o m 10
y e a rs to 30 y e a r s , w h ich e ffe c t iv e ly a llo w s c r e d it unions to m ake m o rtg a g e
loans»

The a cq u isitio n o f tra n sa ctio n a ccou n ts and the in c r e a s e d te r m to

m atu rity w ill c e r ta in ly enhance c r e d it u n ion s' a b ility to co m p e te with o th e r
fin a n cia l in stitu tion s.




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6

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In sh o rt, the v a rio u s f o r m s o f fin a n cia l in te r m e d ia r ie s - - c o m m e r c ia l
b an ks, savin gs banks, c r e d it unions and savings and loa n s - - a r e a lre a d y and
w ill in c r e a s in g ly b e in d ir e c t co m p e titio n with one a n oth er.

A c c o r d in g ly , it

se e m s to m e that an attem pt to d e v is e a re g u la to ry s tru ctu re that is a p p r o ­
p ria te in the co m in g y e a r s m u st n e c e s s a r ily d eal e x p lic ity with the regulation
o f th rift in stitu tio n s.

It is f o r this re a s o n that I re co m m e n d in c lu s io n o f the

F e d e r a l H om e L oan Bank B o a rd and the N ational C re d it Union A d m in istra tion
in the Council w h ich w ou ld b e esta b lish e d under S. 711.

B.

The im p lic a tio n s o f co m p e titio n f r o m n o n -d e p o s ito r y
in stitu tion s______________________ ______________

I w ould a ls o a rg u e that any attem pt to d e v is e a re o rg a n iz a tio n
a p p ro p ria te f o r the next 25 y e a r s should take into a cco u n t o th e r fin a n cia l o r
c o m m e r c ia l in stitu tio n s, not u su a lly c o n c e iv e d o f as d e p o s ito r y in stitu tion s,
w hich a r e in c r e a s in g ly p e r fo r m in g fu n ction s o r d in a r ily a s s o c ia te d with
c r e d it u n ion s, savings and loa n s and banks.

F a ilu r e to d e v is e a re g u la to ry

stru ctu re that e n co m p a s s e s a ll in stitu tion s w h ich p e r fo r m s im ila r fu n ction s
is u n fa ir to th ose in stitu tion s w hich co m p e te w ithin the s tr ic tu r e s o f a tightly
regu lated en v iron m en t.

In p a r tic u la r , I w ould c a ll attention to a rra n g em en ts

such as the M e r r ill L yn ch plan w h ich a llo w c u s to m e r s to b o r r o w , w rite
ch e c k s and m ak e VISA c a r d p u rch a s e s again st in te r e s t-b e a r in g funds h eld in
m a rg in a cco u n ts .

T e st m a rk etin g o f this plan b e g in s this m onth. S im ila rly ,

la r g e re ta il chains h ave the ca p a b ility and m ay c h o o s e to o f f e r s e r v ic e s
w hich have tra d itio n a lly b e e n the p r o v in c e o f c o m m e r c ia l banks.




- 7 C.

The im p lic a tio n s o f te c h n o lo g ic a l inn ovation in
e le c t r o n ic funds t r a n s fe r sy ste m s ______________

The d e v e lo p m e n t o f e le c t r o n ic funds tr a n s fe r sy ste m s w ill p o se a
s e rie s o f s p e c ia l p r o b le m s f o r the bank re g u la to ry fr a m e w o r k in v olv in g
bank stru ctu re , sa fe ty and sou n d n ess, and bank s e c u r ity . M o r e o v e r ,
e le c tr o n ic funds t r a n s fe r sy s te m s p r o m is e to fu rth e r b lu r the d istin ctio n s
among tra d itio n a l fin a n cia l in te r m e d ia r ie s as w e ll as the d istin ctio n betw een
these in stitu tion s and o th e r f ir m s .

The re g u la to ry p r o b le m s thus p osed

w ill b e fu rth e r co m p lic a te d as sharing and jo in t v en tu res in c r e a s e .

M ore­

o v e r , th e re s till e x is t sig n ifica n t q u estion s as to what r o le the g ov ern m en t
it s e lf should play in the d ev e lo p m e n t o f th e se s y s te m s .

Such d ev elop m en ts

p ose q u estion s o f s ig n ifica n ce f o r the shape o f o u r re g u la to ry fr a m e w o r k .

D.

The a p p ro p ria te lo c u s o f the in v e s to r p ro te ctio n function

An a re a o f redundancy and c o n flic t in the fe d e r a l bank re g u la to ry
apparatus u n d e r s c o r e d b y events o f the past th re e y e a r s is the p ro te c tio n
in v e s to rs through the e n fo rc e m e n t o f s e c u r itie s la w s.

of

C o n g re s s m ade a

d eterm in ation that banks should b e ex em p t f r o m the r e g is tr a tio n re q u ire m e n ts
of the S e cu ritie s E xch a n ge A c t o f 1933.

W hatever the re a so n s u n derlyin g this

exem ption o r its m e r it s , the rapid ev olu tion o f the holding com p an y as a
dom inant banking f o r m has s e rv e d to n u llify the a d v is a b ility o f continuing the
exem ption .

So lon g as h old in g com p a n y sy ste m s fin a n ce through the holding

com pany ra th er than the bank - - and that has b e e n one o f the a ttra ctiv e
fea tu res o f the m e ch a n is m - - bank ex em p tion f r o m SEC ju r is d ic t io n is
v irtu a lly m e a n in g le ss f o r banks in holding com p an y s y s te m s .




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The fa c t that the SEC has s e c u r it ie s law ju r is d ic t io n o v e r bank
holding co m p a n ie s w h ile the bank a g e n cie s h ave ju r is d ic t io n o v e r banks
w ithin such sy ste m s has two il l e ffe c t s .

The n e c e s s it y o f d ealing with

two a g e n cie s with r e s p e c t to d is c lo s u r e m a tte rs m ay p ro v e c o s t ly and
b u rd e n so m e to the reg u la ted in stitu tion , and m ay re su lt in d u p lica tion
o f e ffo r t and e x c e s s iv e c o s t w ithin the g o v e rn m e n t.

E ven m o r e tro u b lin g ,

p e rh a p s, have b e e n the so m e tim e s b itte r c o n flic t s b etw een the SEC and
the banking a g e n cie s with r e s p e c t to q u estion s o f p o lic y .
It s e e m s to m e that C o n g r e s s should fa c e up to this fundam ental
a n om aly in the law in the co n te x t o f a c o m p r e h e n s iv e re o rg a n iz a tio n e ffo r t.
R e s p o n s ib ility f o r e n fo rc e m e n t o f the s e c u r it ie s law s should b e v e ste d in
eith er the SEC o r a banking a g e n cy o r a g e n c ie s . The fa ilu r e to do s o , it
s e e m s to m e , w ill lea d to fu r th e r d u p lica tion o f tim e and e ffo r t as w e ll as
fu rth e r c o n flic t and co n fu sio n .

E.

The a p p ro p ria te lo c u s o f co n s u m e r p r o te c tio n and c iv il rights
fu n ction s
___________________________________________________

S in ce 1968, the banking a g e n cie s have b e e n a ssig n e d in c r e a s in g
r e s p o n s ib ilitie s in the c iv il righ ts and co n s u m e r p r o te c tio n a r e a s . The
a g e n cie s have b e e n su b je c t to s e r io u s c r i t i c i s m by the C o n g re s s and
c o n s u m e r and c iv il righ ts g rou p s on the grou n ds that they h ave not b een
v ig o r o u s in e n fo rc e m e n t.

A lthough sig n ifica n t and d e m o n stra b le strid e s

have b e e n m a d e , the fe e lin g con tin u es that the banking a g e n cie s a r e not
s u fficie n tly m in d fu l o f th e ir r e s p o n s ib ilit ie s in th e se fie ld s .

P a r a d o x ic a lly ,

m any b a n k ers a rg u e that the e n fo rc e m e n t o f th e se law s through the




- 9 -

exam in ation p r o c e s s s u b je c ts them u n fa irly to f a r m o r e r ig o r o u s o v e r s ig h t
than o th e r in stitu tio n s.
S om e a rg u e that the p r im a r y m is s io n o f bank re g u la to rs should
be a ssu rin g the sa fe ty and soun dn ess o f the banks and that exam in ing f o r
co m p lia n ce with the co n s u m e r and c iv il rights law s a b s o r b s n eed ed r e s o u r c e s
and c o n flic t s with th e ir sa fety and soun dn ess m is s io n .

They b e lie v e that the

F e d e ra l T ra d e C o m m is s io n should b e a ssig n e d r e s p o n s ib ility f o r a d m in is tra ­
tion o f the c o n s u m e r la w s.

O thers a rg u e ra th er stre n u o u sly that the banking

a g e n cie s a r e the m o s t e ffe c tiv e p o s s ib le v e h ic le f o r the p r o te c tio n o f c o n ­
su m er and c iv il rig h ts.
F o r m y own p a rt, I am o f the v iew that the banking a g e n cie s a r e the
m o st e ffe c tiv e v e h ic le f o r the e n fo rc e m e n t o f the c iv il rights and co n s u m e r
p ro te ctio n statu tes, both b e c a u s e o f th e ir e x p e r tis e and b e c a u s e o f the re g u la r
exam in ation p r o c e s s .

On the o th e r hand, th ere is som e ris k that a banking

agency w h ose p r im a r y c o n c e r n s a re ’ ’ sa fety and so u n d n e ss” and ’ ’c o m p e tit io n ”
m ay not m e e t its r e s p o n s ib ility f o r e n fo rc e m e n t o f c o n s u m e r and c iv il rights
statutes as w e ll as an a g e n cy m o r e c le a r ly d e d ica te d to th o se m is s io n s .

In

any event, I b e lie v e that C o n g re s s should c o n s id e r the a ssig n m e n t o f th ese
functions m the c o u r s e o f a c o m p r e h e n s iv e re v ie w o f the re g u la to ry fra m e w o rk .
If it is d eterm in e d that the bank re g u la to ry fr a m e w o r k should b e the lo c u s o f
these fu n ctio n s, then c e r ta in o th e r fu n ctio n s, including c o n s u m e r p ro te ctio n
r e s p o n s ib ilitie s v i s - a - v i s n on -b a n k h oldin g com p an y s u b s id ia r ie s , p re s e n tly
m the hands o f the F T C , and c e r ta in c iv il rights r e s p o n s ib ilit ie s c u r re n tly
in the hands o f HUD, should b e t r a n s fe r r e d to the bank re g u la to ry fr a m e w o r k .




-

F.

10

-

The re la tio n sh ip o f state and fe d e r a l reg u la tion and
su p e rv is io n _____________________________________________

S till a n oth er q u e stio n w h ich has an im p o rta n t and d ir e c t b ea rin g on
the a p p ro p ria te shape o f the fe d e r a l re g u la to ry stru ctu re is the rela tion sh ip
b etw een state and fe d e r a l bank reg u la tion .

In m y ju d gm en t, this relationsh ip

c r i e s out f o r ra tio n a liz a tio n to a fa r g r e a t e r extent than d o e s the fra m e w o rk
at the fe d e r a l le v e l.

F o r this re a s o n I p r o p o s e d and, on A ugust 29 o f this

y e a r , the B o a rd o f D ir e c t o r s o f the FDIC c o m m is s io n e d a study to analyze
and a p p ra ise the sy ste m o f state and fe d e r a l bank re g u la tio n .

The study w ill

a s s e s s the c o s t s and b e n e fits o f this o v e rla p p in g s tru ctu re and w ill d evelop
re co m m e n d a tio n s f o r its im p r o v e m e n t.

E ven though the fo c u s o f this study

is not upon the in te ra ctio n o f the fe d e r a l a g e n c ie s , the p e c u lia r p a rtn ersh ip
that e x ists b etw een state and fe d e r a l reg u la tion m ean s that its co n c lu s io n s
a r e lik e ly to h ave sig n ifica n t im p lic a tio n s f o r the stru ctu re o f fe d e r a l
reg u la tion as w e ll.

II.

R ela tion sh ip b etw een the F o rm u la tio n and Im p lem en tation o f M onetary
P o lic y and Bank S u p e rv isio n and R egu lation ___________________________

The F e d e r a l Bank C o m m is s io n A c t w ould se p a ra te bank and bank
h old in g com p an y su p e rv is io n and reg u la tion fr o m the m o n e ta ry p o lic y function.
In y o u r le t t e r inviting m e to te s tify , M r. C h airm an , y o u s p e c ific a lly requested
that I a d d re s s the m a tte r o f what r o le the F e d e r a l R e s e r v e System should
have in bank and bank h olding com p an y su p e rv is io n and reg u la tion .
M any a u th o ritie s (including so m e p re v io u s ly a s s o c ia t e d with the
F e d e r a l R e s e r v e S y stem ) have a rgu ed that substantial b e n e fits w ould be




-

11

gained b y sep a ra tin g bank su p e rv is io n and reg u la tion f r o m the fo rm a tio n
and im p lem en ta tion o f m o n e ta ry p o lic y and that the c o s t s o f such s e p a ra ­
tion w ou ld b e n e g lig ib le .

On the o th e r hand, re p re s e n ta tiv e s o f the F e d e r a l

R e s e r v e S ystem a rg u e that sig n ifica n t s u p e r v is o r y and re g u la to ry r e s p o n s i­
b ilitie s a r e re q u ire d f o r the e ffe c tiv e con d u ct o f m o n e ta ry p o lic y .

They

argue as w e ll that an un derstanding o f the nuances o f m on eta ry p o lic y and
o f d ev elop m e n ts in the e co n o m y fa c ilita te bank su p e rv isio n .
T h ree m a jo r argu m en ts h ave b e e n advanced in support o f the re m o v a l
o f the F e d e r a l R e s e r v e S ystem fr o m bank s u p e rv isio n and reg u la tion .

F ir s t,

it has b een a rgu ed that the F e d e r a l R e s e r v e 's r e s p o n s ib ility f o r bank s u p e r­
v isio n d iv e r ts attention f r o m m o n e ta ry p o lic y fo r m a tio n w hich m a y red u ce
its e ffe c tiv e n e s s in im p lem en tin g m o n e ta ry p o lic y .

F o r m e r F e d e ra l R e s e r v e

B oard G o v e rn o r J a m es R o b e r ts o n v o ic e d this c o n c e r n in stating:
A s a p r a c t ic a l m a tte r, I b e lie v e it w ould b e s e r io u s ly d etrim en ta l
to p la c e in the B o a rd the im p orta n t additional r e s p o n s ib ilitie s that
w ould a cco m p a n y u n ifica tio n . T h ere a r e lim its to a m a n 's a b ility
e ffe c t iv e ly to p e r fo r m h is a ssig n e d d u ties. In o u r c o m p le x s o c ie ty ,
m e r e ly keep in g in fo r m e d o f what is goin g on in the national e co n o m y
i s b e co m in g m o r e and m o r e d iffic u lt. D evelop in g and im p lem en tin g
a p p ro p ria te m o n e ta ry p o lic y at a given tim e re q u ir e c o n s id e r a tio n
and evalu ation o f the s ig n ifica n ce o f an en orm ou s volu m e o f a v a il­
a b le data and th e ir in te r r e la tio n s h ip s . The r e s p o n s ib ilitie s a re o f
such m agn itu de that the B oa rd should not b e a ls o bu rd en ed with
the p e r fo r m a n c e o f bank s u p e r v is o r y fu n ctio n s. S u p erv ision is too
im p orta n t a fu n ction in it s e lf to b e the F e d e ra l R e s e r v e 's p a r t-t im e
jo b .
This a rgu m en t has a ssu m ed g r e a t e r im p o r ta n c e today than when f ir s t
m ade b y G o v e rn o r R o b e r ts o n b e c a u s e o f the F e d e ra l R e s e r v e 's m u sh ro o m in g
re s p o n s ib ility u n der the c iv il rights and c o n s u m e r p ro te c tio n law s and b e ca u se
of the e v e r in c r e a s in g bu rd en o f holding com p an y s u p e rv iso n and regu la tion .




-

12

-

S econ d , s o m e o b s e r v e r s fin d the e x istin g co n c e n tra tio n o f p ow er
within the F e d e r a l R e s e r v e S y stem d istu rb in g , given its in su la tion f r o m
the p o lit ic a l p r o c e s s , and w ould fa v o r se p a ra tio n o f the s u p e r v is o r y and
m on eta ry p o lic y fu n ctio n s on this grou n d.

E ven su p p o rte rs o f co n s o lid a tio n

w ithin the B o a rd o f G o v e rn o rs r e c o g n iz e the poten tial p r o b le m , as G o v e rn o r
H olland in d ica te d in su ggestin g that a p a rtia l co n s o lid a tio n "w ould a c c o m p lis h
a g ood d eal o f what is c la im e d w ould b e a c c o m p lis h e d by a c o m p le te c o n s o li­
dation o f F e d e r a l bank s u p e r v is o r y fu n ctio n s, w ithout so m e o f the d an gers
o f c o m p le te u n ifica tio n . . . . "
T h ird , it is a rg u ed that when the im p lem en ta tion o f m o n e ta ry p o lic y
g o a ls and bank su p e rv is io n a r e co m b in e d , the f o r m e r w ill in e v ita b ly take
p r e c e d e n c e , lea d in g

to in c o n s is te n t and in eq u ita b le bank s u p e rv is io n .

F or

ex a m p le, it is argu ed that the m o n e ta ry au th ority w ou ld b e loa th e to r e s tra in
the a g g r e s s iv e p o lic ie s o f a grou p o f o v e re x te n d e d m on ey c e n te r in stitu tion s
when m o n e ta ry p o lic y g o a ls a re a im ed at c r e d it exp a n sion .

C o n v e r s e ly , it

is a rg u ed that the F e d e r a l R e s e r v e B o a rd m igh t m o v e to ch e ck bank holding
com p an y ex p a n sion on sa fe ty and soun dn ess grou n ds when its actu a l rea son
is to e ffe c t a r e s t r ic t iv e m o n e ta ry p o lic y .

E ven ts during the p e rio d

1971-197 5 a r e cite d to su p p ort this p r o p o s itio n .

M any, in clu d in g f o r m e r

FDIC C h airm an F ran k W ille , b e lie v e this in a p p ro p ria te , arguing that bank
s u p e rv isio n and reg u la tion should b e b a se d upon an independent a p p ra isa l
o f the con d ition o f the bank and not upon the m o n e ta ry g o a ls o f the m om en t.
F o r m e r FDIC C h a irm a n W ille c o n c is e ly stated the c a s e as fo llo w s :




The b a s ic p r o b le m , o f c o u r s e , is that w h e re 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 bank reg u la tion and

su p e rv is io n , the f o r m e r w ill alw ays be view ed as m o r e im p orta n t
than the la tte r and the tem p tation o r th reat is e v e r p re se n t to u se
the p o w e rs o f reg u la tion and su p e rv is io n to rew a rd banks f o r th e ir
c o o p e r a tio n o r to p e n a liz e banks f o r th e ir la c k o f co o p e r a tio n
with the B o a r d 's m o s t re ce n t v ie w o f its m o n e ta ry p o lic y g o a ls .
S in ce th o se g o a ls chan ge with so m e fr e q u e n c y , the lik e lih o o d o f
a c o n s is te n t, evenhanded a p p ro a ch to m a tte rs o f bank reg u la tion
and s u p e rv is io n o v e r any length o f tim e is v e r y m u ch in doubt.
W h erea s p r io r to 1970, th is w as a s p e c ia l c o n c e r n o n ly o f la r g e
State m e m b e r banks w h ich the F e d e r a l R e s e r v e S ystem a ctu a lly
exam in ed o r o f m e m b e r banks f o r c e d to the d isco u n t w indow ,
it is now the c o n c e r n o f e v e r y bank in a h old in g com p an y sy ste m .
A lthough I b e lie v e that the f i r s t and th ird o f th e se a rg u m en ts have
som e m e r it , I think that the d e te rm in a tio n o f w h eth er o r not to se p a ra te the
fo rm u la tio n and im p le m e n ta tio n o f m o n e ta ry p o lic y f r o m the su p e rv is io n and
reg u la tion o f banks and bank h oldin g co m p a n ie s m u st u ltim a te ly turn on the
m e r it s o f the c a s e w h ich the F e d e r a l R e s e r v e B o a rd m a k es f o r the p r o p o ­
sition that s u p e r v is o r y and r e g u la to ry r e s p o n s ib ilitie s a r e n e c e s s a r y f o r
the e ffe c tiv e co n d u ct o f m o n e ta ry p o lic y .
The F e d e r a l R e s e r v e has stated two re a s o n s .

F ir s t o f a ll, the

B oard o f G o v e r n o r s h as con ten d ed that in fo rm a tio n gained d ir e c t ly f r o m
exam in ation and s u p e r v is io n o f banks p r o v id e s a u se fu l input in the
fo rm u la tio n o f m o n e ta ry p o lic y .

The a rgu m en t im p lie s that s u p e r v is o r y

r e s p o n s ib ilitie s p ro v id e the B o a rd with a ta n gib le fe e l f o r events in the
banking s y s te m .

F o r m e r G o v e rn o r H olland a rgu ed in te stim o n y b e fo r e

this C om m itte e that "e x a m in e r a s s e t eva lu a tion s supply firsth a n d kn ow led ge
o f the changing qu a lity o f c r e d it . . . .

T his p r o v id e s v a lu a b le supplem ents

to the m ean in g o f the quantitative s ta tis tic s on m o n e ta ry and c r e d it
a g g r e g a t e s ."




- 14 -

T his a rg u m en t m a y be ch a lle n g e d on at le a s t th re e g rou n d s.
o f a ll, the F e d e r a l R e s e r v e d o e s not n eed to b e engaged a c tiv e ly
sion to ob tain such in fo r m a tio n .

F ir s t

in s u p e r v i­

It co u ld b e attained e a s ily through c o n v e r ­

sation s with s u p e r v is o r y a g e n cie s o r through p a r tic ip a tio n on th e ir b o a r d s .
A lte rn a tiv e ly , the B o a rd co u ld b e g iv e n a u th ority to c o lle c t in fo rm a tio n
r e fle ctin g c r e d it qu a lity in o th e r w ays that do not in v o lv e the fu ll pan oply
Of s u p e r v is o r y r e s p o n s ib ilit ie s .

S econ d , even i f m o n e ta ry p o lic y b en efits

fr o m in fo r m a tio n p ro v id e d firsth a n d through d ir e c t su p e rv is io n , w h ich c a n ­
not b e obtain ed in o th e r w a y s, on e s till m u st c o n s id e r w h eth er the value o f
such in fo r m a tio n ou tw eigh s the v e r y substantial c o s t s in te r m s o f tim e and
r e s o u r c e s that a re co n su m e d by s u p e r v is o r y and r e g u la to ry r e s p o n s ib ilit ie s .
F in a lly , m any a n a ly sts q u estion w h eth er such in fo rm a tio n ca n p o s s ib ly be
relev a n t g iv en the la g s b etw een ch a n ges in c r e d it quality and the exam in ation ,
and b etw een even ts in the e c o n o m y and ch a n ges in c r e d it quality.
The se co n d re a s o n o r d in a r ily g iv e n f o r the F e d e r a l R e s e r v e 's
reten tion o f s u p e r v is o r y and r e g u la to ry r e s p o n s ib ilit ie s i s , in e ffe c t , that
they a r e m u tu ally r e e n fo r c in g .

A ga in , te stify in g b e fo r e this C o m m itte e ,

then G o v e rn o r H olland a s s e r t e d :
Now m o r e than e v e r , the F e d e r a l R e s e r v e 's r o le as
m o n e ta ry p o lic y m a k e r and as le n d e r o f la s t r e s o r t
in te ra cts with the e ffe c t s o f p re v a ilin g bank
s u p e r v is o r y and r e g u la to ry p o lic ie s . E ach o f th e se
p o lic ie s in c r e a s in g ly in flu e n ce s the e ffe c t iv e n e s s o f
the o th e r. T o d iv o r c e them is to w eaken both.
G o v e rn o r H olland a rg u ed b y w ay o f ex a m p le that i f the bank s u p e r v is o r a lte rs
bank ca p ita l o r liq u id ity standards "a t an in op p ortu n e m o m e n t, he ca n dilute
o r fr u s tr a te f o r a tim e the th ru st o f m o n e ta ry p o lic y . 11




- 15 -

The d ifficu lty with this p o sitio n is r e la tiv e ly stra ig h tfo rw a rd and it
is d e r iv e d f r o m f o r m e r C h airm an W ille 's a rg u m en ts. S om e tim e s o b je c t iv e
s u p e r v is o r y standards w ill and should run co u n te r to the thrust o f m o n e ta ry
p o lic y and w ill, t h e r e fo r e , d ilu te o r tend to fr u s tr a t e it.

T his w ill b e the

c a s e w h eth er o r not s u p e rv is io n is w ithin o r ou tsid e o f the F e d e r a l R e s e r v e
S ystem u n le ss the B o a rd is r e a lly arguing that su p e rv is io n and regu la tion
ought to b e u se d to fa c ilit a t e the im p le m e n ta tio n o f m o n e ta ry p o lic y . T h is,
o f c o u r s e , w ould b e o b je c te d to b y th o se who b e lie v e in co n s is te n t and
equitable s u p e rv isio n and reg u la tion and by m o n e ta ris ts who w ould a rg u e
that the attem pt to u se such a to o l is a w h olly in a p p ro p ria te and u ltim a te ly
an in e ffe c tiv e w ay to con d u ct m o n e ta ry p o lic y .

One m igh t, h o w e v e r , a c c ept

the B o a r d 's a rg u m en t if it cou ld b e d e m o n stra te d that the a lte ra tio n o f
s u p e r v is o r y standards is an e s p e c ia lly e ffic ie n t le v e r v i s - a - v i s m on ey
supply c o n tr o l - - on e w hich is tru ly n e c e s s a r y .
Thus fa r , I am un persuaded by the c a s e put fo r w a r d by the F e d e r a l
R e s e r v e a gain st this c e n tr a l fe a tu re o f the F e d e r a l Bank C o m m is s io n A ct.
F u r th e r m o r e , I b e lie v e som e b e n e fits w ill be gained f r o m the fu n ction a l
sep a ra tion o f s u p e rv is io n and m o n e ta ry p o lic y . H o w e v e r, as I in d ica te d
at the ou tse t, m y c o n c lu s io n in this re g a rd is ten ta tive.

I have an open

m ind on this is s u e b e c a u s e the a rgu m en ts m a de to date have b e e n la r g e ly
r h e to r ic a l and I am co n fid e n t that c o n c r e t e e v id e n ce and sig n ifica n tly
m o r e v ig o r o u s a n a ly sis ca n be b rou g h t to b e a r on this s u b je ct by the
F e d e ra l R e s e r v e B o a rd and o th e r s .




-

IH.

16

-

Should A ll the F u n ction s o f Bank and Bank H olding C om pany R egu lation
and S u p e rv isio n be C on solid a ted in a Single A g e n cy ?______________________

The se co n d c e n tr a l is s u e r a is e d by the F e d e ra l Bank C o m m is s io n
A c t is w h eth er bank and bank h old in g com p a n y reg u la tion at the fe d e r a l le v e l
should b e c o n s o lid a te d in a sin g le a g e n cy .

A s I in d ica te d at the o u tset,

I am o f the v ie w that it w ould b e un w ise to c e n t r a liz e a ll bank re g u la to ry
fu n ction s in a sin g le a g e n cy .

T his v iew a r is e s out o f m y jud gm en t that the

e x is te n ce o f a lte rn a tiv e re g u la to ry sy s te m s g iv e s r is e , to a m u ch g r e a te r
d e g r e e , to c o n s tr u c tiv e in n ovation in reg u la tion and in fin a n cia l s e r v ic e s
than it d o e s to re g u la to ry "la x ity . "

That is , I b e lie v e that the e x is te n ce o f

som e d e g r e e o f re g u la to ry c h o ic e p r o v id e s a b e tte r m e ch a n is m o f re g u la tory
r e fo r m than w ould co n s o lid a tio n o f re g u la to ry and s u p e r v is o r y r e s p o n s ib ility
w ithin a sin g le a g e n cy . N e v e r th e le s s , I am w e ll a w a re that th e re a re
r e s p e c ta b le a rgu m en ts to b e m a d e f o r the p r o p o s itio n that so m e o r a ll
o f the fu n ction s o f bank reg u la tion should b e co n s o lid a te d .




It has b e e n a rgu ed that:
- c o n s o lid a tio n w ould le a d to e co n o m y and e ffic ie n c y o f o p e ra tio n
- c o n s o lid a tio n w ould elim in a te c e r ta in fr ic t io n s and p r a c t ic a l
p r o b le m s
- c o n s o lid a tio n w ould fa c ilit a t e the handling o f d is t r e s s e d bank
c a s e s and bank fa ilu r e s
- co n s o lid a tio n w ould re s u lt in u n ifo rm ity o f a p p roa ch
and elim in a te c e r ta in in e q u itie s
- c o n s o lid a tio n is n e c e s s a r y to e lim in a te a "co m p e titio n in la x ity "
- c o n s o lid a tio n w ould im p r o v e the su p e rv is io n and reg u la tion o f
bank h oldin g com p an y s y s te m s .

- 17 -

U ltim a tely, it s e e m s to m e that the d e c is io n to c e n t r a liz e turns on
the q u estion o f w h eth er, on b a la n ce , a sy ste m o f d iv id ed o r fra g m e n te d
reg u la tion le a d s to " la x ity " d e trim e n ta l to the p u b lic in te r e s t, o r w h eth er
it re su lts in a m o r e d yn am ic and e ffe c t iv e sy ste m o f reg u la tion .

I am o f

the la tte r view b e lie v in g that the b e n e fits o f such a sy ste m a r e substantial.
By c o n tra s t, the b e n e fits - - la r g e ly o f e ffic ie n c y and e co n o m y - - w hich
w ould flo w f r o m c o n s o lid a tio n a r e m o d e s t o r m a y b e ob tain ed w ithout
ce n tra lizin g a ll r e g u la to ry fu n ction s in a sin g le a g en cy .
A s I in d ica te d at the ou tset, the F e d e r a l Bank C o m m is s io n A c t
d oes a d d r e s s what I c o n s id e r to b e the m o s t im m e d ia te ly p r e s s in g p r o b le m
a s s o c ia te d with the p r e s e n t re g u la to ry stru ctu re - - the fra g m e n te d reg u la tion
o f holding com p a n y s y s te m s .

B e ca u se I b e lie v e that this p r o b le m can and

should b e d ealt with w ithout a co m p r e h e n s iv e re o rg a n iz a tio n o f the re g u la tory
stru ctu re, I sh all d is c u s s this p r o b le m and m y p ro p o s e d re so lu tio n se p a ra te ly .
B e fo r e doing so , I sh a ll exa m in e and evaluate the argu m en ts w h ich fa v o r
ce n tra liz a tio n o f bank re g u la to ry fu n ctio n s.

A.

E co n o m y and e ffic ie n c y o f o p e ra tio n

C o n so lid a tio n w ou ld le a d to e c o n o m ie s by elim in a tin g the d u p lica tion
of som e fu n ctio n s.

A ls o , the la r g e r s c o p e o f a sin gle a g e n cy m a y a ffo rd

new p o s s ib ilit ie s f o r d iv is io n o f la b o r and s p e cia liz a tio n
in additional e c o n o m ie s .

w hich w ill re su lt

In a d d re ss in g the F e d e r a l Bank C o m m is s io n

p ro p o s a l, the FDIC has attem pted to id e n tify and w eigh the im p o rta n ce
o f the e c o n o m ie s that w ould flo w f r o m co n s o lid a tio n in a sin g le a g en cy .




-

18

-

D u p lication is p a r tic u la r ly e x p e n siv e in c e r ta in a re a s in clu d in g , f o r
ex a m p le, m a in ten a n ce o f so p h istica te d co m p u te r equipm ent, em p loy m en t and
train in g o f h igh ly s p e c ia liz e d p e rs o n n e l, data c o lle c t io n and data p r o c e s s in g .
E c o n o m ie s co u ld b e a ch ie v e d by co m b in in g le g a l, r e s e a r c h , train in g and
o th e r W ashington o f f ic e fu n ctio n s.

E co n o m ie s a ls o w ould flo w f r o m the

e lim in a tio n o f s e n io r a g e n cy sta ff tim e spent com m u n ica tin g and k eep in g
cu r re n t with the a c tiv itie s o f the o th e r a g e n c ie s .

C o n s id e ra b le tim e p re se n tly

spent in fo rm u la tin g p o lic y and re g u la tio n s w ould b e saved.
A ls o , m o r e e ffic ie n t u se cou ld b e m ade o f e x a m in e r tim e and
talent.

T ra v e l tim e o f e x a m in e rs co u ld b e red u ced b e c a u s e the n u m ber

o f fin a n cia l in stitu tion s in any g e o g ra p h ic a re a w ou ld in c r e a s e su bstan tially.
A sin g le a g en cy co u ld a ls o m ak e m o r e e ffic ie n t u se o f s p e c ia liz e d e x p e r tis e
to handle co m p lic a te d c r e d it s and to co n c e n tra te on such a re a s as tru st
a c t iv it ie s , in tern a tion a l d ep a rtm en ts and fo r e ig n o f f ic e s o f fin a n cia l in stitu ­
tio n s, data p r o c e s s in g and o th e r a re a s o f autom ated a ctiv ity and c o m p lia n c e
with fe 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 .

A sin gle

a g en cy w ou ld e lim in a te d iffe r e n c e s in r e p o r ts file d by fin a n cia l in stitu tion s,
th e re b y elim in a tin g so m e d u p lica tion and redundant e ffo r t in a d m in isterin g
and p r o c e s s in g such r e p o r t s .

C o n so lid a tio n o f trainin g p r o g r a m s w ould

lea d to so m e e co n o m ie s and w ou ld m a k e it m o r e fe a s ib le to d e v e lo p advanced
and s p e c ia liz e d train in g p r o g r a m s .
N otw ithstanding the b e n e fits to b e gained fr o m co n s o lid a tio n in th ese
a r e a s , it should b e n oted that bank exa m in a tion , the a ctiv ity con su m in g the
bulk o f a g en cy r e s o u r c e s , w ould b e a ffe cte d little b y c o n s o lid a tio n .




Bank

- 19 -

exam in ation s a r e la b o r in te n siv e and in this a re a each o f the a g e n cie s has
reach ed a s iz e in w hich m o s t e c o n o m ie s o f s c a le h ave b e e n re a liz e d .

Our

a n alysis o f this fu n ction show ed that co n s o lid a tio n is h igh ly u n lik ely to
a ffect v e ry g re a tly the p e rso n n e l re q u ire m e n ts f o r the exam ining f o r c e o r
resu lt in sig n ifica n t c o s t sa v in g s.
Thus, w h ile so m e savings w ou ld undoubtedly re su lt f r o m c o n s o lid a ­
tion o f the th re e a g e n c ie s , th ese savin gs w ould not be so g re a t as on e m igh t
in itia lly im a g in e .

M o r e o v e r , m any o f the e c o n o m ie s w hich w ould re s u lt fr o m

con solid a tion in a sin g le a g en cy co u ld b e a ch ie v e d through v olu n ta ry c o o p e r a ­
tion o r through the s o rt o f body en v ision ed in S. 711.

B.

F r ic tio n s and p r a c t ic a l p ro b le m s

C on so lid a tio n m a y elim in a te ex istin g fr ic t io n s in co m m u n ica tio n
and co o rd in a tio n .

T h is w ould b e p a r tic u la r ly b e n e fic ia l in the a re a o f

p ro b le m bank c a s e s and bank h olding com p a n y su p e rv isio n .

It w ould a ls o

be u sefu l in the d raftin g o f reg u la tion s and in d ealin g with c o m p le x p ro b le m s
such as the d ev elop m en t o f e le c t r o n ic funds t r a n s fe r s y s te m s .

It w ould

a llev ia te d iffic u ltie s so m e tim e s en cou n tered in evaluating the soundness
o f the loa n s m a d e by s e v e r a l d iffe re n t fin a n cia l in stitu tion s to a sin g le,
nationally b a se d co m p a n y .

A sin g le a g en cy w ould a ch ie v e a u n ified a p p roa ch

to dealing with fo r e ig n banking in stitu tion s and p r o b le m s o f fo r e ig n len d in g.
F u r th e rm o r e , the a d m in istra tio n o f a sin g le a g e n cy , and o v e r s ig h t by the
C o n g re s s , the E x e cu tiv e B ra n ch , and the pu b lic w ould b e g re a tly sim p lifie d .
The pu b lic w ou ld not b e co n fu se d about the a g en cy to w h ich it should d ir e c t




-

an in q u iry .

20

-

C o n g r e s s io n a l req u e sts f o r in fo r m a tio n w ou ld no lo n g e r have

to b e co o rd in a te d with s e v e r a l a g e n c ie s .

C.

The handling o f d is t r e s s e d bank c a s e s and bank fa ilu r e s

The e x istin g bank re g u la to ry fr a m e w o r k d oes not d elin ea te c le a r ly ,
eith er by statute o r cu s to m , the d iv is io n o f au th ority and r e s p o n s ib ility in
d is t r e s s c a s e s . L a ck o f c la r it y as to ju r is d ic t io n co u ld lea d to s e r io u s
p r o b le m s in co m m u n ica tin g in fo rm a tio n and in co o rd in a tin g a c t iv itie s .
C o n s id e r, f o r e x a m p le , the e a s ily im a gin ed c a s e in w h ich a national bank
that is a lea d bank in a h old in g com p a n y sy ste m is in the th ro e s o f a liquidity
c r i s i s and lik e ly but not c e r ta in to fa il.

The C o m p tr o lle r o f the C u rren cy

as c h a r t e r e r w ou ld b e d ir e c t ly in v o lv e d in seek ing a solu tion to the p ro b le m
sh ort o f fa ilu r e and w ou ld b e c o n c e r n e d as to when an in s o lv e n c y d e te rm in a ­
tion is r e q u ir e d . The F e d e r a l R e s e r v e w ould b e in v o lv e d as s u p e r v is o r of
the h oldin g co m p a n y and as p oten tia l s o u r c e o f liq u id ity through the discou n t
w indow .

F in a lly , the FDIC as in s u r e r and p oten tial liq u id a to r w ould be

seek in g , w ithin sta tu tory lim it s , to fo r m u la te the re s o lu tio n w h ich w ould
be le a s t d isru p tiv e to the co m m u n ity in v o lv e d .
N e e d le s s to sa y , the p oten tia l f o r co n fu sio n , c o n flic t and d elay is
su bstan tial.

Indeed, it has b e e n a s s e r t e d that the p r o tr a c te d re so lu tio n

o f the F ra n k lin N ational Bank c a s e w as the re su lt o f the re g u la to ry stru ctu re
and, as on e p a rticip a n t in that c a s e , I am c e r ta in that th e re is an elem en t
o f truth to that a s s e r t io n .
m a jo r bank fa ilu r e s .




C o m p a ra b le p r o b le m s have a r is e n in o th e r

-

21

A c c o r d in g ly , it is f a ir to say that co n s o lid a tio n w ould fa c ilita te the
handling o f bank fa ilu r e s at the fe d e r a l le v e l in so m e m e a s u r e . (It should,
h o w e v e r, b e noted

that m o r e s e r io u s p r o b le m s a r is e in d ealin g with state

a u th orities in state bank fa ilu r e s . ) The b e n e fits to b e gained a r e not in m y
judgm ent s u ffic ie n tly g re a t as to p ro v id e a co m p e llin g c a s e f o r co n so lid a tin g
the banking a g e n c ie s .

M o r e o v e r , notw ithstanding som e c o n flic t and d ela y,

m a jo r bank fa ilu r e s h ave b e e n handled with a m in im u m o f il l e ffe c t s .

■D*

U n iform ity o f a p p ro a ch and elim in a tion o f in e q u itie s

D iffe r e n c e s in reg u la tion , exa m in a tion standards and re p o rtin g
req u irem en ts am ong the a g e n cie s lea d to d iffe re n t trea tm en t o f p e r s o n s and
in stitu tion s s im ila r ly situated, so m e tim e s re su ltin g in sig n ifica n t in e q u itie s.
A sin gle a g en cy w ould b rin g u n ifo rm tre a tm e n t to a ll fin a n cia l in stitu tion s in
such m a tte r s as r u le s , re g u la tio n s, standards and p r o c e d u r e s . Banks w ould
a lso b e su b je ct to g r e a t e r u n ifo rm 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 a deq u a cy and o th e r a re a s re la te d to bank ex am in ation s
and s u p e r v is o r y p o lic y .

H olding com p an y s u p e r v is io n and m e r g e r p o lic y

a re two a r e a s w h e re a u n ifo rm a p p ro a ch is h ig h ly d e s ir a b le .
W hile c o n s o lid a tio n undoubtedly w ill re su lt in im p ro v e m e n ts in
u n ifo rm ity o f a p p ro a ch and e lim in a te so m e in e q u itie s , d iffe r e n c e s in the
a p p roa ch o f v a rio u s in d iv id u a ls and g rou p s w ithin an a g e n cy m ay b e as g re a t
as the d iffe r e n c e s in a p p ro a ch am ong the a g e n c ie s .

F o r e x a m p le , p o lic y

d iffe r e n c e s tend to e x is t am ong the d iffe re n t re g io n a l o f f ic e s o f the FD IC ,
p artly as a r e s u lt o f d iffe re n t p e rs o n a l sty le s and p a rtly as a re s u lt o f




-

unique lo c a l c ir c u m s t a n c e s .

22

-

A c c o r d in g y , it should not b e e x p e cte d that

co n s o lid a tio n w ou ld n e c e s s a r ily b rin g about co m p le te u n ifo rm ity o f a p p roa ch .

E.

"C o m p e titio n in la x it y " vs the b e n e fits o f d is p e r s e d
reg u la tion
___________________________________________

It should b e o b v io u s at this ju n ctu re that the p r o p o s a l to co n s o lid a te
som e o r a ll o f the fu n ction s o f bank su p e rv is io n and reg u la tion m ay h ave som e
m e r it .

I have not, h o w e v e r , d is c u s s e d the argu m en t m o s t often r e lie d

upon by p rop on en ts o f co n s o lid a tio n in a sin g le a g e n cy .

T his a rgu m en t is

groun ded in the n otion that the e x is te n c e o f r e g u la to ry c h o ic e a llo w s ban kers
to p lay re g u la to rs o ff a gain st one a n oth er in o r d e r to obtain le s s v ig o ro u s
re g u la tio n .

In sh o rt, it is a s s e r t e d , the p o s s ib ilit y o f re g u la to ry c h o ic e

lea d s to a "c o m p e titio n in la x it y " am ong the re g u la to r s .
Opening h e a rin g s on the F e d e r a l Bank C o m m is s io n A c t on
O c to b e r 31, 1975, M r. C h airm an , y ou stated the argu m en t w e ll that
. . . t h e r e 's a stron g ten d en cy f o r the re g u la to ry a g e n cie s to
b e fa r m o r e len ien t, to o le n ie n t, too p e r m is s iv e . They fa il to
e x e r t the kind o f d is c ip lin e and strin g e n cy in th e ir exam in ation
than they w ould i f they did not have at le a s t the re co g n itio n o f
the fa c t that if they a r e to o s t r ic t and to o tough that they w ill
lo s e so m e o f the banks b e c a u s e , o f c o u r s e , banks a r e f r e e to
m o v e f r o m b ein g State banks to national banks, to State m e m b e r
banks to State n o n m e m b e r banks w h e r e v e r the ju r is d ic t io n w ould
b e lig h te s t and e a s ie s t and the m o s t p e r m is s iv e .
S e v e ra l p oin ts a r e often cite d as su p p ort f o r this a rgu m en t.

During

the e a rly 1 9 6 0 's , C o m p tr o lle r o f the C u r r e n c y Jam es Saxon expanded the
p o w e rs o f n ational banks through a s e r ie s o f ru lin g s, and w as quite lib e r a l
in granting nation al bank c h a r t e r s and b ra n ch a p p lica tio n s - - a
r e v e r s a l o f the p o lic ie s o f h is im m e d ia te p r e d e c e s s o r s .




sharp

T h e se p o lic ie s

- 23 -

p rov ok ed sharp c r i t ic is m , p a r tic u la r ly f r o m the F e d e r a l R e s e r v e B o a rd ,
and s e v e r a l o f h is ru lin g s w e r e o v e rtu rn e d in the c o u r ts .
R ece n t m e r g e r d e c is io n s by the O ffic e o f the C o m p tr o lle r have b een
used to su p p ort the "c o m p e titio n in la x it y " argu m en t. The C o m p tr o lle r has
been s ig n ifica n tly m o r e w illin g to gra n t m e r g e r a p p lica tio n s than the FDIC
and the F e d e r a l R e s e r v e B o a rd , and m any have b e e n granted in the fa c e o f
a d v e rs e fin d in g s b y the J u stice D ep a rtm en t.

The ten d en cy has b een so

p ron ou n ced that so m e state banks have shifted to n ational c h a r te r s in o r d e r
to obtain a m e r g e r a p p ro v a l.

In add ition to th e se illu s tr a tio n s , it has a ls o

been su g g ested by so m e that on e o r m o r e o f the re ce n t la r g e bank fa ilu r e s
m ay h a v e, at le a s t p a rtly , b e e n the re s u lt o f co m p e titio n in la x ity .

F in a lly ,

w hile the c h a rg e s have not b e e n d ocu m en ted , it has b e e n a s s e r te d that the
F e d e ra l R e s e r v e S y s te m 's c o n c e r n with m e m b e rs h ip a ttritio n has led to
a tem p erin g o f re g u la to ry z e a l.
F r o m th e se illu s t r a tio n s , it is a rg u ed that re g u la to rs unduly c o n ­
cern ed with m aintaining th e ir m a rk e t sh a re o f re g u la te e s have a cted in w ays
co n tra ry to the p u b lic in te r e s t.

A lthough a g iv en re g u la to r m a y have b een

co n c e rn e d with m aintaining h is sh a re o f the m a rk e t f o r re g u la te e s , I do
not b e lie v e that this c o n c e r n has b een a sig n ifica n t fa c t o r in bank regu la tion .
P erh ap s I am n a iv e , but in no in sta n ce h ave I even su sp e cte d that a re g u la to r
was m otiva ted by such a c o n c e r n during the tim e that I have b e e n in W ashington.
F o r ex a m p le, w h ile it is tru e that the C o m p t r o lle r 's m e r g e r p o lic y w as m o r e
fa v o ra b le to m e r g e r s than that o f the FDIC during the e a r ly 1 9 7 0 's, I am




co n v in ce d that this r e fle c t e d le g itim a te d iffe r e n c e s o v e r p o lic y and the law
and not any e ffo r t f o r a g e n cy s e lf-a g g r a n d iz e m e n t.
I am tro u b le d by the " la x ity " argu m en t on one fu rth e r s c o r e .
w e ll a w a re o f the e ffe c t iv e n e s s o f a pithy and e v o ca tiv e p h ra se .

I am

And, I have

b een guilty o f u sin g such p h ra s e s in w ays that m ay a ttra ctiv e ly m is r e p r e s e n t
the r e a lity w h ich I am d e s c r ib in g .

N e v e r th e le s s , it is m y s in c e r e hop e that

we can and should put behind us the u se o f the p h ra se "co m p e titio n in la x ity "
in fa v o r o f h a r d -n o s e d and o b je c t iv e a n a ly s is .
re a s o n .

I say this f o r a v e r y sim p le

In its im p lic a tio n , the p h ra se is in a c c u r a te and g r o s s ly u n fa ir to

the m en and w om en who s u p e rv is e and reg u la te banks and who u se th eir
b e s t ju d gm en t and a b ility to c a r r y out the m andate o f C o n g re s s and a ct in
the pu b lic in t e r e s t.

M o r e o v e r , its u sa g e is in m y op in ion in s e n s itiv e , and

I ch a lle n g e th o se who r e s o r t to it to spend so m e tim e with bank re g u la to rs
to se e w h eth er they co m p e te in "la x ity . "
Indeed, although u se o f the p h ra se "c o m p e titio n in e x c e lle n c e "
re p r e s e n ts r e s o r t to platitude as w e ll, m y e x p e r ie n c e at the FDIC in d ica tes
that p r o fe s s io n a l p r id e is a stron g m otiva tin g f o r c e .

FDIC e x a m in e rs

b e lie v e that they ex a m in e and s u p e r v is e banks m o r e e ffe c t iv e ly than the
e x a m in e rs o f the o th e r two a g e n c ie s , and they w o rk h a rd to a s s u r e that
they d o.

M o r e o v e r , u n le ss I m isju d g e m y c o lle a g u e s on the pan el, I am

quite c e r ta in that o u r own p r o fe s s io n a l p rid e le a d s us to co m p e te in ways
that redound to the p u b lic b e n e fit.
F in a lly , and m o s t im p o rta n tly , banking h is to r y d e m o n stra te s c o n ­
c lu s iv e ly that the e x is te n c e o f r e g u la to ry a lte rn a tiv e s p r o v id e s , in p art at




- 25 -

lea st, on e o f the m e ch a n is m s w h ich the r e g u la to ry r e fo r m m o v e m e n t seek s
- - a m ea n s o f s e lf-a d ju s tm e n t and s e l f - r e f o r m .

In e ffe c t , som ething lik e a

m a rk et m e ch a n is m m a y b e seen at w o rk with g o o d reg u la tion d riv in g out bad
o v e r the lon g haul.

In sh o rt, I b e lie v e that a lte rn a tiv e re g u la to ry sy ste m s

se rv e a r e g u la to ry r e fo r m fu n ction a n alogou s to z e r o - b a s e budgeting and
"s u n s e t" la w s.
R ecen t banking h is t o r y is r e p le te with e x a m p le s o f this phenom enon.
Although m any d is a g r e e d with the s p e c ific s o f h is d e c is io n s it is c le a r , in
r e tr o s p e c t, that Jim Saxon s e r v e d the banking in d u stry and the p u b lic w e ll
by allow ing n ational banks to do things repugnant to h is co lle a g u e s at the
FDIC and the F e d e r a l R e s e r v e B o a rd .

In e ffe c t , h e h elp ed take banking

and bank reg u la tion out o f the c o n s e r v a t is m that w as a h o ld o v e r f r o m the
D e p re s s io n .

M o r e o v e r , I find it h igh ly doubtful that a sin g le banking a g en cy

would have fe lt the n eed to im p le m e n t r e fo r m s in its exa m in a tion and su p e r­
v is o r y p r o c e d u r e s as sig n ifica n t as th ose r e ce n tly adopted by the C o m p tr o lle r
o f the C u rre n cy as a re su lt o f the H askins and S ells study o f that o f f ic e .

At

le a st at this ju n ctu re , I think it is b e n e fic ia l, not h a rm fu l, that the FDIC
and the C o m p t r o lle r ’ s O ffic e h a v e d iffe r e n t stra te g ie s f o r dealing with the
p ro b le m o f in s id e r a b u se.

M o r e o v e r , w h ile one m igh t a rg u e that the

d evelop m en t o f d iffe re n t e a rly w arn ing sy ste m s in v o lv e s c o s t ly d u p lica tion ,
I b e lie v e that the co m p e titio n w hich I h ave w atched in this a re a is healthy
and in the b e s t in te r e s t o f the banking sy ste m .
In addition to the r e g u la to ry r e fo r m fu n ction w h ich is s e r v e d by a
sy stem in v olv in g r e g u la to ry a lte rn a tiv e s , the e x is te n c e o f m o r e than one




-

26

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banking a g e n cy p r o v id e s the C o n g r e s s and the p u b lic with in fo r m e d c r it ic s
and a lte rn a tiv e s o u r c e s o f a n a ly s is .

F o r e x a m p le, r e g a r d le s s o f the rela tiv e

m e r it s o f the r e s p e c t iv e p o s itio n s , I b e lie v e that it w as a healthy and vital
sign that the FDIC w as a b le to co m m e n t on the b ill p r o p o s e d by the F e d e ra l
R e s e r v e and the A d m in istra tio n p ro v id in g , am ong o th e r th in gs, f o r the
expa n sion o f NOW a cco u n ts nationw ide and f o r the paym ent o f in te r e s t on
reserves.
F in a lly , and in the sa m e v ein , the e x is te n c e o f m o r e than on e
a g en cy r e s p o n s ib le f o r sa fe ty and sou n dn ess p ro v id e s a backup o r w a tch - ^
dog w h ich , ra th er than a llow in g o r en cou ra g in g la x ity , tends to d e te r it.
A lthough the FDIC h as r a r e ly e m p lo y e d its standby a u th ority to exam in e

j,

m e m b e r banks, this to o l p r o v id e s the in s u r e r o f banks with the m ea n s to

r

a s s u r e the a cco u n ta b ility o f the o th e r a g e n c ie s .

IV.

Bank H olding C om pany R egu lation and S u p e rv isio n
In m y op in io n the m o s t s e r io u s in a d eq u a cy in the p r e s e n t re g u la tory

fr a m e w o r k at the fe d e r a l le v e l is the fra g m e n ta tio n o f bank h oldin g com pan y
s u p e rv is io n .

R e ce n t events h ave illu s tr a te d that the e x istin g fr a m e w o r k is

not on ly unduly c o s t ly b e c a u s e o f the o v e rla p p in g and c o n flic tin g ju r is d ic tio n s
in v olv e d but a ls o sim p ly has not fu n ction ed p r o p e r ly in so m e in s ta n c e s .

In

th re e o f o u r la r g e s t bank fa ilu r e s - - the in s o lv e n c ie s o f H am ilton N ational
Bank o f C hattanooga and the A m e r ic a n C ity Bank o f M ilw aukee and the d is ­
t r e s s e d m e r g e r o f the P a lm e r N ational Bank o f S a ra sota , F lo r id a - - the
ca u se w as ra th er m a s s iv e u n sa fe and unsound lending p r a c t ic e s o c c u r r in g




- 27 -

in the e s s e n tia lly u n su p e rv ise d en v iron m en t o f a n on -banking h oldin g com p an y
a ffilia te.

The fa ilu r e o f the H am ilton Bank is p erh a p s the m o s t g ra p h ic c a s e .

But f o r the $80 m illio n in m o r tg a g e s in itia ted b y its A tla n ta -b a se d m o rtg a g e
com pany a ffilia te , and then dum ped on the bank when things went bad, the
H am ilton Bank p ro b a b ly w ould b e in e x is te n c e today.
T h ese c a s e s illu s tr a te two points w hich should b e r e c o g n iz e d by
both the banking a g e n cie s and the C o n g r e s s .

F ir s t o f a ll, the notion that

one segm en t o f a h old in g com p an y sy ste m can b e in su la ted f r o m the re m a in d e r
of the sy ste m i s quite sim p ly un tru e.

It is the w o r s t fo r m o f s e lf-d e c e p t io n

to think that the lea d bank in a h olding com p an y is in a sa fe and sound c o n d i­
tion b e ca u s e its la s t exam in ation w as s a tis fa c to r y , if o th e r fa c e ts o f the
holding com p a n y s y s te m a r e not u n dergoin g equally r ig o r o u s scru tin y .

My

point is that when bank h olding co m p a n ie s w e r e a llo w e d to p r o c e e d in a
m anner that w ould b e u n a cce p ta b le in a c o m m e r c ia l bank, so m e o f them
w ere e n cou ra g e d , in e ffe c t , to un dertake en orm ou s ris k .
The se co n d poin t flo w s f r o m the f ir s t , that is , it sim p ly m a k es no
sen se f o r as m any as fo u r bank re g u la to ry a g e n cie s to have sa fety and
soundness ju r is d ic t io n o v e r v a rio u s seg m en ts o f an in te g ra te d b u sin e ss
e n te rp ris e .

In evita b ly, this a p p ro a ch w ill be at tim e s co n flictin g and

uncoo rdinated.
D uring the C o n g r e s s io n a l d ebate o v e r the 197 0 A m en dm en ts to the
Bank H olding C om pany A c t o f 1956, h old in g com p an y sa fety and soundness
regulation and su p e rv is io n w e r e la r g e ly d is r e g a r d e d .

The em p h asis at that

tim e w as on p ro v id in g sa feg u a rd s a g ain st undue co n c e n tra tio n o f e co n o m ic




- 28 -

p o w e r stem m in g f r o m bank h oldin g com p an y a cq u isitio n s o f banking and
n on -bank ing s u b s id ia r ie s .

F o r e x a m p le, in te stim o n y on the 197 0

A m en dm en ts b e f o r e the Senate Banking and C u rre n cy C o m m itte e , C h a rls
W a lk er, U nder S e c r e ta r y o f the T r e a s u r y , stated that le g is la tio n w as
re q u ire d to stop the tren d tow a rd the m e rg in g o f banking and c o m m e r c e
that w as taking p la c e through the v e h ic le o f the o n e -b a n k holding com p an y.
F e d e r a l R e s e r v e B o a rd C h airm an A rth u r B u m s v o ic e d s im ila r c o n c e r n .
A lthough th e re w as d is c u s s io n during c o n s id e r a tio n o f the 1970 A m endm ents
about d is p e r s in g s u p e r v is io n and reg u la tion o f bank h oldin g co m p a n ie s am ong
the th re e fe d e r a l bank re g u la to ry a g e n c ie s , the e m p h a sis on the co m p e titiv e
and banking stru ctu re a s p e c ts o f the bank holding com p a n y m o v e m e n t, cou pled
with the F e d e r a l R e s e r v e 's r e s p o n s ib ility f o r a d m in iste rin g the 1956 B anki
H olding C om pany A c t, led the C o n g r e s s u ltim a te ly to d e le g a te r e s p o n s ib ility
fo r a d m in iste rin g the 1970 A m en dm en ts to the F e d e r a l R e s e r v e S ystem .
That such little c o n s id e r a tio n w as given to the co n s e q u e n ce s o f
fra g m en tin g r e s p o n s ib ility o v e r the d iffe re n t seg m en ts o f a h oldin g com pan y
sy ste m p ro b a b ly r e fle c t e d , in p a rt, the p re v a ilin g th e o ry that the r e s p e c tiv e
en tities w ithin a s y s te m co u ld b e e ffe c t iv e ly in su la ted f r o m tro u b le s else w h e re
in the sy ste m .

It a ls o m a y have r e fle c te d the n otion that the la r g e r in stitu ­

tion s in the h olding com p an y s y s te m , lik e the lea d bank, w ould b e a s o u r c e
o f strength f o r a ll the com p on en ts o f the s y s te m .

E vents s in ce the p a ssa g e

o f the 1970 A m en d m en ts h ave d e m o n stra te d fla w s in th e se a ssu m p tio n s and
the in h eren t w ea k n ess o f the fra g m e n te d re g u la to ry fr a m e w o r k su p erv isin g
the v a rio u s com p on en ts o f a bank h oldin g com p an y sy ste m .




In spite o f the

- 29 -

rh e to ric about the le g a l se p a ra te n e ss o f each entity w ithin the bank h o ld ­
ing com p a n y , it has b e c o m e m o r e and m o r e apparent as we have gained
e x p e r ie n c e that a bank h oldin g com p an y should b e re g a rd e d as a sin g le ,
in teg ra ted unit.
E ven if it w e r e not p o s s ib le to illu s tr a te the a d v e r s e co n s e q u e n ce s
o f the p re s e n t fr a m e w o r k in c o n c r e t e c a s e s such as the H am ilton fa ilu r e ,
the p r e s e n t fr a m e w o r k should b e r e je c te d both b e c a u s e o f the g o v e rn m e n ta l
w aste that re su lts f r o m the u n n e ce s s a ry d u p lica tion o f e ffo r t and b e ca u s e o f
the bu rd en im p o s e d upon the ba n k er who m u st d eal with fo u r bank re g u la to rs
as w e ll as the SEC, the J u stice D ep a rtm en t, the F T C and m is c e lla n e o u s
oth er re g u la to ry b o d ie s .

In m y ju d gm en t, this p r o b le m should b e re m e d ie d

im m e d ia te ly b y ch a rg in g the s u p e r v is o r o f the lea d bank in a h olding c o m ­
pany sy ste m with the p r im a r y s u p e r v is o r y r e s p o n s ib ility f o r the en tire
sy stem .

I w ould not at this tim e , h o w e v e r , sh ift the F e d e r a l R e s e r v e

B o a r d 's p r e s e n t r o le in d eterm in in g p e r m is s ib le a ctiv itie s f o r bank holding
co m p a n ie s.

N o r w ou ld I shift r e s p o n s ib ility f o r app rovin g h olding com p an y

fo rm a tio n s and a cq u is itio n s .

V.

The F e d e r a l Bank E xa m in ation C ou n cil A ct (S, 711)
S. 711 w ould e sta b lish a F e d e r a l Bank E xa m in ation C ou n cil to p r e ­

s c r ib e u n ifo rm standards and p r o c e d u r e s f o r the exam in ation o f c o m m e r c ia l
banks b y the C o m p tr o lle r o f the C u rre n cy , the F e d e r a l D e p o sit In su ra n ce
C o rp o ra tio n and the F e d e r a l R e s e r v e S y stem .

The C ou n cil m igh t a ls o m ake

recom m en d a tio n s to p ro m o te u n ifo rm ity in bank su p e rv is io n .




In addition to

- 30 -

esta b lish in g u n ifo rm exa m in a tion sta n d ard s, the Council w ou ld, u n der the
p r o p o s e d le g is la tio n , con d u ct s c h o o ls f o r fe d e r a l e x a m in e r s , w h ich w ould
be open to state bank e x a m in e r s , and w ould d e v e lo p u n ifo rm re p o rtin g
sy ste m s f o r b an ks, bank h old in g co m p a n ie s and n on -ban k s u b s id ia r ie s .
In a d d ition , the le g is la tio n w ould p ro v id e f o r e sta b lish m e n t o f a lia is o n
co m m itte e on u n ifo r m standards and p r o c e d u r e s b y state and fe d e r a l bank
s u p e r v is o r y a g e n c ie s .

The C h a irm a n o f the B oard o f G o v e rn o rs o f the

F e d e r a l R e s e r v e S y stem w ou ld b e C h a irm a n o f the C o u n cil.

With ce rta in

m o d ific a tio n s , I su p p ort the e s s e n tia l th ru st o f this le g is la tio n .
F ir s t o f a ll, I o p p o s e the re q u ire m e n t that u n ifo rm exam in ation
and s u p e r v is o r y standards b e e sta b lish e d .

A s I h ave in d ica te d , on e o f the

g re a t v irtu e s o f o u r e x istin g re g u la to ry s tru ctu re is the p o s s ib ilit y f o r
c r e a tiv ity and in n ova tion .

The ex a m in a tion p r o c e s s is on e o f th o se a ctiv itie s

that b e n e fits m o s t f r o m co m p e titio n and e x p e rim e n ta tio n am ong bank re g u ­
la t o r s .

A study o f bank exa m in a tion w ou ld re v e a l that n u m erou s in n ova tion s,

ch an ges and im p r o v e m e n ts have b e e n p r o p o s e d and m any h ave b e e n adopted
during the p ast fo u r y e a r s .

I, f o r o n e , b e lie v e that this w ould have b een

le s s lik e ly to h ave o c c u r r e d i f u n ifo rm ity had b e e n m andated.

F o r this

re a s o n , I s tro n g ly r e co m m e n d that the C ou n cil p e r fo r m a d v is o r y , c o o r d i ­
nating and w atch d og fu n ctio n s and that it not be re q u ir e d to set u n ifo rm
stan d ards.
S econ d, I w ould a s s ig n to the C o u n cil the fu n ction s o f the existin g
In tera gen cy C oord in a tin g C o m m itte e and w ou ld add the F e d e r a l H om e Loan
Bank B o a rd and the N ational C re d it Union A d m in istra tio n to the C ou n cil.




- 31

As I in d ica ted at the o u tse t, I b e lie v e that th e se two a g e n cie s m u st be
in clu d ed in any e ffo r t to r e o r g a n iz e the banking a g e n c ie s .
T h ird , I o p p o s e d esig n a tin g the C h airm an o f the F e d e ra l R e s e r v e
B oard as C h airm an o f the C o u n cil f o r two re a s o n s .

F ir s t o f a ll, I b e lie v e

that the C hairm an should b e a b le to d ev o te c o n s id e r a b le tim e and e ffo r t to
the a c tiv itie s o f the C o u n cil and I s e r io u s ly doubt that the C h airm an o f the
B oard o f G o v e rn o rs w ou ld h ave tim e to do so»

And se co n d , with r e s p e c t

to s u p e r v is o r y m a tte r s , X ca n s e e no s p e c ia l advantage o r e x p e r tis e that
the F e d e r a l R e s e r v e S y stem p o s s e s s e s o v e r the o th e r a g e n cie s that should
lead to the d e sig n a tio n o f its C h airm an as C hairm an o f the C ou n cil.




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