Banking Essay, Research Paper


So Much for That Plan

More than 70% of commercial bank assets are held by organizations that are

supervised by at least two federal agencies; almost half attract the attention

of three or four. Banks devote on average about 14% of their non-interest

expense to complying with rules” (Anonymous 88). A fool can see that

government waste has struck again. This tangled mess of regulation, among

other things, increases costs and diffuses accountability for policy actions

gone awry. The most effective remedy to correct this problem would be to

consolidate most of the supervisory responsibilities of the regulatory agencies

into one agency. This would reduce costs to both the government and the

banks, and would allow the parts of the agencies not consolidated to

concentrate on their primary tasks. One such plan was introduced by

Treasury Secretary Lloyd Bentsen in March of 1994. The plan called for

folding, into a new independent federal agency (called the Banking

Commission), the regulatory portions of the Office of the Comptroller of the

Currency (OCC), the Federal Reserve Board, the Federal Deposit Insurance

Corporation (FDIC), and the Office of Thrift Supervision (OTS). This plan

would save the government $150 to $200 million a year. This would also allow

the FDIC to concentrate on deposit insurance and the Fed to concentrate on

monetary policy (Anonymous 88). Of course this is Washington, not The

Land of Oz, so everyone can’t be satisfied with this plan. Fed Chairman Alan

Greenspan and FDIC Chairman Ricki R. Tigert have been vocal opponents of

the plan. Greenspan has four major complaints about the plan. First, divorced

from the banks, the Fed would find it harder to forestall and deal with

financial crises. Second, monetary policy would suffer because the Fed would

have less access to review the banks. Thirdly, a supervisor with no

macroeconomic concerns might be too inclined to discourage banks from

taking risks, slowing the economy down. Lastly, creating a single regulator

would do away with important checks and balances, in the process damaging

state bank regulation (Anonymous 88). To answer these criticisms it is

necessary to make clear what the Fed’s job is. The Fed has three main

responsibilities: to ensure financial stability, to implement monetary policy, and

to oversee a smoothly functioning payments system (delivering checks and

transferring funds) (Syron 3). The responsibilities of the Fed are linked to the

banking system. For the Fed to carry out its job it must have detailed

knowledge of the working of banks and financial markets. Central banks

know from the experience of financial crises that regulatory and monetary

policy directly influence each other. For example, a banking crises can disturb

monetary policy, discouraging lending and destroying consumer confidence,

they can also disrupt the ability to make or receive payments by check or to

transfer funds. It is for these reasons that it is argued that the Fed must

maintain a regulatory role with banks. The Treasury plan would leave the Fed

some access to the review of banks. The Fed, which lends through its

discount window and operates an interbank money transfer system, would

have full access to bank examination data. Because regulatory policy affects

monetary policy and systemic risk, it is necessary that the Fed have at least

some jurisdiction. The Fed must be able to effectively deal with current policy

concerns. The Banking Commission would be mainly concerned with the

safety and stability of the banks. This would encourage conservative

regulations, and could inhibit economic growth. The Fed clearly has a hands

on knowledge of the banking system. “The common indicators of monetary

policy – the monetary aggregates, the federal funds rate, and the growth of

loans – are all influenced by bank behavior and bank regulation.

Understanding changes and taking action in a timely fashion can be achieved

only by maintaining contact with examiners who are directly monitoring

banks” (Syron 7). The banking system is what ultimately determines monetary

policy. It is only common sense to have personnel in the Fed that have a

better understanding of the system other than just through financial

statements and examination reports. The Fed also needs the authority to

change bank behavior that is inconsistent with its established monetary policy

and with financial stability. This requires both the responsibility for writing the

regulations and the responsibility for enforcing those regulations through bank

supervision. State banking charters have already started to be affected.

Under the proposed plan, state chartered banks would be subject to two

regulators. While the federal bank would have only one. Thus, making the

state bank charter less attractive. However, an increasing number of banks

are opting for state supervision. It turns out that many banks are afraid of

losing existing freedoms, or of failing to gain new ones, if supervision is

centralized. “State regulators have given their banks more freedom than

federal ones: 17 now permit banks to sell insurance (and five to underwrite it,

23 allow them to operate discount stockbrokers and a handful even let them

run estate agencies” (Anonymous 91). The FDIC has two main criticisms of

the Treasury’s plan. First, FDIC Chairman Tigert believes “that it is very

important that there be checks and balances in the system going forward”

(Cocheo 43). Second, Tigert believes that, since the FDIC is the one who

writes the checks for bank failures, the FDIC should be allowed to keep its

independence. It is necessary to maintain the checks and balances of

different agencies. This separation is necessary because of the differences in

examinations of the different regulatory agencies with respect to the same

institutions. It is important “that the independent [deposit] insurer have access

to information that’s available not only through reporting requirements, but

also through on-site examinations” (Cocheo 43). Tigert explains that the FDIC

must keep backup examination authority. As well as maintain the ability to

conduct on-site examinations of all institutions it insures, not just the

state-chartered nonmember banks it supervises directly. “She agrees with

those who say there is no need for duplicative examinations, but insists FDIC

must be able to look at institutions whose condition or activities have changed

drastically enough to be of concern to the insurer. While consolidation of the

bank supervisory process is overdue, issues of bank supervision and

regulation affect the entire economy. There is no way to tell what is in store

for banking regulation in the future. It is known, however, that we must

beware that all the regulatory agencies in place now, are in place for a

reason. Careful thought and debate must be undertaken before any reform is

made. In the end, Americans seem no more inclined to tolerate concentration

among regulators than they are among banks.

Anonymous. “American Bank Regulation: Four Into One Can Go.” The

Economist 330 (March 5, 1994): 88-91.

Cocheo, Steve. “Declaration of Independence.” ABA Banking Journal 87

(February 1995): 43-48.

Syron, Richard F. “The Fed Must Continue to Supervise Banks.” New

England Economic Review (January/February 1994): 3-8.

Works Consulted

Anonymous. “Banking Bill Spells Regulatory Relief.” Savings & Community

Banker 3 (September 1994): 8-9.

Broaddus, J. Alfred Jr. “Choices in Banking Policy.” Economic Quarterly

(Federal Reserve Bank of Richmond) 80 (Spring 1994): 1-9.

Reinicke, Wolfgang H. “Consolidation of Federal Bank Regulation?”

Challenge 37 (May/June 1994): 23-29.

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