This time, the cliche has a certain accuracy: It's deja vu all over again. And again and again.
Reform of the banking system's confusing and duplicative regulatory structure is again being reviewed, with rationality the objective. Again, we will try to find a way to avoid regulators from here and there forcing their various positions upon the country's financial structure.
How often have we considered this before? One remembers the 1971 Hunt Commission recommendation that the Office of the Comptroller of the Currency be retitled the Office of the National Bank Administrator and established as an independent agency separate from the Treasury Department. The National Bank Administrator shall retain all existing functions."
This was followed by the Financial Institutions in the Nation's Economy study and resulting legislative proposals of 1975. The FDIC's Lapidus Report followed in 1979. The Bush Task Group report on deregulation in 1985 was followed by President Reagan's 1986 promise of a regulatory reform bill.
Rep. Henry Gonzalez, the House Banking Committee chairman, promised a "single banking and thrift czar" in 1990. Then there was the Treasury Study and proposal for regulatory reform of 1991. All proposals died aborning.
Center Stage
This time, the idea that the structure be reformed into one, or perhaps two, primary regulators with reasonably scoped areas of responsibility attracted a kind of ground swell of support. The proposals are not restricted to a limited group of committee members or under secretaries, but rather are at center stage in a posture that can, on Washington's runway of legislative fashion, result in law.
One has a strong sense that the banks' consistent position, which has resulted in the existing system being retained through the years, has somehow been muted if not forgotten.
It may be useful to reiterate that long-held stance.
Banking in the United States is smothered by restrictive laws. Its functions are limited and unevenly divided among different types of institutions; it is prohibited from certain financial businesses and grudgingly admitted into others; and its geographic reach is peculiarly constrained.
This unfortunate pattern has had calamitous effects. Limits on branch banking have almost destroyed institutions because they could not reach out for deposits. The country's largest financial disaster - the savings and loan crisis - occurred because those institutions were limited by law to one form of real estate loan. (When the cost of deposits exceeded the income derived from mortgages, the S&L system collapsed.)
Measure of Relief
Congress has been timorous in enacting legislation correcting these shortcomings. The political conflicts among financial competitors whenever Congress starts to consider any structural change has made any real reform almost unachieveable.
Indeed, what Congress has typically done in its fear of the repetition of past problems and in learning precisely the wrong lessons from the past has been to tighten the noose around the banks. From the perspective of Congressional action, we have today a considerably more constipated banking system than we had 10 years ago.
There has, however, been relief. Much has come from those very regulators whose functions we now are looking to dismember. The confusion of regulators that looks so incongruous on an organization chart has yielded unexpected benefits.
Each regulator, nervous about his or her place in the spectrum and solicitous of the institutions subject to his or her jurisdiction, has through the years demonstrated ingenuity in finding opportunities for relief from legislative burdens.
We occasionally refer to this as "competition among regulators." This competition would essentially be removed by the current proposals.
Some Positive Results
Some have preferred the formulation "competition in laxity." Whether regulatory competition is positive or negative has not been sufficiently explored in the current debate, and it must be if the existing system is to be improved, not merely changed. We must not assume that a simpler system is necessarily a better one.
Constructive results of the present system are legion. I can mention only a few.
Decades ago the comptroller of the currency attempted to find ways to reduce branch banking restrictions. Later, he sought to bring modern computer facilities to national banks, the institutions under his jurisdiction.
He openly observed that the latter effort was in response to similar actions by the Federal Home Loan Bank Board (then the supervisor of federal S&Ls) and the National Credit Union Administration.
The bank board and its successor, the Office of Thrift Supervision, also found ways to let S&Ls branch throughout the country. The Federal Reserve System accommodated member banks in achieving some freedoms from the Glass-Steagall Act and its restrictions upon bank securities activities. The FDIC has used imaginative techniques to keep banks alive that might well have been liquidated.
Currently, regulators are happily acquiescing in the fiction that banks do not underwrite or distribute mutual fund stocks, but rather broker them, even when a bank is the sole seller of a fund's stock.
The vitality of the dual banking system, the system under which we have both state and national banks, can also be seen as part of the regulatory complexity. A New York state-chartered bank, Marine Midland, was denied permission to merge for financial reasons with a Hong Kong bank.
In a classic example of competition among regulators, Marine became a national bank, merged, and is healthy today.
System Not Broken
When state savings banks were stifled by state restrictions upon their activities, federal chartering was offered and the relief that became available - in the competition between federal and state systems - resulted in liberalization of state law.
Will Structure Hold?
The present regulatory system is not broken. It has operated in essentially its present form for 50 years. Proposals that it be changed have consistently been unsuccessful and banking has been the better for it. There is no real reason that reform be accomplished now.
If the present structure is to be replaced by one superregulator, or even two, the real question is whether the underlying legal structure within which banks operate will be effective. Before the regulatory system can be so thoroughly disrupted, the laws that make the present system desirable should themselves be reformed.
Restrictive securities limitations, insurance prohibitions, and branching restrictions should, as a start, be modified. The bank holding company structure should be loosened if not eliminated. Congress' recent dismantling of the dual banking system should be revisited.
In other words, the horse should be put before the cart. A determination of who administers the laws should be made with those laws in mind. Present banking laws dictate a malleable regulatory structure; at some time in the future, more moderate laws could be conducive to a single regulator.
Since politics makes a considered review of banking law impossible, more thought should be given to doing nothing at all right now.
