During his tenure as chairman, Alan Greenspan has resisted the temptation to let the Federal Reserve Board pursue its own form of irrational exuberance. He has charted a prudential course, steering away from too great or too frequent rate adjustments.
Partly as a result of his skills as a helmsman, we are enjoying an unparalleled period of economic expansion. This legacy makes his views about financial reform all the more puzzling.
Recently, Mr. Greenspan testified on something everyone likes to call "financial modernization." He supported the notion but warned that banks wading into the waters of diverse financial products and services- insurance, securities, mutual funds, and the like-should do so through affiliated subsidiaries of bank holding companies.
Mr. Greenspan got the issues right: competition in the financial services industry, risk to the deposit insurance funds, impact on consumers, and risks to the taxpayer. The Fed chairman is good at what he does. Very good.
But in a rare display of exuberance, he came down on the wrong side of those issues. And for the wrong reason-something Congress, the administration, and all the banking agencies call, sotto voce, "turf."
The Fed is the federal supervisor of bank holding companies and their affiliates. The distinction between holding company affiliates and operating subsidiaries of a national bank is where the rubber meets the turf. Mr. Greenspan and his agency have the primary say in the former but precious little say in the latter.
So when the Fed chairman says it's all right for banking institutions to diversify their activities so long as they do so through a bank holding company structure, what he's really saying is "so long as we, the Fed, maintain control."
Admittedly, he finds some support for that proposition in the Bank Holding Company Act. That law regulates the movement of capital among affiliates that could weaken the banks in a holding company family. It restricts transactions among affiliates to be certain they're done at arm's length. And it lets the Fed oversee the flow of so-called upstream dividends from the banks to their parent holding companies. Fair enough.
But any one of the other primary regulatory agencies can easily replicate each of those restrictions. They can-and do-frequently impose identical limitations on banks as conditions for entering new lines of business through a subsidiary of the bank itself, without requiring the formation of a holding company at all.
That's precisely what the Office of the Comptroller of the Currency has done, for example, as it has approved such operations under its "op sub" rule. And the OCC did so without the need of legislative assistance from the Congress or blessings from the Fed.
That, one suspects, is at the heart of Mr. Greenspan's concern. Once it's clear the other banking agencies can and will adequately oversee business decisions by banks to modernize themselves by moving into new lines of business through subsidiaries, the role of the Fed would diminish.
It might even call into question the utility of the Bank Holding Company Act. Or perhaps eventually compel the Fed to follow the lead of another central bank, the Bank of England, and cede all supervisory authority to another agency.
Why else would Mr. Greenspan suggest that banks enjoy a "distinct competitive advantage" over nonbanks? Doesn't this conveniently ignore the cost of the regulatory burden that banks must bear in the examination process, the so-called "compliance" scrutiny, the public hearings accompanying many acquisitions, and the requirements of the CRA?
When he points to risks to the deposit insurance funds-whose balances are presently at all-time highs-are we really to think the Federal Deposit Insurance Corp. is either unwilling or unable to fend for itself? Are we to forget the lessons of a decade ago?
The FDIC, not the Fed, is the receiver of all failed depository institutions. The FDIC, not the Fed, writes the checks to pay off depositors. The FDIC, not the Fed, marshals the assets of failed banks- assets that include the banks' operating subsidiaries but exclude assets held by affiliates in holding companies.
As he expresses concern for consumer choice, why not also point out choices now available to consumers through alternative delivery channels?
Thanks to the marketplace, unfettered by the good offices of the Fed and unencumbered by the good intentions of Congress, what about consumers' access to financial products through their home PCs, at local grocery stores and financial supermarkets, from consumer finance companies, and, increasingly, over the Internet?
And when he speaks of risks to taxpayers, surely he realizes that the insurance funds aren't taxpayer-funded. Surely he's not implying that some of our banking institutions could test the resources of those funds because they are "too big to fail" and would require a bailout at taxpayer expense?
Nope. Mr. Greenspan is too hardened in the ways of Washington to advance any of those notions. That could cost the Fed territory in the turf battles that have long been a staple in our nation's capital and, regrettably, remain so today. And that, gentle reader, is the one thing any bureaucrat in Washington, even one as rationally exuberant as Mr. Greenspan, is loath to do.
If Congress really wants to tackle financial modernization, start with the banking agencies themselves. Enjoin our central bank to stick to matters of monetary policy and leave supervision to the other agencies, or preferably just one agency. Mr. Byrne is chairman of the financial institutions practice group at the LeClair Ryan law firm of Richmond, Va., and was general counsel of the Federal Deposit Insurance Corp. during the Bush administration.
