Just three days after financial reform's enactment, Chairman Alan Greenspan began staking out the Federal Reserve Board's turf as top overseer of diversified conglomerates.
"The Federal Reserve retains the overall responsibility for financial services holding companies with bank subsidiaries," Mr. Greenspan said in a speech Monday. "If the bank is large and/or a significant part of the organization, both law and good supervisory and stabilization policies require an active umbrella supervisor."
President Clinton made history Friday by signing the Gramm-Leach-Bliley Act of 1999, which repealed the laws separating commercial and investment banking and prohibiting bank holding companies from underwriting insurance. To give regulators time to prepare, cross-industry mergers will not be allowed until mid-March.
Addressing the annual meeting of the American Council of Life Insurers, Mr. Greenspan said the Fed's "major emphasis will be on protecting the bank subsidiary and on the risk management of the consolidated entity."
The law establishes the central bank as the primary regulator of holding companies, and provides for so-called "functional regulation" of financial activities by state and federal agencies. For instance, the Securities and Exchange Commission will still oversee securities underwriting and sales units, and state insurance commissioners will continue supervising insurance products.
Getting regulators to cooperate this way, however, is easier said than done.
Industry officials are taking a second look at the intricacies of the law's regulatory scheme after being sidetracked for months on fights over community reinvestment requirements, customer privacy, and other higher-profile issues.
"Now that our nation's financial services delivery system has been overhauled, the way in which our business is regulated -- today and tomorrow -- is on everybody's mind," said ACLI president Carroll A. Campbell Jr. "It is imperative that our system of regulation be modernized to keep pace" with market changes.
Mr. Campbell predicted that conflicts would arise among various regulators, especially at the beginning, but that government officials would eventually reconcile their roles and smooth the process. "It will take a little shaking out," he said. "In the end, it's going to be good."
Others are more skeptical, saying the law's regulatory provisions mostly represent political deals that were made just to get the bill passed by Congress and signed by the President.
"It's not a unified whole in terms of setting forth a comprehensive, sensible regulatory framework," said John B. Chesson, senior legislative counsel for the National Association of Insurance Commissioners.
But Mr. Greenspan sought in his remarks to defuse concerns about regulatory infighting or duplicative regulation. "It is clear from the letter and the spirit of the Gramm-Leach-Bliley Act that bank regulators and the holding company supervisor are to give great deference to the functional regulators," he said. "This arrangement will work well, if and as the parties cooperate. We fully expect that will be the case. There will understandably be some tensions as we all move up the learning curve."
The law creates "real and effective limits" to prevent the Fed from butting in on the "first-level" supervisors, he said. However, he said, the Fed will intervene to preserve the health of a bank affiliate by, for example, imposing more restrictions on relationships among banks, affiliates, and their customers beyond the law's limits on investments and lending among these parties. In extreme cases, the Fed could order divestiture of risky affiliates or the bank itself from the parent company, he said.
