The acquisition of Alex. Brown by Bankers Trust is brought to you by the Federal Reserve Board. Thank God.
The Fed, of course, recognizes the competitive forces at work in the financial services industry, both here and abroad. Under a new rule, it allows bank holding companies to generate 25% of their gross revenues from underwriting and dealing in "ineligible" securities at the subsidiary level. Hence, the BT-Alex. Brown deal.
Similarly, the Comptroller of the Currency recently acknowledged the same competitive influences. The OCC's "operating subsidiary rule" sets the stage for national banks to engage in other activities "incidentally" (and naturally) related to banking.
These actions did not require an act of Congress. Some grumbling has been heard from the Hill, and the drumbeat sounds for congressional hearings, but fortunately, Congress has stayed out of the way of these regulatory steps. So far, so good.
It is probably foolish, or dangerous, to view Congress as irrelevant, but that is what it seems to have become in the debates over "financial modernization." Bankers increasingly look to their regulators, not to their congressmen, to strike enlightened balances between legitimate regulatory concerns and equally legitimate business concerns.
The danger in labeling Congress irrelevant is the chance of overreaction by some members. They might call for overregulating (again) our banking institutions. Some could urge still more complicated regulation of our securities industry. Others might even take a shot at some sort of federal regulation of the insurance business, once they figure out which side of Main Street-lined with banks and insurance agencies-will be most helpful to their next reelection campaigns.
The regulatory agencies, on the other hand, including the Fed and the OCC, seem inclined to a common theme of regulation that embraces a reasonable recognition of the real world of business and market forces. Consider the two rules mentioned above. They allow banks to enter new business ventures, but require that activities outside traditional banking be conducted in separately organized, capitalized, and managed subsidiaries. And, they call for appropriate "firewalls" and restrictions on self-dealing.
The touchstone of bank supervision is safety and soundness and the corresponding stability of our banking system. The regulatory community knows this. It has responsibilities to ensure this. From my experience at the FDIC in the early part of this decade, when the S&L bailout was at its peak, the regulators take their responsibilities seriously. This is especially true when they are unencumbered by reports, inquiries, or hearings mandated by Congress. For the most part, it is best that Congress leave the task of supervision to the professional supervisors.
Those in Congress who criticize recent actions by the banking agencies point to concern about the "safety net" of federal deposit insurance and the risk of another bailout by the taxpayers. But is important to remember that most bank and thrift failures in the 1980s and early 1990s resulted from congressional meddling that lost sight of those concerns.
Responsibility for cleaning up this mess fell to state and federal banking agencies. They had to close insolvent institutions and liquidate assets inherited from failed institutions. The lessons were not lost on them-or the industry. The regulators andthe regulated sought ways to strengthen our banking institutions.
Left to their own devices, the banking agencies separated the federally insured business of deposit-taking and lending from risks of other businesses, to promote safety and soundness. As targets of initiatives by Congress to undo what it had done in the first place, banks and thrifts increased reserves, tightened credit policies, and disposed of real estate portfolios.
The results speak for themselves. The Bank Insurance Fund is at an all- time high. So is the Savings Association Insurance Fund, now recapitalized. The FDIC is able to live off its investment income. Most banks pay nominal premiums.
Despite rising loan-loss provisions (including, importantly, credit card chargeoffs), commercial banks reported record earnings of $52.4 billion in 1996. Without the special SAIF assessment last year, thrifts (which earned just over $7 billion in 1996) also would have enjoyed a record year.
Higher levels of fee income and wider net interest margins were the principal contributors-factors that Congress has little to say about. Increased fee income results from elementary market forces of supply and demand at work. Supply the products and services that customers demand at competitive prices, and fee income will go up. Economics 101. There is little Congress can-or should-do about this.
Improved interest margins are a reflection of the overall state of the economy. As our economy grows and banks become larger and more efficient through internal growth or consolidation, their purchasing power increases. Their cost of funds declines and margins improve. There is little Congress can do about this either.
No one seriously disputes the vital role that legislative oversight plays in our system of government. We place great reliance on checks and balances. We expect regulators to be held accountable as a matter of course-to be "checked" from time to time by the legislative branch.
But the system necessarily implies a notion of balance, too, so that legislative oversight does not lead to legislative overkill.