A major issue impeding enactment of financial modernization legislation involves regulatory turf. The Federal Reserve argues that any company owning a bank should be subject to supervision by an "umbrella" regulator. The Fed, to no one's surprise, is the Fed's candidate to be the umbrella regulator.
Nonbanking companies and other regulators see little need for an umbrella regulator and, in any event, don't want the Fed in that role. Banks, already subject to the Fed's jurisdiction, have to be more polite but are also troubled by the notion.
A few months ago, no one had even heard of the term "umbrella regulator." Now Washington's in a frenzy trying to decide what an umbrella regulator does.
In the monetary policy arena, the Fed has earned a great deal of respect, particularly under Alan Greenspan and Paul Volcker. But it's difficult to understand the degree of deference the Fed is being accorded on regulatory issues.
The Fed's regulatory scorecard is good, but far from stellar. It has some pretty big blunders under its belt, including its ruling in the early 1970s that the Savings and Loan business wasn't "closely related to banking."
That decision prevented banks from absorbing the S&Ls before they cost taxpayers $140 billion.
The Fed argues that the need for an umbrella regulator is demonstrated by the fact that the problems at Continental Illinois, the Texas banks, and the S&Ls spread to their affiliates. It implies that an umbrella regulator could have prevented those outcomes.
The record doesn't support the claim. Continental's problems developed in its lead bank, and that's where they remained.
The Texas banks, operating through multibank holding companies, also developed problems in their lead banks. Other banks owned by these companies continued to operate after the lead banks failed. The Federal Deposit Insurance Corp. was upset, so it obtained legislation to force affiliated banks to stand behind each other's losses.
The S&L industry had an umbrella regulator that performed miserably. The Federal Home Loan Bank Board had regulatory, supervisory, liquidity, and insurance responsibilities for the industry. There were no checks and balances.
Consider the concentration of power if the central bank were anointed the umbrella regulator. It would be responsible for monetary policy, the payments system, the discount window, consumer protection laws, and supervision of the financial system.
Other major countries around the world have rejected granting that level of power to unelected officials serving fixed terms. Most countries represented on the Basel Committee (the coordinating body for bank supervision among major countries) don't put their central banks in charge of bank supervision and several don't give them any role.
The Bank of England has just been stripped of its supervisory authority. That was the price it had to pay for getting more freedom to set monetary policy.
It's ironic that just as the Bank of England's umbrella is being snatched away, the United States is rushing to grant the Fed more power than most central banks dare dream about. Odd for a country founded on the precepts of decentralized power and checks and balances.
If one were to designate a single agency as umbrella regulator, the Federal Deposit Insurance Corp. would be more appropriate than the Fed. The FDIC is the true lender of last resort to the banking system and already has authority to examine any affiliate of a bank.
Even better, one could designate the supervisor of the lead bank in each banking company as the umbrella regulator for that company. The supervisor of the lead bank is in by far the best position to understand and supervise the entire company. This approach would require very little change in the regulatory status quo.
The Fed should be required to make a much stronger case before we entrust it with so much authority. One S&L-type debacle courtesy of an all- powerful umbrella regulator is one too many.