Federal Reserve Chairman Alan Greenspan recently argued for an "umbrella supervisor"-presumably the Fed-for any company that owns a bank. If the Fed sticks to this position, it could become the main obstacle to financial modernization legislation.

Banks need the ability to seek the most progressive regulatory forum. They have suffered for decades under the yoke of outmoded laws, and their share of the financial services marketplace has declined precipitously.

Most of the relief banks have been able to obtain from these burdens has resulted from liberalization moves by one regulator or another, particularly the Comptroller of the Currency. Banks are understandably loathe to lock themselves into an umbrella supervisor, giving up the freedom to choose the most enlightened regulator.

Nonbanking firms, whose support will be needed to enact financial modernization legislation, are even more strongly opposed to an umbrella supervisor. They've seen the damage excessive regulation has done to the banking industry and want no part of it.

Washington turf battles will be the inevitable result of any attempt to designate an umbrella supervisor. The specter of the Fed fighting the Treasury, the Securities and Exchange Commission, the Federal Deposit Insurance Corp., and various state bank, insurance, and securities commissioners for supremacy is not pleasant.

Chairman Greenspan observes that most financial companies take a centralized approach to risk management. He believes the regulatory structure should parallel that model. Someone needs to have an overview, because troubles in one legal entity can spread to other entities in the same enterprise.

There's no umbrella supervisor today for financial companies that don't own banks. If a company owns life insurance and leasing companies, and the leasing company gets into trouble, the relevant insurance commissioner moves to protect the insurance company's policy holders. The creditors of the leasing company are on their own. It's not clear why the situation should be any different when a company owns a bank.

The only real justification for umbrella supervision is concern about taxpayer exposure through the deposit insurance system. Bank regulators, particularly the FDIC, have authority to demand information from and to examine any affiliate if they believe it's relevant to the condition of the bank. If they need more authority, they should request it. That doesn't require a big debate about umbrella supervision.

Perhaps a case can be made for umbrella supervision, but it hasn't been done yet. We will need a great deal more information about precisely what problems the umbrella supervisor will be expected to address. We will also need a much clearer delineation of what authority the umbrella supervisor will have.

If a case can be made for umbrella supervision, it seems clear the umbrella supervisor should be either the FDIC or the regulator of the lead bank. The FDIC is the only federal agency that's exposed to the risk of loss when a bank fails. Rather than giving the FDIC additional authority, it would be better public policy to reform the deposit insurance system to curtail the FDIC's risk exposure and enhance market discipline.

Charging the regulator of the lead bank with responsibility to oversee the entire enterprise makes more sense. Centralized risk management systems are almost always lodged in the lead bank. The lead bank is dominant in most holding companies, and one must understand it to understand the company.

The lead bank approach to supervision has considerable appeal for political reasons as well. No company would be at the mercy of a supreme regulator. If a regulator becomes unbearably regressive, the lead bank's charter can be changed.

Let the regulators earn industry loyalty by becoming the best, most efficient, and most enlightened agencies possible. Competition in excellence will work as well in government as it does in the private sector.

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