As I was reading the American Banker the other day, I was struck by a headline: "Superregulator Needed In Financial Services, Fed Chairman Says." Something about the headline didn't seem quite right.
A little research revealed the source of my confusion. About a year ago, the American Banker ran a story with the headline: "Greenspan Hits Superregulator Plan as a Bar to Innovation, Risk-Taking."
What momentous event occurred during the past year to cause the central bank to alter its view of bank regulation so drastically? There have been no banking crises; indeed, the industry has continued to report record levels of earnings and capital. Nothing appears to have changed except the political standing of the Federal Reserve.
A year ago the Democrats were in charge of both houses of Congress and the White House. The chairman of the House Banking Committee, Henry Gonzalez, was noted for his hostility toward the Federal Reserve. The Clinton administration was promoting a plan to consolidate the federal banking agencies and strip the Fed of its bank regulatory powers.
Today the Republicans are in charge of both houses of Congress. The chairman of the House Banking Committee, Jim Leach, is an unabashed fan of the Fed. His Glass-Steagall reform bill, if enacted, will insure that the Fed will be the dominant bank regulator. Treasury appears to have lost its zest for challenging the Fed's supremacy.
What a difference a year can make in political fortunes in Washington! One can readily appreciate, under the circumstances, how the Federal Reserve's views might change regarding the need for a superregulator.
But Mr. Greenspan had it right a year ago when he addressed the annual convention of the Independent Bankers Association. He said a single bank regulator would inevitably destroy the dual banking system that has led to so much innovation.
He went on to observe, "In addition to fostering innovation, and perhaps just as important," he observed, "is the safety valve that the dual banking system has provided for avoiding overly rigid and inflexible federal regulation and supervision. The prerequisite for such flexibility is having more than one federal regulator.
"With multiple federal regulators, a bank can choose to change its charter and thereby also choose to be supervised by another federal regulator. That potential has placed a significant constraint on the potential for arbitrary and capricious policies at the federal level."
Mr. Greenspan went on to espouse four fundamental principles to be used in evaluating reform proposals: "First, there should not be a single monolithic federal regulator. Second, every bank should have a choice of federal regulator. Third, there should, to the extent feasible, be only one federal regulator per organization. Fourth, the U.S. central bank should continue to have its essential hands-on involvement in supervision and regulation."
The Glass-Steagall reform bill adopted by the House Banking Committee violates at least the first two of Mr. Greenspan's fundamental principles. It would require securities underwriting activities to be placed in a bank holding company affiliate rather than allowing them to be conducted in a separately funded and capitalized bank subsidiary.
There are lots of things wrong with this approach. It endeavors to force banks to operate through the bank holding company structure, an archaic and inefficient device. Moreover, it would expose insured banks to the risks of an affiliate gone awry without the right to receive the profits if the affiliate is successful.
Back to Mr. Greenspan's fundamental principles, the approach would also go a long way toward creating a "single monolithic federal regulator," depriving banks of the "choice of federal regulator." There is only one federal agency responsible for regulating bank holding companies today. Guess which one it is.
There is an easy way to reform the Glass-Steagall Act without doing violence to any of Mr. Greenspan's four fundamental principles. We should allow banks the choice of organizing their securities underwriting affiliates as either bank or bank holding company subsidiaries. The regulator of the lead bank in a holding company should be given oversight of the entire enterprise. If no holding company is retained, the regulator of the bank will, by definition, have oversight of the entire company.
Many banks are sitting on the sidelines in the current Glass-Steagall debate, not much interested in its outcome because they don't plan to engage in securities underwriting activities. They are making a huge mistake.
The outcome of the debate on how securities activities will be structured and regulated will carry over to all future debates on expanded powers of banking organizations. The industry may well win the skirmish over Glass-Steagall and lose the war. Mr. Isaac, former chairman of the Federal Deposit Insurance Corp., is chairman and chief executive of Secura Group, a financial institutions consulting firm headquartered in Washington.