Two recent announcements by the Federal Deposit Insurance Corp. illustrate the need for reforms at the agency. The first said the value of bank mergers in 1998, at $233 billion, exceeded the total from 1992 through 1997.

The second disclosed FDIC enforcement actions against three community banks. One was criticized for expanding its loans from $4 million to $7 million over three years, while adding only one employee.

Major banks are developing virtually overnight into enormous and complex financial conglomerates. Meanwhile, the agency responsible for safeguarding the banking system against a meltdown is focusing its might on farm banks.

When I arrived at the FDIC in 1978, it had an extremely dedicated staff and considerable financial resources. It also had a very limited vision of its role.

The agency's supervisory personnel were focused almost exclusively on regulating state banks that were not members of the Federal Reserve System. Though these banks were large in number, they were small in size.

After being hit by a series of surprises (the failures of First Pennsylvania, Penn Square, and Continental Illinois stand out), we decided that the FDIC needed to redirect its resources. Hundreds of small banks could fail and not have the financial impact on the FDIC, or on the financial system, of a single large bank failure. Because the FDIC had to pick up the pieces whenever a large bank toppled, we needed to become much more familiar with these banks.

We reduced FDIC personnel in rural areas and increased staffing in urban areas. We relied more on state banking department examinations of small, untroubled state banks to free some resources for larger banks.

Most important, we informed the Fed and the Office of the Comptroller of the Currency that the FDIC wanted to accompany those agencies when they examined larger banks and problem banks. We didn't want to supplant those agencies or impinge on their primacy in those banks, but we needed to get more firsthand information.

To report that the Fed and the OCC were resistant to the FDIC's request for on-site presence at "their" banks would be a gross understatement. But the FDIC persevered and developed a cooperative approach to examinations that served the banking system and the country well.

The FDIC reverted to its old ways during the 1990s, but not by choice. The FDIC board had been expanded from three to five members. The President appoints three members. The other two are the comptroller and the head of the Office of Thrift Supervision.

Whenever there's a vacancy on the FDIC board-which occurs frequently-the OCC and OTS can exert considerable influence over the FDIC. During one such period, they scuttled the FDIC's cooperative examination program.

The FDIC staff now must get board approval for each bank or S&L it wishes to examine under the program. It would have never occurred to me, as FDIC chairman, to interfere with a decision by the professional staff to examine any bank at any time.

The last time this country had a weak and politicized deposit insurance agency-the former Federal Savings and Loan Insurance Corp. - it cost taxpayers $150 billion to clean up the mess. We need the safeguard of a strong and effective deposit insurer to provide healthy checks and balances on the system.

The FDIC has an able new chairman, who has announced the appointment of Jim Sexton to head the agency's supervisory efforts. Mr. Sexton held the same position during my tenure and was a strong proponent of the cooperative exam program.

When we implemented the cooperative exam program, the top 25 banking companies held roughly one-third of the nation's banking assets. They hold double that percentage today. The FDIC fund is exposed to risks at these banks as never before.

It's time to put the FDIC back on track. The five-member board appears to be an obstacle to the FDIC's performing its mission. Congress should restore the FDIC's three-member board, with the OCC and OTS representatives as additional, nonvoting members.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.