Congress has committed a grievous sin of omission by not sitting Paul Fritts down for an exit interview before he left town after 34 years at the Federal Deposit Insurance Corp.
Mr. Fritts, who was the FDIC's director of bank supervision, seemed as happy as a cow in a cornfield to be moving back to his native Illinois, and it's cruel for me to suggest bringing him back so quickly. But the regulator has very serious concerns about the direction of his agency, and they deserve airing.
Some of those misgivings were shared in an interview with reporter Barbara A. Rehm in the Sept. 10 edition of this newspaper.
Mr. Fritts alluded to a Bosnia-type conflict between the FDIC, the independent agency responsible for the safety and soundness of the deposit insurance system, and the Office of the Comptroller of the Currency, the arm of the Treasury that regulates national banks. He suggested that the integrity of our deposit insurance system is being threatened by the bloody bureaucratic in-fighting.
There's a tendency to dismiss OCC and FDIC turf fights simply because there have been so many over the years.
During the banking crisis of the 1980s, the FDIC often griped that the OCC wasn't keeping it up to date on the true condition of some troubled national banks until the institutions had actually failed. The delay in getting FDIC people into the institutions was cited as one reason for the high cost of bank resolutions.
'89 Law Tipped the Balance
Congress sided with the FDIC when it drafted the 1989 thrift-bailout law by giving the agency authority to examine any bank or thrift. Congress, in effect, made the FDIC a super-regulator.
Many thrifts complained of back-to-back exams, first by their primary regulator, the Treasury's Office of Thrift Supervision, and then by the FDIC. They said that the exams were time consuming and expensive and that they often received conflicting sets of instructions.
The powers of the FDIC expanded again with the implementation of risked-based deposit insurance premiums. Banks and thrifts pay a rate based on the results of an FDIC examination, not the findings of their primary regulators. Thus we now have situations where the FDIC rates banks high or lower than the OCC examiners.
Reluctance to Lend
Many banks complain that such duplicate regulation led to their reluctance to extend riskier types of loans and contributed to the so-called credit crunch.
Vacancies created by the deaths of two of the five board members (in 1992 and 1993) gave the Treasury's two representatives control of the "independent" agency. The FDIC, for all intents and purposes, is now run by Comptroller of the Currency Eugene Ludwig, a Clinton appointee who was confirmed last spring. That will remain the case until those vacancies are filled.
According to my sources, one of Mr. Ludwig's first official board actions was to try to cut down on duplicate exams by requiring the FDIC to give the OCC formal notice before examining any national banks. The FDIC opposed the move, saying it ran counter to the 1989 law giving the FDIC authority to examine any banks it determined were a threat to the insurance fund.
The FDIC also said the move ran counter to congressional intentions that it act as an independent agency and not as an arm of the Treasury. Mr. Ludwig is now trying to get the FDIC staff to go along with an informal oral agreement to provide him with advance notice.
Ms. Rehm's article said that on another occasion, Mr. Ludwig had Mr. Fritts removed from an interagency committee on the credit crunch because Mr. Fritts disagreed that tough regulation was the cause of the lending draught. Mr. Fritts claimed the comptroller seemed to be telling examiners to ease up, which is the reverse of what Congress told them just two years before when the banking industry appeared on the verge of a major breakdown.
"If you push examiners in opposite directions often enough, eventually they are going to say, What's the lowest common denominator?" Mr. Fritts told our reporter. "You stand the risk of examiners going out and not calling it the way they see it, but calling it the way they think someone else wants them to see it."
Congress ought to haul Mr. Ludwig and Mr. Fritts up before a committee and get to the bottom of the controversy. One of the causes of the S&L crisis was the failure of the lawmakers to heed the warnings of career examiners like Mr. Fritts. And here they go again, repeating that error even as taxpayers pay the latest installment to clean up the S&L mess.