A lot of folks in Washington are giving thought to the structure of bank regulation, trying to come up with ways to make it more efficient and effective.

The regulatory structure in effect for the savings and loan industry until a few years ago was the very model of efficiency.

The chairman of the Federal Home Loan Bank Board had under his control the industry's liquidity function, the insurance and failure-resolution functions, and the regulatory and supervisory functions.

When I served on the vice president's Task Group on Regulation of Financial Services in 1983, I urged reform of the savings and loan system.

One-Man Rule

The Bank Board chairman argued vociferously that its system was vastly superior to the bank regulatory system, and he refused to participate in any discussions to change it. That was the end of that. The issue never made it to the table.

I felt then, and I fell even more strongly now, that the Bank Board system was fundamentally flawed. There were no meaningful checks and balances.

The chairman of the Bank Board had tremendous power. His agency could decide what the industry would be permitted to do, how closely the industry would be supervised, how much funding would be made available, what accounting and capital standards would be applied, and when problems would be recognizes and how they would be resolved.

The only real limitation on that authority came from the political process. The industry developed a powerful lobbying apparatus with the administration and Congress to bend the Bank Board to its will. We all know the results.

A series of policy and execution blunders of similar character and magnitude is simply not possible in the banking industry. No person or agency has sufficient authority to bring it about. And because the authority for bank regulation is so diffuse, it is much less susceptible to political pressures.

Each of the various banking agencies brings to the table a different agenda and perspective. Some are independent agencies, some are not.

The Federal Reserve is concerned principally with the money supply and economic stability. Its voice clearly needs to be heard on bank regulatory matters, but it has a bias against making waves.

The Comptroller's office is charged with promoting a strong national banking system. It is an arm of the Treasury Department, which has overall responsibility for economic policy.

Agencies' Different Strengths

These are powerful arguments for providing the Treasury Department with direct input into the bank regulatory process, though there is a clear danger in allowing it to dominate the field to satisfy short-term political objectives.

The state banking departments are closer to the people and more attuned to local economic conditions and needs. I believe we would lose something valuable if we were to emasculate them, though I wouldn't be comfortable allowing them free rein.

The Federal Deposit Insurance Corp. is charged with protecting the deposit insurance fund. It servers as an independent watchdog, roaming about the system looking for problems that others might have missed or preferred not to see.

A strong, independent FDIC is critical to avoiding another thrift-type debacle, but it would probably be too risk averse if left completely to its own devices.

Frustrating, but ...

The bank regulatory system is complex, expensive to operate, and filled with tension and conflict. many times during my tenure at the FDIC I found the system extremely frustrating, and I wished I could have been czar.

But in my more rational moments I recognized that I and my FDIC colleagues were not the font of all wisdom and that the interagency discussions and battles were reducing the potential for serious mistakes.

The genius of our nation's system of government is that it is designed to be cumbersome, with lots of checks and balances. A premium is placed on making it difficult for the government to do harm.

We can undoubtedly find ways too improve bank regulation and make it more efficient. But we should tread down this path very carefully because it would not be difficult to come up with something far less effective.

Mr. Isaac, a former chairman of the Federal Deposit Insurance Corp., is managing director and chief executive of the Secura Group, a financial services consulting firm based in Washington.

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.