Regulators Should Not Be Puppets

I am no apologist for the Federal Home Loan Bank Board or the Federal Savings and Loan Insurance Corp. If their sort of ineffective performance were the only alternative, I would vigorously applaud the enactment of mechanical intervention guidelines for banking regulators.

But that's not the case.

Federal and most state commercial bank regulators should not be tarred with the same brush used on those defunct thrift agencies.

The use of discretion by regulators does work, but it depends on the quality and competence of the people guiding the state and federal regulatory agencies.

Congress Overreacted

Granted, there have been cases in which regulatory discretion led to problems. Nevertheless, it was ludicrous for Congress to enact the early intervention mechanisms in the 1991 banking bill.

Early intervention robs the system of both flexibility and discretion.

Federal regulatory officers would need to exercise no prudence or caution. They would simply enforce capital adequacy standards, administrative orders, and even bank closings on a mechanical basis.

Our banking system would lose its ability to react to adverse conditions.

Early intervention assumes that all situations are the same - that once a bank's capital reaches to a certain level, certain actions must take place. Wouldn't it be nice if all commercial banking situations were alike?

Innocent Victims

A study published by the Office of the Comptroller of the Currency revealed that just as many banks failed because of economic and financial conditions in the community as because of insider abuse, self-dealing, or preferential treatment.

For hundreds of commercial banks and savings and loans in the Southwest, failure resulted not because of incompetent or crooked management, but because the economy on which the asset portfolio was based simply disintegrated.

Even the most competent bank management would have difficulty trying to realize a profit when faced with the triple whammy of real estate devaluation, the oil and gas energy collapse, and significant declines in agricultural prices.

We are now dealing with this phenomenon in the Northeast, where financial institutions are fighting to stay afloat. The commercial real estate market has collapsed. Even the most conservative management, utilizing conservative real estate appraisals and loan-to-value ratios, can wind up losing an entire bank or thrift in such circumstances.

Salvageable Banks Jeopardized

Mechanical intervention, whether early or not, would not remedy this situation any better than discretionary intervention.

Discretionary federal regulatory management permits case-by-case solutions.

Mechanical early intervention lumps all problems into the same classification.

Chances are the practice will result in the demise of some good, salvageable banks along with the bad ones.

In view of the savings and loan crisis, it is understandable why Congress finds a mechanical early intervention system attractive: The lawmakers don't want to be embarrassed again.

A Personnel Issue

I would argue, however, that the problems reflected the quality and competence of the individuals involved, rather than the regulatory system.

The management of a business is the key to its survival, and federal banking regulatory agencies are no different from the management of profitable well-run corporations.

If we want strong discretionary regulatory management, it is up to Congress and the administration to hire appropriately trained and qualified federal regulators.

It is highly inappropriate to ignore the concept of quality in regulatory management and reduce competent federal regulators to puppets. It makes infinitely more sense to utilize regulators' experience, expertise and common sense.

Early intervention would be an extreme case of throwing out the baby with the bathwater.

Mr. Austin is the president and chief executive of Austin Financial Services Inc., Toledo, Ohio, a financial consultant to commercial lending groups.

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.