In testifying before the House Banking Committee in sup, port of the administration's supervisory consolidation plan, Comptroller Eugene Ludwig sounded very much like Chicken Little.

Although claiming that "we are in the midst of a powerful cyclical recovery," he noted that interest rate environments and market condition have their ups and downs.

Sounding more and more like the fabled pessimist, he continued, "I cannot say what the fire next time will he, but I can say there will be a fire next time. What will happen if we have not rebuilt our fragmented and broken regulatory system? There is every reason to believe that when the next crisis strikes, the costs will again be enormous."

'National Problem'

This ominous note was highlighted in a written summary of his. testimony submitted to the committee in which he stated: "We face a serious governmental and national problem that cries out for a prompt solution.

"Our system of multiple federal supervisors for banks and thrills failed us when we most needed it, as evidenced by the massive wave of bank and thrift failures in the 1980s and the ensuing credit crunch that contributed to the severity of the last recession.

"The cost to the American economy runs in the tens of billions of dollars. When put to another test, J fear that our supervisory system might well fail us again, at possibly an even greater cost."

Worrisome Precedent

As everyone knows, the thrift industry, which fared far worse than the banking industry, had a single federal regulator, a "reform" he now seeks to impose on banks.

Moreover, there were proportionately more failures among national hanks, which have a single supervisor, than among state-chartered banks, which are subject to dual state and federal supervision. Whatever its shortcomings, there is no evidence that our system of multiple regulators imperils the safety and soundness of the industry.

in his oral testimony, the comptroller declared that "the administration's proposal would end the competition in laxity., The latter rather timeworn phrase was borrowed from an earlier era, when it referred to state supervision of banks and was used to justify federal supervision over state-chartered institutions.

Today, however, thanks in part to successful efforts of the Conference of State Bank Supervisors in the area of examiner training, state supervision is strong.

Hardly Lax

The comptroller's remarks about "competition in laxity" do not jibe with his written summary, in which he stated: "We can better see why our supervisory system failed us by taking a closer look at how it threatens the long-run viability of banks and thrifts. Multiple supervisors have saddled those institutions with reporting and regulatory requirements that have been needlessly late and confusingly different and with supervisory requirements that are needlessly duplicative."

Saddling banks, with reporting and regulatory requirements does not seem to be a good prescription for winning a competition in laxity.

When not competing in laxity and causing problems, the federal supervisors' apparently are kept busy avoiding accountability.

Accountability Issue

In his written summary the comptroller stated: "The current supervisory structure also permits supervisors to avoid accountability for theft actions. As matters now stand, it is never entirely clear which agency is responsible for problems caused by faulty, or overly burdensome, or late regulation. That means that Congress, the public, and depository institutions themselves can never be certain which agency to contact to address problems caused by a particular regulator."

As for the public, the agencies are quite efficient in directing aggrieved parties to the appropriate forum for redress of their grievances. Congress and the institutions themselves know full well where to turn.

Our system is undeniably confusing to those not familiar with it, just as our federal system of government, with its built in checks and balances, is confusing to those unfamiliar with our form of democracy.

But we need checks and balances in banking just as much as we need them in government. Much of the confusion arises not from the fact that we have mulitple supervisors, but from the manner in which Congress has appoTtioned rulemaking and enforcement authority among them.

Then, too, there are the innumerable banking laws; rules, and regulations that spring from sources outside the realms of banking law and regulation.

A Few Examples

For example, the Department of Housing and Urban Development issues regulations under the Real Estate Settlement Procedures Act, and the Federal Trade Commission does so under the Fair Debt Collection Act. The Securities and Exchange Commission has rules regarding missing, lost and stolen securities, and signature guarantees, and even the Environmental Protection Agency issues rules affecting hanks, to cite but a few examples.

For more than 25 years I have been about as deeply immersed in bank regulation as one can get. I have been associated with money-centers, regionals, and community banks, both standalone and members of bank holding company groups, national banks, state member banks, and state nonmembers.

While I am acutely aware of the unreasonably heavy regulatory burden banks must hear, over the years I have yet to encounter any significant problem attributable to the fact that we have too many supervisors. To he sure, we have too many laws, which have spawned too many regulations, but Treasury's supervisory consolidation proposal, as manifest in Senate bill 1633, does not repeal a single substantive law, or for that matter, do anything to advance the cause of real reform.

Compliance Jobs Are Secure

Substituting one supervisor for three, or four if we include the thrifts, looks good on the surface, but any banker who believes it will reduce the compliiance burden is in for a big disappointment. Compliance officers need not fear that it will cause a thinning of their ranks.

Fed Governor LaWare and others have warned of the very serious dangers inherent in consolidating all federal supervisory authority into one agency and the threat to the dual system that would result if the charterer of national banks were to be given supervisory authority over statechartered banks.

I strongly concur. I also agree that it would he a serious mistake to take away the Fed's supervisory authority. Those responsible for regulation should understand the business they are regulating, and no agency understands banking better than the Fed.

Its 12 district banks function as banks and interact with banks throughout the country every day. Each district hank president meets regularly with the seven governors in connection with open market activities.

Finger on the Pulse

All of this gives the Fed an unrivaled Understanding of banking and a unique ability to keep its finger on the pulse of the industry. It would not make any sense to take away or diminish its supervisory authority.

While Treasury's sweeping proposal goes too far, if any of the three bank supervisors must he sacrificed to the cause, a case could he made for divesting the Federal Deposit Insurance Corp. of its supervisory authority. When the Federal Reserve Act was passed in 1913, one of its purposes was to bring statechartered banks under some form of federal supervision.

It was then anticipated that all state-chartered banks would join the system, but many did not. Thus, when the FDIC was created in the Banking Act of 1933, it was given supervisory authority over state nonmember banks.

Primary Purpose: Insurance

By extending the Fed's supervisory reach to all state-chartered banks, this early purpose would he fulfilled and the FDIC could focus on its primary mission: providing for deposit insurance. The Senate bill does not address the incongruities between the Federal Reserve and FDIC acts.

Apparently they will remain and we will still have two classes of state-chartered banks, memhers and nonmembers. In order to place all state-chartered hanks on an even footing it may make sense to require membership in the Federal Reserve System, but this could he disruptive to banks that have structured their operations in a manner that conforms to the requirements of the FDIC Act, but not the Federal Reserve Act.

Wholly apart from the compliance issue, some bankers are not opposing the proposal hecause of a belief that the new banking commission will have an attitude closer to that of the OCC than either the Fed or the FDIC

More in Tune

In their view, the OCC has been more sensitive to their business needs than either the Fed or the FDIC, owing to their overriding concerns with monetary policy and the insurance fund, respectively.

To his credit, Comptroller Ludwig has spoken out in favor of more equitable treatment for banks visa vis their nonhank competitors in the financial services market place. But we should not craft a new hunking structure on the assumption that the individuals in whose hands we are entrusting all supervisory authority over banks will act reasonably.

The host way to guard against arbitrary action is to provide a choice of forums. Perhaps we may not need three federal regulators, but we certainly need more than one.

I served for six years 9n the board of my state bankers association and participated in national trade association activities for almost as long a period and don't recall ever having heard any outcry over the sharing of supervisory authority among federal hunking regnlators.

As counsel for a multibank holding company I was aware of some irritation in hank lawyer circles about differences of opinion among the agencies on some issues, which made their jobs a bit more difficult.

Such differences also appear to be troublesome to the comptroller and some former regulators, who have decried the fact that the banking agencies have not always been able to agree.

But these differences have not been monumental and have not in any way imperiled the safety and soundness of the system.

Banking is a complex business and there is no one perfect solution to every problem. Banking organizations feeling overly burdened by these differences always have the option of making all of their banks national, memher and nonmember; according to their preference.

If the interstate banking' bill passes, which now appears to be a virtual certainty, the problem will fade away. A much more daunting problem is having to deal with different state laws that have nothing to do with the structure of our banking system, but everything to do with banks' day-today transactions.

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.