Banking in America has always been a heavily regulated industry. Regulations are deep waters that bankers learn to swim in from the very start of their careers.
Bankers do not select the people who regulate them. They do, however, have some choice in how they interact with their regulators, and strive to have a relationship that adds value to what their firm offers to customers. Bankers hope for and count on smart regulators, who understand the industry and, even more, the irreplaceable role banks play in a modern economy. They are eager to share their best ideas and engage in the common purpose of promoting economic growth and development. Banks grow as their communities grow. In a downturn, it is tough to get loans repaid by struggling businesses, while a bustling economy brings loan growth and timely return on loans and investments.
Our banking regulatory agencies were created by Congress over generations, in recognition and support of the role of banks play in our economic vitality. The Office of the Comptroller of the Currency was established 150 years ago when national finances were traumatized by the Civil War. The federal government was counting its last dimes, having great difficulty borrowing enough money to fund its armies and navy. The solution was a system of national banks that could gather millions of small deposits from average people and convert the deposits into loans to the government. These banks could then use the bonds themselves to support lending to businesses. The result was that, while Union armies were successful in the field, the economy of the north likewise experienced strong and steady growth.
One hundred years ago, almost to the day, the Federal Reserve was created to promote the stability of the banking system in troubled times, when economic challenges and other events could cause a liquidity problem for otherwise solvent banks. An essential service that banks provide is to take in short-term savings and convert them into longer-term loans, meeting the needs of savers and borrowers alike. That works fine, until some event causes enough savers to pull their money that banks strain to serve their borrowers. If that strain becomes a panic, the inability of banks to reclaim funds from borrowers can even cause healthy banks to fail. The Fed was created just for those times, to lend resources to banks to cover withdrawals, backed by the collateral of the banks' healthy, performing loans.
A generation later, in the midst of the Depression, Congress created the Federal Deposit Insurance Corp. The FDIC was tasked to insure small deposits and encourage individuals and families to keep their deposits in banks where the money could be put to work funding borrowers with plans to grow their enterprises.
This is a long, sustained and clear history of national policy invested in promoting a strong and vibrant banking system. State banking regulators for an even longer time fill similar roles. To work, our system requires smart and prudent regulators as much as it requires smart and prudent bankers. To that end, the nation counts on the fair application of clear and sensible rules. The measure of good regulation must be: does it enhance the ability of banks to serve their customers, especially over the long run? If not, changes and reforms are in order.
As Federal Reserve Chairman-nominee Janet Yellen goes through the confirmation process, there are few who doubt that her nomination will be confirmed by the Senate. Nevertheless, it is important that we have this process and that she be subjected to it. Having passed through the confirmation gauntlet myself, I can testify that it means a lot of work, effort and even angst for the nominee.
However, the process is important for our republic and for the successful service of the nominee as it confers legitimacy and a tie to the people on whose behalf one serves. It reminds us of the job the nominee has been asked to fill and why it is important. Additionally, it allows the nominee to explain how she will embrace and carry out the weighty duties invested by Congress in the office.
Then, once the nominee is confirmed, the opportunity devolves upon regulator and industry alike to make sure that the actions taken and the policies applied serve well the customers of banks, who are also the sovereign people who lend their authority to the office and their confidence to the officeholder.
Wayne A. Abernathy is executive vice president for financial institutions policy and regulatory affairs at the American Bankers Association. Previously he served as assistant secretary of the Treasury for financial institutions and as staff director of the Senate Banking Committee.