The Region

Views of Regulatory Consolidation

Top of the Ninth

Gary H. Stern | President, 1985-2009

Published March 1, 1994  | March 1994 issue

Late last year the Administration unveiled its proposal to revise the structure of bank supervision by consolidating the responsibilities currently performed by the Federal Reserve, the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Office of Thrift Supervision into a single new federal banking agency. This proposal is the most recent in a long series of such proposals. Given the remarkable complexity of the present structure, bank supervision is an obvious target of current efforts to streamline government.

While I believe that the current regulatory structure can be streamlined, there are other, equally important, objectives to consider. Ideally, restructuring bank supervision should make it more effective. I doubt, however, that more effective supervision can be achieved simply through bureaucratic reorganization. Despite the complexity of the existing structure, the agencies have been able to make it work reasonably well. At least in the short run, consolidation of the agencies would be likely to decrease the effectiveness of supervision as significant attention was diverted to the process of consolidation.

If revising the structure of banking supervision is unlikely to improve the effectiveness of bank supervision, what considerations should guide the process? From my perspective, any restructuring proposal should satisfy the following criteria. First, the reforms should enhance the efficiency of the supervisory process. Second, the new structure should ensure a sufficient role in regulation and supervision for the Federal Reserve to fulfill its central bank responsibilities. Third, the new structure should also ensure that the supervisory authorities have adequate independence. Fourth, the resulting structure should ensure equitable treatment of comparable institutions. Fifth, the revised regulatory structure should not impede competition among banks. And finally, the supervisory structure must allow adequate oversight of any consolidated organization in which a bank is affiliated.

To some, my second principle—that the Federal Reserve must have a sufficient role in regulation and supervision to fulfill its central bank responsibilities—may seem unduly self-serving. But it is my conviction that for the Federal Reserve to effectively fulfill its responsibilities as the nation's central bank, it must have a significant, direct role in the supervision of the nation's banks.

In general terms, the Federal Reserve has three basic responsibilities: conducting monetary policy, ensuring the smooth functioning of the payment system and ensuring the stability of the nation's financial markets. For each of these responsibilities our involvement in supervision and regulation has, over the years, proven to be of considerable value.

History has shown that in times of crisis in the financial markets, it is the Federal Reserve that is called on to manage the situation. This responsibility for ensuring financial stability is cited by the Federal Reserve Act as one of the principal reasons for the creation of the System. Experience has shown that the Reserve banks, with their broad knowledge of regional economic and business conditions, bank supervisory resources and bank operations expertise are uniquely qualified to respond to the unpredictable demands of a crisis situation.

Without its supervisory responsibilities, the System would be seriously handicapped as a crisis manager. Currently, we have both the opportunity to shape policies that will reduce risks that can lead to instability and the resources to respond effectively to crises when they arise. Under the Treasury's proposal, we would lose these capabilities. In particular, we would no longer have staff with the breadth and depth of hands-on, practical expertise and experience essential to managing serious financial disruptions effectively, nor would we have the clout as an institution to intervene positively. My concern over this situation is magnified by the fact that I do not see any other institution or entity ready and able to step in and play the role of crisis manager that the Federal Reserve currently performs.

Our bank regulatory structure can be streamlined, but in doing so we should ensure that the changes are consistent with other fundamental objectives, including the preservation of the System's ability to continue to act as effective crisis manager.