Statement by John P. LaWare, Member, Board of Governors of the Federal Reserve System, before the Subcommittee on Financial Institutions Supervision, Regulation and Insurance of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, June 23, 1992

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Statement by John P. LaWare, Member, Board of Governors of the Federal Reserve System, before the Subcommmittee on Financial Institutions Supervision, Regulation and Insurance of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, June 23, 1992

I am pleased to be here to address issues of regulatory burden: how it might be eased for well-run depository institutions and what long-term regulatory and legislative efforts are needed to keep excessive requirements in check. These hearings are extremely important because, over time, the regulatory burden on U.S. depository institutions has grown progressively to the point where it may well threaten the viability of the banking industry itself. Both the Congress and the regulatory agencies must act now to stem the tide of ever-increasing regulatory burden and to explore ways of reducing existing burdens.

NATURE OF BANKS' REGULATORY BURDEN

The U.S. banking system operates under a wide array of statutory and regulatory constraints imposed on it for a variety of reasons. Some restrictions, such as those related to antitrust matters, reflect broad public policies to promote free markets and to prevent abusive business practices that we have seen in the past. With only a few exceptions, these laws apply to businesses of all kinds. Other statutes and regulations, however, apply only to banks and other insured depositories because of the special and critical functions they perform: (1) their role in the payments mechanism, which facilitates payments by businesses, governments, and consumers domestically and throughout the world; (2) their role as a chartered recipient of federally insured deposits providing a source of savings and investment to the general public that is free of the risk of default, up to $100,000; (3) their role as important credit intermediaries for all segments of society; and not least (4) their importance as the principal vehicle through which the nation's monetary policy is implemented.

Society's reliance on the banking system for these and other functions, combined since the 1930s with the government's direct exposure arising from its deposit insurance guarantee, led to the belief that banks should be treated differently from most businesses and that they should be held to somewhat higher standards. As a result, banking is, and has long been, one of the most regulated industries. Without doubt, some regulation is needed to minimize excessive risktaking by banks, to protect financial markets and the payments system, to minimize the government's exposure because it is the ultimate guarantor of bank deposits, and--through such burdens as reserve requirements-to implement monetary policy.

However, during the past quarter-century or so, the Congress has enacted additional financial services laws designed to achieve a variety of other objectives. These laws are most frequently directed at protecting consumers, ensuring that services are made available to all members of society, and enforcing tax and criminal laws. They typically impose specific and detailed requirements on depository institutions that, in most cases, are not placed on mutual funds, insurance companies, and other nondepository financial institutions. Obviously, this places depositories at a competitive disadvantage.

Although these statutes and regulations both those related to safety and soundness and those related to other public policy goals--may address legitimate public policy concerns, they also impose significant costs, both direct and indirect, on the banking system. The direct costs of regulation include additional personnel and equipment to ensure compliance, the diversion of management from other business activities, deposit insurance premiums, and lost revenues from non-interest-bearing reserves maintained at the Federal Reserve. The public at large also bears a substantial direct cost in the expanding size of regulatory agencies to administer the growing volume of laws and regulations. …