Supervision and Regulation of Financial Firms
The status quo: Walk softly and carry no stick.
—PATRICK HONOHAN, GOVERNOR OF THE CENTRAL BANK
On paper, federal financial regulators seemed to possess extensive authority to deal with shortcomings in governance and risk management at financial firms. Bank supervisors’ powers included authority (with some variations) to charter financial institutions after reviewing capability of the charter applicants, examine their financial condition, set capital standards, prohibit unsafe or unsound practices or conditions, bring enforcement actions, require prompt corrective actions with respect to institutions that begin to lose their capital strength, and place a failing institution into conservatorship or receivership. (In a conservatorship, the goal is to restore an institution to sound financial condition; in a receivership, the goal is to wind up the institution’s affairs by paying creditors and liquidating assets.)
There are many variations on this pattern. For example, the FDIC and the Federal Reserve supervise state-chartered banks, among other institutions, while the Office of Comptroller of the Currency (OCC) supervises only institutions that it charters, national banks.
The US financial system is fragmented into many more institutions of varying sizes and types than in Canada or Europe. Similarly, supervision of the US banking system is fragmented, with responsibilities divided among federal and state authorities. At the federal level, supervisory responsibilities are divided among a multiplicity of federal agencies and instrumentalities. Much of the fragmentation derives from historical circumstances in the United States and especially the populist antagonism to the power of the nation’s first central banks, the First and Second Banks of the United States, chartered in the eighteenth and