Superregulator Is Wrong Rx for What Ails Banks

By Aukamp, William M. | American Banker, May 23, 1994 | Go to article overview

Superregulator Is Wrong Rx for What Ails Banks


Aukamp, William M., American Banker


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. …

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