Vol. 2000-10

 A Few Random Thoughts At Year End

             Borrowing from the title of an old Broadway musical: “A funny thing happened on the way to this Report.”  The subject had been decided upon long ago: we would consider the ways in which banking public policy was likely to be affected by the presidential election, something we have done often after past elections.  But it is early December as I write and there is still no President-elect nor, for that matter, full certainty about the way in which the new Congress will be structured, particularly on the Senate side.  A report on the interaction between political change and banking public policy must await another day.

             I think, however, that Karen Shaw Petrou was essentially correct when, in a recent talk before the Boston Counsel Group, she argued that many of the key issues likely to receive close attention, and possibly even be resolved, in 2001 are identifiable now.  They are, she pointed out, mostly free of partisan ideology, noting such subjects as deposit insurance reform, risk based capital, and privacy.  They are driven, she said, largely by external events in the markets, which seems reasonable to me (Petrou, “No Matter Who Wins . . .,” Boston Counsel Group speech, October 19, 2000).

             Yet if financial public policy is defined as a set of arrangements defining and regulating banks and other financial institutions, then it is impossible to focus on the underlying reasons for changes in public policy without also taking into account the role of political change.  A good example would be the tie between the Federal Reserve’s increasing importance as a federal bank regulator and the fact that for the past six years or so the Chairman of the House Banking Committee has been a fervent admirer of the Fed.  In the past, the Fed typically found its friends in the Senate (and of course still does) while its serious critics were generally in the populist House of Representatives.  Wright Patman and Henry Gonzalez were examples.  Of course there are additional explanations for the Fed’s recent political success, such as the stature and prominence of Chairman Greenspan, but I think that the close relationship between the chairmen of House Banking and the Federal Reserve was a key factor.  The result can be seen in the Gramm-Leach-Bliley (GLB) Act.

             When I examined my own list of issues and subjects likely to attract attention in 2001 – such as merchant banking and the line between banking and commerce, deposit insurance reform, or capital regulation – a common thread was regulatory reform.  Indeed, in some cases it seemed to me that resolution of the knottiest items is likely to depend on the nature of regulatory reform, the pressure for which is clearly building.  This might seem strange, since one would ordinarily expect issues to be resolved through a combination of market forces and legislation (with the latter often of some importance but almost always lagging), after which any change required in the structure and management of financial regulation would follow.  But in this nation, with its multiplicity of financial regulatory agencies, many of which have other and more important responsibilities, the unique financial regulatory system can play an important, independent role in the shaping of public policy.

             If, as I think quite likely, a major subject to be dealt with in the future is reform of the financial regulatory system, this is a huge task, to which I devoted a double report earlier this year (“Reform of the Financial Regulatory Structure,” Vol. 2000-2&3).  Today, with Christmas approaching rapidly, I cannot picture readers waiting eagerly for another lengthy analysis of financial regulation.  Instead I will make only a few observations, laced with some irreverency, on recent news reports or other developments that relate to regulatory reform.  My comments will be brief, as fits the Season.