VOL 2001-4

This is the second of a two-part report on the prospects for regulatory structure reform. My thesis is that modernization of the U.S. financial system will not be accomplished solely by the Gramm-Leach-Bliley Act of 1999 (the GLB Act). The GLB Act was intended to lower or eliminate barriers between or among the various financial services industries, but did not deal with the obvious fact that the combination of integrated financial markets and fragmented national regulation raises major public policy issues. To achieve truly effective modernization, I believe, as do most other observers, that additional legislation will be needed, addressing regulatory structure reform, deposit insurance reform and the lingering separation of banking and commerce. The most pressing need is for regulatory structure reform.

Part I dealt with two particularly difficult regulatory structure issues: 1) the need to reduce the excessive number of different regulatory agencies for an emerging single financial services industry, and 2) the appropriate role for the central bank in the new scheme of things.

In some ways, the most surprising question was why there is apparently so little interest in regulatory structure reform in the United States. One of the factors that discourage such initiatives is the reluctance of the Federal Reserve, a formidable political force, to surrender its important role in banking supervision and regulation. Indeed, the central bank seems intent on expanding its regulatory power. In contrast, many other advanced nations – Britain perhaps being the most prominent and Germany the most recent – have moved decisively to restructure their regulatory systems and free their central banks from hands-on supervision of banks and other financial institutions. Another factor is seemingly little resistance to the proliferation of regulatory agencies. It may be hard to believe, but there is serious talk in industry and Congressional circles of creating a new federal agency to charter insurance companies (apparently while leaving state chartering agencies in place) and even to create a new federal corporation similar to the FDIC to protect the public in the event of insurance company failures. A third factor complicating any serious attention to regulatory structure reform is the "dual banking system," an arrangement unique to the United States that has a history of frustrating past efforts to simplify the fragmented U.S. banking structure. A key question is whether dual banking can play a constructive role in regulatory agency structure reform.

Section I of this report deals with the fragmented U.S. regulatory structure as it relates to the traditional dual banking system. Section II looks at what I believe to be an emerging dual system at the federal level. Section III examines deposit insurance reform from the perspective of regulatory structure in the new financial setting created by the GLB Act. And Section IV winds things up with a few summary comments.