The Not So Torpid Days of Summer
Long-time subscribers know of my practice of reading copies of the American
Banker in batches of 25 or 50, taking only a few seconds to scan each
day’s headlines before putting the paper aside for serious reading later.
This at least enables me to pretend to be well-read during daily
conversations. Much more
importantly, the later readings offer a panoramic view of banking developments
over a particular period, often helping to distinguish the forest from the
trees. In the most recent instance
-- July and August of the present year -- as my reading approached issues dated
in late July I was becoming discouraged; nothing new appeared to be happening
with respect to public policy issues.
To be sure, the economy was slowing noticeably, but this seemed to be
more a matter of concern to manufacturing than to banking, which the stock
market in fact was treating rather kindly.
Fading rapidly from sight was the hubbub over the new rules for capital
regulation being fashioned by the gnomes of Basel.
The initial report of the Basel group had landed with a dull thud and
plans for implementation had been pushed back a year or so, until at least 2005
(and, some would say, “if ever”).
Privacy issues, another example, continued to pop up, though the push to
distribute privacy notices was completed. My
impression -- possibly an instance of the wish being father to the thought - was
that the heat generated by “privacy” was lessening.
For a time much of it seemed to be coming out of California, particularly
the state legislature, and appeared to be tied to the Governor’s need to find
something to take the public’s mind off California’s energy crisis.
Broader articles later in the summer seemed to be saying: “what do we
do now?” And of course there were
still other examples of old issues, some important, making news.
Somewhat unexpectedly, the campaign for deposit insurance reform launched
earlier in the year by the Federal Deposit Insurance Corporation (FDIC) found
“legs” during most of July, even though the issues had been pretty
thoroughly picked over and a new Chairman was coming aboard.
Of course most of these issues were important to various groups but they
were largely related to FDIC operations. For
example, there was the question of insurance coverage: should it be increased
from its present level of $100,000 per depositor? Or should that level be indexed for price level or income
changes and, if so, what was the appropriate base point? Depending on the base year selected, one could justify a
significant reduction in present coverage for each depositor because the $5,000
maximum in 1934 would be about $65,000 today.
But if one were to select the year in which the present $100,000 coverage
was put into effect, it would be possible to make a case for substantial
increase, perhaps even for doubling the present coverage level.
There were equally important operational questions, particularly those
having to do with the level, construction, and applicability of deposit
insurance premiums. Doubtless these
and FDIC housekeeping issues would have continued to receive attention, although
probably not a great deal, in the fall. Suddenly,
things changed.
On July 27 a rather large savings bank was closed by the Office of Thrift
Supervision (the Superior Bank in Chicago) with indications that the eventual
cost to the FDIC would be quite large. This
virtually guaranteed a new and much broader look at deposit insurance, including
the possible combination of the two existing insurance funds and the possible
consolidation of the Office of Thrift Supervision (OTS) with the Office of the
Comptroller of the Currency (OCC). Nor
are these the only issues likely to emerge.
In the first place, whenever a large bank fails, there is an immediate
flurry of “finger pointing.” As
my cynical friend and occasional contributor to these reports, Frip Chissom, put
it in a recent letter: “A bank has failed so heads must roll, not just the
heads of the bank’s owner and management but also those in the public sector
responsible for regulation and supervision.”
And so the blame game begins.
Senator Sarbanes, the new
Chairman of the Senate Banking Committee, then threw a huge log on the fire by
announcing that he had asked the General Accounting Office (GAO) to investigate
the bank’s failure and was scheduling hearings for mid-September.
He asked the GOA to review the “implementation of the Prompt Corrective
Action Provisions” of the 1991 law, “especially the effectiveness in
preventing losses to the insurance funds” (American Banker, August 16,
2001). Readers will note that the Senator was asking for nothing less than a
reconsideration one of the core provisions of the Federal Deposit Insurance
Corporation Improvement Act (FDICIA). It
was probably at about this point in my reading that I began to sense that a
“forest” was emerging out of the “trees.”
The
Superior Bank failure did more than throw new light on deposit insurance reform.
Its effect may go far beyond what the FDIC has been proposing by reviving
issues that Congress loves to keep buried.
In a letter to the American Banker, Alfred Byrne, a former FDIC
general counsel, raised such an issue. Commenting
on the paper’s discussion of the various possible parties bearing some
responsibility for the bank’s failure, Mr. Byrne, noted that the Banker
had “failed to give credit where credit is due -- to lay the blame where it
belongs.” The Congress, he said
“is the real culprit” (American Banker, August 3, 2001).
Mr. Byrne’s explanation was simple: Congress has neglected, and
continues to neglect, its responsibility to reform the bank agency regulatory
structure, something that has been called to its attention for many years by
many persons, publications, and organizations (including this writer).
Then several weeks later, the
front page of the American Banker was dominated by a report that the
Secretary of the Treasury (Paul O’Neill) was considering streamlining the
financial regulatory structure by introducing a plan to combine the FDIC, the
OTS, and the OCC into a single agency, presumably under the wing of the Treasury
Department. At the same time, the
Federal Reserve would be given responsibility for supervision and regulation of
the twenty or so largest banking organizations.
However, the same article included an unusually strong statement by a
Treasury spokesperson denying that such a proposal was being considered by the
Secretary (American Banker, August 15, 2001).
Whether Mr. O’Neill’s “suggestion” was really only a casual
observation made during an informal conversation (as the Treasury spokesperson
appeared to be saying), or whether it was a serious trial balloon, it will add
additional flame to the fire. It is
an idea with a long history, both with respect to the function of the FDIC and
to the regulatory authority of the Federal Reserve.
At a minimum, therefore, deposit insurance reform could become a major
item on Congress’ legislative plate. The
key question is whether the consideration will stay focused largely on the
FDIC’s operational interests, or whether it will go beyond to include much
more important public policy questions, such as the worth of “prompt
corrective action” and the powers available to the FDIC for its crisis
management responsibilities in serious depressions.
It also seems possible, that
regulatory agency reorganization will once again be on Congress’ legislative
plate. If so, it is a matter that
Congress will be considering in a somewhat different setting than in 1998-99,
when the contest between the Fed and the Treasury over dominance in the
financial regulatory area resulted in some improvement in the Fed’s position
but fell far short of what the Fed had been seeking initially through the
financial modernization legislation (Gramm-Leach-Bliley) of 1999.
In 2001-02, the battle may be more equal in the sense that it will no
longer be possible to sweep the entire debate under the old rug of “just turf
warfare” (the Fed’s initial merchant banking fiasco makes this unlikely).
Also, the Fed’s performance as the central bank in the current economic
decline may mean, justifiably or not, that the Chairman’s remarkable position
of power in Washington will be somewhat diminished.
No matter how one views it, we
have come a long way during the last nine or ten weeks of summer, from focusing
on the question of whether FDIC insurance coverage for depositors should be
indexed to such questions as whether FDICIA should be reexamined and possibly
revised, or whether the Treasury or the Federal Reserve will be the dominant
financial institution in Washington. In
terms of public policy issues, the “forest” appears to have fully emerged
from the “trees.” But once
again, the first and most important question is whether Congress and the
Administration (particularly the Treasury) will recognize the challenge and face
up to it, or continue to ignore it.
As readers know, I have written on many occasions about the public policy
issues just mentioned. Accordingly,
I will offer in the sections that follow only cursory reviews of the substance
of the issues, focusing instead on recent developments and articles, several of
which I have already mentioned in this introductory portion.
Section I discusses the financing issues in the FDIC’s reform
proposals, but only to argue that they not be used to diminish the possibility
of fundamental reform of FDICIA. Section
II takes a new look at regulatory structure reform while Section III attempts to
tie a few loose strings together and offers some concluding observations.