Bank Regulation: D'ej`a Vu - Again

`AT the federal level there should be only one examining authority for commercial banks.'' That's not a leaked quote from the forthcoming recommendations of the Bush administration for reform of the nation's system for regulation of its financial institution. It comes from the 1961 report of a ``Commission on Money and Credit.''

For decades, it has been obvious that the system for regulating the nation's commercial banks, mutual savings banks, and savings and loan associations is illogical, overly complex, and redundant. But facing a divided financial industry that jealously guards every prerogative and power, Congress has never managed comprehensive regulatory reform. Further, the banks and thrifts generally preferred a divided regulatory system. This ``divide and conquer'' approach, they believed, weakened the regulators and opened the door for stimulating competition between regulators in granting additional financial powers.

``It is not the way to run a banking systems,'' says Steven Felgran, a professor of finance at Northeastern University's business school. ``What we have is totally crazy.''

The banking committees of Congress always have legislation of some sort pending. It is one way of assuring that committee members receive sizable contributions from various financial industry political action committees. In the last 30 years, Congress has passed important legislation regulating bank holding companies and foreign banks. When the thrifts got into trouble in the early 1980s because of the deregulation of interest rates and rising interest rates, it gave these institutions wider investment powers in the hope of making them more viable financially. In hindsight, the change proved to be a mistake and the decision was reversed two years ago. But Congress has left the regulatory structure divided.

In about two weeks President Bush is expected to recommend the creation of a ``super regulator'' for banks, savings associations, and other financial services - perhaps in his State of the Union message. He will probably revive some of the proposals made by a commission on banking reform he headed as vice president early in the Reagan administration.

With the air of crisis in the banking industry and the debacle in the savings business, observers say there is perhaps a 50-50 chance of Congress actually taking some action.

The 1961 commission was set up by the Committee for Economic Development, a group sponsored by leading progressive businessmen, educators, and union leaders. The CED was far more influential three decades ago than it is today.

Headed by Frazar Wilde, chairman of the Connecticut General Life Insurance Company, the commission called for the Federal Reserve Board to take over the regulatory functions of the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (FDIC). The commission also recommended a second unified authority at the federal level for the examination of all federally insured savings and loan associations and mutual savings banks.

Mr. Bush is expected to recommend one regulator consolidating many functions of the Fed, the FDIC, the Comptroller, the Office of Thrift Supervision, and the National Credit Union Administration.

This, says Prof. Felgran, is ``an excellent idea.''

At the moment, tens of thousands of officials, examiners, lawyers, and other employees in some eight federal agencies and federally chartered corporations in Washington, plus scores of state authorities, regulate the financial industry.

Banks and thrifts are something special in the business world. They are caretakers of people's money. Their deposits are covered by government insurance. There is no way for the regulators or the banks themselves to assess accurately the value of many of the assets against which banks and thrifts make loans, such as real estate or businesses. Yet a threat to the financial system is a threat to the entire economy.

All this means banks can't be left entirely to the ``wonderful, wide world of free enterprise,'' as Felgran puts it. They must be regulated carefully. Perhaps this time Congress will agree with the Bush administration to do it more sensibly.