Forty-three years ago, I arrived in Washington from New York
City, fresh out of law school, to serve a clerkship on the U.S. Court of
Appeals. Washington has been my home ever since.
Washington has obviously changed over those four decades,
but one thing hasnt changed: every time someone new encounters our Byzantine
structure of financial regulation, they immediately want to overhaul it. As a
result, we have seen almost a score of studies, commissions, proposals, and
reorganization plans put forward over the past three or four decades.
Yet, as sensible and thoughtful as these initiatives may
have been, they have uniformly failed to get any traction. Just why this is so
is the main topic I want to discuss with you today. And if that doesnt get
your pulse racing, I want to finish up with a few comments on another current
topic predatory lending and preemption.
So let me start by posing this question: why has there been
so much chatter about our bank regulatory structure?
The answer to this is obvious: the current bank regulatory
structure offends all of our aesthetic and logical instincts. Its complicated;
its irrational; it probably has inefficiencies; and it takes a great deal of
explaining. Its a product of historical accident, improvisation, and
expediency, rather than a methodically crafted plan. It reflects the accretion
of legislative enactments, each passed at a very different time and under
very different circumstances in our history.
Given all of these criticisms over the years, its fair to
ask why we have not seen any change in the structure. Its certainly not for
trying. Major efforts were put forth in the Reagan and Clinton administrations
to rationalize the structure, but they never got very far off the ground. Yet
in a number of foreign countries the United Kingdom and Japan, for example
we have seen in recent years the creation of strong, independent financial
supervisory agencies, with consolidated jurisdiction over financial firms. Why
havent we been as enlightened?
There are a variety of very compelling reasons, I believe.
First, the system works. While it is far from perfect, at
its best it works extremely well. A variety of formal mechanisms and external
pressures have caused the agencies to work quite well together. To be sure,
there are examples of interagency rivalry, turf protection, and even
inconsistency that arise from time to time, but on the whole the agencies have
recognized the need to work together, to avoid inconsistencies, and to respect
one anothers jurisdictions and responsibilities. We clearly have an example of
a system that doesnt work at all in theory, but works well in practice.
Moreover, studies conducted over the years by the General Accounting
Office and others have repeatedly deflated the proposition that huge savings
would accrue from regulatory restructuring.
Instead, researchers have concluded that while there are some
redundancies and extra costs associated with multiple agencies, those costs are
located primarily in such back-office functions as human resources and
information technology, rather than in front-line supervision, where the lions
share of agency resources are spent.
Accordingly, the savings that might be realized from restructuring would
likely be quite modest.
Second, there has never been a public constituency for
change. Neither the banking industry itself which has learned to cope with
and take advantage of the current structure nor advocacy or interest groups
that are stakeholders in the system, have mounted any case for change. And
experience tells us that logic alone will generally not be enough of a catalyst
for major reform legislation; a public and political constituency is almost
always necessary.
But apart from these considerations, there have been, and
continue to be, two major reasons why regulatory restructuring has not gained
more momentum. The role of the Federal Reserve and the FDIC is one; the impact
on state banking systems is the other. Time after time, well-meaning proposals
for change have run into the intractable reality of having to deal with those
concerns.
Right at the outset of any consideration of restructuring
one must confront the question of what role the Federal Reserve should play in
bank supervision. While the Feds role as a supervisor was quite modest until
the expansion of its bank holding company jurisdiction in 1970, the Fed has
long and successfully argued that it must have a major presence in bank
supervision in order to obtain a window into the banking system as an adjunct
to its monetary policy and payments system responsibilities. Yet countries
around the world Great Britain, Japan, and now China, chief among them have
chosen to move precisely in the opposite direction, concluding that the central
bank cannot provide objective, independent bank supervision while discharging
its monetary responsibilities at the same time. Whos right? More importantly,
whats right for the United States? My
personal view is that we have it about right as it is although I believe very
strongly that bank supervision must focus on safety and soundness concerns, and
bank supervisors should not be looked to for the conduct of macroeconomic
policy.
The role of the FDIC in the supervisory framework is another
perennial issue. The FDICs role in insuring deposits and resolving failed
banks has provided it with a strong argument for involving itself in the
supervision of banks. But does the FDICs legitimate interest in minimizing
losses to the deposit insurance fund constitute justification for pervasive and
continuous involvement in day-to-day supervision of banks that are not in the
problem categories? Even more fundamentally, is the FDICs paramount interest
in minimizing losses with the aversion to risk that interest encourages
consistent with the responsibilities of balanced supervision?
To be sure, some would resolve these conflicts by
transferring all bank supervisory jurisdiction to the Fed or the FDIC. In
fairness, I dont think either of those agencies has seriously suggested this.
Without putting too fine a point on it, Ill just say that I do not share this
view. It would probably be immodest of me to expand on that at this time.
It is obvious, I think, that the present distribution of
bank supervisory authority creates some burdens for banks, not the least of
which is having to contend with visitations by examiners from different
agencies, frequently duplicating or ignoring one anothers work. I believe
this is a concern that needs continual attention, for if there was anything
that might galvanize the industry to support restructuring, it is likely to be
the annoyance and burden of such supervisory duplication.
Finally, there is the question of how any plan to rationalize
bank supervision would comport with a strong dual banking system. If the
federal bank supervisory agencies were consolidated into a single independent
agency, as many scenarios envision, with the federal supervision of state banks
being performed by the same agency that supervises national banks, charter
choice might be rendered all but meaningless. Banks ability to select the
system of supervision they deemed best suited to their needs would be
curtailed. Disparities in powers between state and national banks would become
untenable with a single federal agency presiding over both types of
institutions, and the pressure for uniformity would be very strong.
Perhaps the most significant question would be how such an
agency would be funded. Today, national banks bear virtually all of the costs
of their supervision, while state banks bear only about 20 percent of their
supervision costs the portion attributable to that supervision carried out by
the states themselves. As we are all aware, this disparity arises because the
Fed and the FDIC, with virtually bottomless pockets, subsidize the state banks
they supervise by absorbing all of the costs of their federal supervision. This
inequity could not possibly be perpetuated if all federal bank supervision were
vested in a single independent agency that didnt have the resources of the Fed
or the FDIC. Such an agency would either have to be supported by appropriations
which would be a bad idea, in my view or it would have to assess all of the
banks it supervised. Even if the agency for unified supervision were the Fed or
the FDIC, it is inconceivable that the present subsidy for supervision costs
could be limited to state banks. Since many supervisors of state banks at
both the state and federal levels -- have a pathological fear that equalizing
supervisory fees would cause massive conversions from state to national
charter, it is not surprising that they have opposed regulatory consolidation.
I recognize that some may view these remarks as a ringing endorsement
of maintaining the status quo. That is not my intention. I share the
intellectual interest in structural rationalization that the advocates exhibit.
But I think that any proposal, no matter how logical it might appear, must
address the fundamental political obstacles Ive been discussing before we
spend a lot more time spinning our wheels over still another iteration of an
idea that is showing distinct signs of age.
* * *
Now let me turn briefly to two related subjects that are
stirring up a lot of comment these days: predatory lending and preemption.
First, I want to state emphatically that there is no question that predatory
lending is a real concern. We have
ample evidence that people in many areas are being stripped of the equity in
their homes by a certain subspecies and I use that term in its most
pejorative sense -- of subprime lenders, overwhelmingly unregulated nonbanks.
Some 20 states have undertaken initiatives to address predatory lending, either
through statute or regulation. In a case thats drawn considerable attention, a
Georgia statute imposes severe restrictions on so-called high-cost mortgage
loans, requiring lenders who offer them to comply with a range of substantive
and procedural requirements.
Unfortunately, the passage of these laws has led to
considerable uncertainty about their applicability to national banks, which, as
you know, operate under a longstanding constitutional immunity from state laws
that purport to regulate the manner in which they conduct their banking
business an immunity repeatedly reaffirmed by the Supreme Court of the United
States, tracing back to the mid-19th century. The Office of Thrift Supervision has already
determined that the Georgia law is inapplicable to federally chartered savings
institutions and their operating subsidiaries, and the OCC is now reviewing
comments submitted in response to a request for a determination of that laws
applicability to national banks.
Unfortunately, the legal disputation over preemption tends
to distract us from the real question: how best to deal with the problem of
predatory lending in our communities, while ensuring that adequate credit remains
available on reasonable terms to mortgage customers at all income levels. The
nuances of preemption theory are unlikely to mean much to borrowers who either
have been burned by predatory lenders or denied credit in the first place.
I have several concerns about the across-the-board approach
that has been adopted, with the best of intentions, by some states. First, it
would inevitably add significant costs to banks that operate in many
jurisdictions, since they would have to bear the costs and risks of complying
with innumerable local laws costs that would ultimately be reflected in the
cost of credit. But even more of a concern is that such laws may actually have
the effect of making credit harder to come by for those who may most need it
and deserve it.
Evidence increasingly suggests this might already be
happening. Fannie Mae recently announced that it would not purchase mortgage
loans subject to the New York State and Georgia anti-predatory laws a
decision that will undoubtedly cause some contraction in credit availability to
subprime borrowers.
Recent analysis by economists, one of whom has been on the
OCC staff, of anti-predatory lending laws in Chicago and Philadelphia and in
North Carolina bears out this fear. In Chicago, a municipal law that applied
primarily to banks had the effect of driving more subprime mortgage lending
into the nonbank sector, which is precisely where predatory practices are most
prevalent. And a Philadelphia law that applied to all financial services
providers had the effect of reducing the availability of subprime mortgage
money generally. Similarly, it appears
that the North Carolina law decreased the availability of subprime credit in
the state.
Subprime credit is not the equivalent of predatory
credit. Indeed, the growth of our subprime credit market has made legitimate
credit available to families that may previously not have had access to credit.
Thus, any law that causes responsible lenders to exit the subprime market must
be viewed as problematic.
I think that the OCC has a better approach. Rather than
focusing on the features of particular loan products, we focus on
abusive practices on preventing them in the first place, attacking
them out where theyre found to exist, and providing restitution to those who
have been victimized by them.
Our emphasis on prevention has taken the form of
comprehensive guidance the only such guidance thats been produced by any
of the federal banking agencies -- instructing national banks on how to avoid
engaging in abusive or predatory practices. Rigorous, ongoing supervision and
oversight by OCC examiners is designed to make certain that this guidance is
followed. But when its not, we have not hesitated to use our enforcement
authority to combat unsafe, unsound, unfair, or deceptive practices. Indeed,
OCC enforcement actions have resulted in refunds totaling hundreds of millions
of dollars to consumers.
I believe that the OCCs approach to predatory lending not
only provides an effective remedy where abusive conduct has been found, but
avoids the overbroad and unintended adverse effects of one-size-fits-all laws.
Quite apart from the question whether state and local laws
threaten the unintended consequences of encouraging bank lenders to exit the
subprime lending market, there is the question whether such laws can
constitutionally apply to national banks. Since we presently have under
consideration a request for a preemption determination with respect to the
Georgia law, I will not discuss that issue directly. Suffice it to say that
preemption is a doctrine with almost 200 years of history and constitutional
precedent behind it. It is not an issue as to which we have a broad range of
discretion.
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The OCC charters, regulates and examines
approximately 2,100 national banks and 52 federal branches of foreign banks
in the U.S., accounting for more than 55 percent of the nations banking
assets. Its mission is to ensure a safe and sound and competitive national
banking system that supports the citizens, communities and economy of the
United States.
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