Federal banking supervision is weekend because regulatory authority is shared by three agencies, according to a study released yesterday by the Senate Governmental Affairs Committee.
The study recommended that all bank supervision activities of the Federal Reserve Board, the Comptroller of the Currency and the Federal Deposit Insurance Corp. be combined into one overall bank regulatory agency.
Legislation to that effect has been introduced in Congress. Bank regulators, recognizing the difficulties of overlapping, earlier this year formed an inter-agency committee to standardize bank examinations.
The Senate committee study maintained that regulatory weaknesses show up most in three areas: examination of banks, bank merger activities and bank holding company ventures.
The study comes from the fifth volume of a six-volume study of federal regulation that has taken the committee two years to complete. Among areas studied by the committee were antitrust, health and safety, food and transportation.
The Comptroller of the Currency regulates the nation's 4,748 nationally chartered banks, the Federal Reserve Board regulates the 1,030 state-chartered banks that are members of the Federal Reserve system (by law all national banks are members), and the Federal Deposit Insurance Corp. regulates the remaining 8,590 banks.
Committee chairman Sen. Abraham Ribicoff (D-Conn.) said in a statement accompanying the report that the structure of "commercial banking regulation is unique. Nowhere else does a regulated industry have the opportunity to select its regulatory agency."
Yet a bank seeking a national charter, Ribicoff said, "is choosing the comptroller to be its regulator. A bank with a state charter seeking federal deposit insurance is choosing the FDIC to be its primary regulator. A state chartered bank which elects to join the Federal Reserve system is choosing the Fed to be its primary regulator."
The study noted that the three different agencies differ in their approach to regulation and that banks often change regulators to get various benefits such as lower reserve requirements, less stringent examinations or a more liberal approach.
The study noted that the Comptroller "spends substantially less time on each (bank) examination than either the Fed or the FDIC."
The study contended that bank examinations are "critically important" because they serve the "fundamental purpose of detecting as soon as possible any unsafe or unsound banking practices which, if allowed to continue, can ultimately lead to bank failure."
The three regulators may differ as to what they believe is an unsafe or unsound banking practice - which ultimately can lead to banks shopping for the regulator "that best suits their needs."
According to the committee study, of the 149 banks that were on the problem lists of the three agencies in 1970, 11 had switched regulators by 1976 "either to avoid enforcement action or to obtain lower reserve requirements."
The study maintained that one off-shoot of the ability of banks to switch regulators is that the banks to switch regulators is that the bank regulatory agencies compete to make their "regulation more attractive," to hold or attract clients.
The study said that banks have switched charters from state status to national status in order to take advantage of the more liberal merger posture adopted by the Comptroller of the Currency.
The study cited the case of Bankers Trust Co. of Columbia, S.C., which shifted an FDIC-regulated bank to a national bank on Oct. 15, 1973, acquired several banks, and then shifted back to state, non-Fed member status (that is, FDIC-regulated) 14 months later.
The bank did so, the study claimed, because the FDIC told the bank it would not approve the mergers.
"Faced with that information, they switched charters, secured the Comptroller's approval of their merger and then switched back to the FDIC's jurisdiction," the report said.
Even though the Federal Reserve Board has power to regulate activities by bank holding companies (corporations that have bank subsidiaries), the Fed can be circumvented.
The report noted that a bank holding company can use "its national bank subsidiary for the transaction, since the comptroller, who regulated the activities of the national bank, is often more likely to grant approval."