Federal Reserve Vice Chairman Preston Martin yesterday urged banks, savings and loan associations and other financial institutions to set up a self-policing system to protect the soundness of the U.S. financial structure.
"I want to raise the radical notion that it is time for the industry and regulatory bodies, both federal and state, to investigate with seriousness the feasibility of some kind of peer review or self governance," Martin said at a conference sponsored by the American Bankers Association.
Martin's remarks came as some critics of financial deregulation are contending the process has gone too far. They cite the collapse of Continental Illinois National Bank and several other financial institutions, the Ohio bank holiday last month, the failure of two government securities firms and the weakened condition of many savings and loans.
Changing economic conditions on top of deregulation have created the need for new types of reviews, Martin said. Price disinflation and deflation in some areas have affected loan quality, he noted, and some firms' aggressiveness in taking advantage of deregulation has led them into highly risky businesses.
Peer reviews have already been set up in the accounting profession and the nuclear power industry, Martin said.
Between 100 and 200 accounting firms are reviewed by their peers every year, but "the imposition of sanctions by one or another" of the public oversight boards "has been notable by its absense," Martin said. "Nevertheless, the accounting profession should be commended for its voluntary effort conducted by a professional organization and aimed at improving the quality of the auditing process."
Martin said financial institutions now require new techniques to ensure safety and stability in the future. "We have arrived at a crossroads in the banking business, which faces a future considerably different from the past," Martin said.
"The challenges and opportunities confronting banks will continue to increase and bankers will be expected to step up to greater leadership roles in maintaining safety and soundness in the changing banking industry," Martin continued. "Today's high-risk banking requires new approaches by the examiners. Industry self-interest, I would submit, also necessitates your involvement in self-regulatory and other solutions."