THE STRUCTURE OF FEDERAL REGULATION OF DEPOSITORY INSTITUTIONS (By Samuel B. Chase, Jr.*) INTRODUCTION This paper is concerned with the system of Federal regulation of depository institutions. Most of it is devoted to the regulation of commercial banks, a complex matter that has been the subject of considable controversy for many years. The paper also deals, but less extensively, with the desirability of integrating regulation of savings and loan associations with that of commercial and mutual savings banks. The issues addressed here are controversial, and for good reason: there are no certain answers. Regulation of commercial banks and thrift institutions can never be perfect, and disputes over the appropriate regulatory framework largely reflect differing judgements as to what imperfections are most to be feared. This paper endeavors to present. fairly the major considerations that must be weighed and, at places, presents my own judgements. When this project was begun, it was hoped that the paper could draw on, and evaluate, regulatory agency responses to a questionnaire submitted to them in mid-August, as part of the FINE study. Unfortunately, most of the material requested of the agencies was not available in time for use in this paper, although Federal Reserve Board responses to some of the questions were available and proved helpful. When they become available, the full responses will no doubt shed additional light on some of the questions addressed here. Background REGULATION OF COMMERCIAL BANKS The key organizational features of U.S. commercial bank regulation are (a) dual banking under which both the states and the national government charter and regulate banks, and (b) a complex division of Federal regulation of both national and insured State banks. This paper is directly concerned with whether Federal authority' should remain divided, not with dual-banking. It is often contended, however, that unified Federal authority would destroy dual banking, and this argument will be discussed later. For present purposes it is sufficient to note that the system of state chartering and supervision traces to New York's Free Banking Act of 1838. That legislation ended the previous practice of issuing bank *Consultant. Washington, D.C. Paper prepared for the Financial Institutions and the Nation's Economy (FINE) Study of the House Committee on Banking, Currency and Housing. charters only by special legislative act; under the new system, bank charters were to be issued by an administrator, on the condition that certain tests laid out in the law were met. Free banking spread rapidly to other states, and remains in effect throughout the nation today. Twothirds of the nation's more than 14,000 commercial banks are statechartered. They operate under state laws governing their organization and powers and are supervised by state banking agencies. Except for a handful of banks that are not members of the FDIC, they are also subject to Federal regulation. The Federal bank regulatory system is built on several statutes: 1. The National Currency Act of 1863 and the 1864 Act that replaced it, which has come to be known as the National Bank Act, established Federal chartering and supervision of national banks, and marked the origin of today's dual banking system. 2. The Federal Reserve Act of 1913 created the Federal Reserve System. This legislation, an outgrowth of the panic of 1907, is best known for establishing the present system of central banking. It also had as one of its purposes "to establish a more effective supervision of banks in the United States." Although the act requires all national banks to be members of the Federal Reserve System, membership for state-chartered banks is voluntary. The Federal Reserve Act represented the first incursion of Federal bank regulation into the affairs of state-chartered banks because it provided for regulation of state member banks by the Federal Reserve, and laid the basis for divided Federal authority in bank regulation. 3. The McFadden Act of 1927 requires national banks to conform with state branching laws, thereby ruling out or limiting branching by national banks in many states and effectively prohibiting interstate branching. 4. The banking legislation of the 1930s, among other things, established Federal deposit insurance; separated commercial banking from the underwriting and marketing of private securities; and provided for other restraints on banking practices, including controls over deposit interest rates. Originally the law required that all Federally insured banks eventually become members of the Federal Reserve System. That requirement was eliminated in 1939, leaving insured nonmember banks to be supervised by the FDIC, and thereby producing today's three-way split of Federal authority. Since almost all commercial banks are insured, the Federal regulatory presence is nearly all-embracing. 5. The Bank Holding Company Act of 1956 imposed Federal regulation on companies that controlled two or more banks. It placed all regulatory powers over these companies in the Federal Reserve Board, but left unchanged the division of responsibility for oversight of subsidiary banks. 6. The Bank Merger Act of 1960, as amended in 1966, requires mergers involving insured banks to receive prior approval of one of the three Federal banking agencies. Amendments to the Bank Holding Company Act passed in 1966 require similar prior approval of acquisitions of banks by holding companies, but in this case, jurisdiction is lodged solely in the Federal Reserve. 7. The 1970 amendments to the Bank Holding Company Act of 1956 bring all holding companies (including those that control only one bank) under the regulatory jurisdiction of the Federal Reserve, regardless of which agency is the "primary" Federal regulator of subsidiary banks. Extension of the Act to cover one-bank holding companies vastly increased the number of companies and subsidiaries subject to Federal Reserve regulation. The Federal commercial bank regulatory system that rests on these statutes may be summarized as follows: 1. The Comptroller of the Currency charters and supervises national banks, authorizes domestic branches where permitted by state law, and must approve all mergers where the surviving bank is a national bank. 2. The Federal Deposit Insurance Corporation insures all national banks and state-member banks. It supervises all insured state non-member banks (including mutual savings banks), and must approve all mergers where the surviving bank is a state non-member. 3. The Federal Reserve System supervises all state member banks. In a number of cases its regulatory powers and responsibilities extend to national banks as well. It approves, and issues regulations covering, all foreign branches, and as well. It approves, and issues regulations covering, all foreign branches of member banks, whether they have national or state charters and charters and regulates international "Edge Act” subsidiaries of all banks. The Federal Reserve Board has jurisdiction over all mergers where the surviving bank is a state member bank. 4. The Federal Reserve Board regulates all bank holding companies. It determines permissible nonbank activities within general statutory guidelines, and must approve all formations of bank holding companies and all acquisitions of bank and nonbank subsidiaries. Roughly 1,700 registered bank holding companies today control nearly 4,700 commercial banks, including all of those with assets of more than $3 billion at mid-1975. Holding company banks account for over two-thirds of total assets of U.S. commercial banks. Despite the fact that a majority of holding company banks are either national banks or non-member banks, the Federal Reserve at times exercises substantial de facto power over the affairs of subsidiary banks through its ability to withhold approvals of applications under the Bank Holding Company Act. 5. The individual states charter banks, determine whether branching will be allowed within their borders, and in some cases regulate bank holding companies. The Bank Holding Company Act allows individual states to keep out-ofstate holding companies from acquiring banks within their borders, by permitting interstate acquisitions only where “specifically authorized by the statute laws of the State" in which the bank to be acquired is located. The accompanying table shows, by deposit size at the end of 1974, the distribution of the nation's commercial banks according to their status under Federal regulation. It does not reflect the overlapping jurisdiction of the Federal Reserve under the Bank Holding Company Act. The overlapping is substantial; for example, over 2,000 national banks are subsidiaries of bank holding companies. The preceding discussion does not fully portray the complexity of Federal bank regulation, largely because it fails to enumerate a number of cases of overlapping jurisdiction. It does, however, reveal the features that have generated the most meaningful controversies-sideby-side existence of state and national banks; a division of Federal authority that gives banks options to change primary Federal regulators by changing either their charter status (state or national) or their Federal Reserve membership status; and the overlay of unified Federal Reserve regulation of bank holding companies and, within limits, their banking subsidiaries. NUMBER OF COMMERCIAL BANKS, GROUPED BY CLASS AND DEPOSIT SIZE, DECEMBER 31, 1974 Note: Deposit size classifications based on domestic deposits only; most banks with material amounts of foreign deposits are in the largest size group. Source: Annual Report of the Federal Deposit Insurance Corporation, 1974, Table 104, p. 199. |