The Brady Report
The Brady Report is the most recent thorough study, having been conducted by then Treasury Secretary Nicholas Brady. Entitled “Modernizing the Financial System: Recommendations for Safer, More Competitive Banks,” the report was submitted to Congress on Feb. 5, 1991 with no tangible results. Its major recommendations were:
• Having a bank and its BHC regulated and supervised by the same regulator. The Report recommended a “two federal regulator” approach: (1) the Fed would be responsible for all state chartered (including FDIC insured) banks and their BHCs; (2) a new federal regulator, the Federal Banking Agency (FBA), would be formed within the Treasury Department to take over the powers of the OCC and be responsible for all national banks and their BHCs (i.e., the supervision of BHCs of national banks would shift from the Fed to the Treasury Department); (3) where a BHC has both national and state banks, jurisdiction would go to the regulator of the largest bank in the system; and (4) the FBA would take over the responsibilities of the OTS (in effect, a de facto merger of the OTS into the OCC). The Fed and the FBA would mutually agree on regulatory policies, and the “states would offer a counterpoint to the two federal regulators by continuing to charter, regulate, and supervise state banks” (but without any real explanation of how this would work).
• Eliminating FDIC regulation and supervision of banks, while enhancing its authority to act as insurer. Under the report, the FDIC would no longer supervise banks, but would “administer the deposit insurance system, protect the safety and soundness of its insurance funds, and manage any resulting bank resolutions.” It would receive copies of all insured bank call reports and could examine troubled banks with the approval of the Fed or the FBA.
• Maintaining a meaningful role for the Fed. The Fed’s “ability to carry out monetary policy and discount window activities would be preserved, as would its capacity, in concert with the Treasury, to make the important systemic risk (“too big to fail”) judgments.”
As can be seen from the above history of bank regulatory studies, a common thread was clearly present: having a single federal bank regulator (whether a newly established entity or a strengthened OCC) supervise all national banks (and their BHCs) and possibly insured state banks.
When you consider all the underlying effort that went into these studies (including the Blueprint and GLB), it is hard to believe that an overall regulatory restructuring effort at this time would be starting from scratch. The main new ingredient is the impact of the financial services crisis and the ingredients that led to it (including the obvious regulatory failures).
Dual Banking System
Having a consolidated (i.e., consolidating the OCC, OTS, FDIC and the Fed) federal regulator (as currently under consideration by the administration and as recommended by a majority of the regulatory studies mentioned above) would undermine, according to a number of commentators (including the American Bankers Association), the dual banking system (DBS). A question: why do we need state banks and their 50 regulatory systems? What do they really add?
Currently, state banks are regulated by their state banking departments, the FDIC (if they are insured, which most are) and the Fed (if they are Federal Reserve members, a significant number are).
The arguments for a DBS include: the states’ regulatory systems and approaches deal with local situations, practices and customs; they promote competition and provide checks and balances; and they provide an alternative to a creeping federal bureaucracy.
These arguments did not seem to have much effect on the studies mentioned above, which generally relegated state regulatory authorities to secondary positions in the regulatory structures they proposed.
Best Approach
I agree that the best approach would be an overall and encompassing regulatory restructuring (including the establishment of a systemic risk regulator and a resolution regulator) as soon as possible (and hopefully before Dec. 31, 2009). However, this probably is not doable politically within this time frame.
There should be a reasonable possibility to put the Fed in place as the systemic risk regulator (although possibly with some other regulators as “partners”) and the FDIC as resolution regulator this year. While there seems to be considerable support for the FDIC (because that is what it currently does as far as banks are concerned), the Fed’s appointment may be a challenge (particularly in view of the positions of Mr. Dodd and Mr. Shelby and, probably, Mr. Frank) since there appears to be a general concern with giving the Fed too much power.
Conclusion
In my judgment, we should get the Fed (which appears to want the job) in place as quickly as possible as the sole systemic risk regulator (for all the reasons mentioned in my April 8 column) and the FDIC in place as the sole resolution regulator (at least for the banks and bank holding companies, including those investment banks that are in financial holding company systems) and, contemporaneously, or as soon thereafter as possible, the overall financial services regulatory system should be restructured and consolidated, based in part on all the underlying work and research done in connection with the regulatory studies mentioned above, the enactment of GLB, the Blueprint and the current financial services crisis to date.
In my view, we are not starting from scratch, but rather using the wealth of information, concepts and experience developed since 1947.
Clyde Mitchell is adjunct professor of banking law at Fordham Law School, and a former partner in the banking and financial services group at White & Case.
