Statements to the Congress.Statement by Susan M. Phillips, Member, Board of Governors of the Federal Reserve System Board of Governors of the Federal Reserve System
The managing body of the Federal Reserve System, which sets policies on bank practices and the money supply. , before the Subcommittee sub·com·mit·tee
A subordinate committee composed of members appointed from a main committee.
Noun on Capital Markets, Securities and Government-Sponsored Enterprises of the Committee on Banking and Financial Services The examples and perspective in this article or section may not represent a worldwide view of the subject.
Please [ improve this article] or discuss the issue on the talk page. , U.S. House of Representatives, April 18, 1996
I am pleased to appear before this subcommittee on behalf of the Federal Reserve Board to provide comments on the Entrepreneurial Investment Act of 1996, a bill proposed by Chairman Baker. At his request, the Board staff provided technical assistance in the drafting of the bill.
This bill would permit smaller bank holding companies to provide limited equity capital to customers of the subsidiary banks. Specifically, bank holding companies of less than $1 billion in assets, all of whose subsidiary banks were well capitalized, could invest in the equity of those of their customers with whom they have had a "significant" debt relationship for at least a year. The individual equity investments in these firms could not exceed 25 percent of the voting shares Voting Shares
Shares that give the stockholder the right to vote on matters of corporate policy making as well as who will compose the members of the board of directors.
Different classes of shares, such as preferred stock, sometimes don't allow for voting rights. of the firm; the holding company could not take an active part in the management of the firm in which it held equity; and the subsidiary banks or other depository institution Depository institution
A financial institution that obtains its funds mainly through deposits from the public. This includes commercial banks, savings and loan associations, savings banks and credit unions. subsidiaries could not hold any of the stock. The aggregate amount of this equity investment could not exceed half of the amount by which the subsidiary banks' capital exceeded the well-capitalized minimum.
The bill prohibits joint marketing of the products of the banking organization and the firms in which the bank holding company invests. For prudential reasons, the Board would have to provide one-time approval for a banking organization to initiate such investments, and the Board could supervise and regulate this activity, as well as require divestiture The breakup of AT&T. By federal court order, AT&T divested itself on January 1, 1984 of its 23 operating companies, which became known as the Regional Bell Operating Companies (RBOCs). if it concluded such action was necessary to preserve the safety and soundness of the insured depository The place where a deposit is placed and kept, e.g., a bank, savings and loan institution, credit union, or trust company. A place where something is deposited or stored as for safekeeping or convenience, e.g., a safety deposit box. subsidiaries. Should the banks' capital decline, the Board could take action to preserve the safety and soundness of the subsidiary insured depository institutions, including requiring divestiture by the parent holding company of shares already held. The bank holding company would be required quarterly to mark the shares to market value, if possible, and if the shares are not traded, to mark them to the lower of their acquisition price by the holding company or their book value as measured by the firm's balance sheet.
Banking organizations already are involved in similar activities under provisions of existing law. For example, under existing statute and regulation, all bank holding companies have for some time been able to acquire passive equity investments in any company of up to 5 percent of the voting shares and up to 24.9 percent of the total equity in a combination of voting and nonvoting stock Nonvoting stock
A security that does not entitle the holder to vote on the corporation's resolutions or elections.
nonvoting stock . There are no limits on the total amount of equity investments that can be made under these provisions. The bill before you also permits 25 percent of the equity of a company to be purchased--although all could be voting--but there are prudential limits on the total amount of equity purchases.
Under existing interpretations of law, national banks may--in addition--take so-called equity kickers Equity kicker
Stock warrants issued attached to a new debt, preferred or common stock issue to improve the salability of the issue.
equity kicker as part of loan agreements. That is, the bank may take part or all of its interest on a loan in the form of options or warrants for voting stock Voting stock
The shares in a corporation that entitle the shareholder to vote.
Stock for which the holder has the right to vote in the election of directors, in the appointment of auditors, or in other matters brought up at the or profit sharing profit sharing, arrangement by which employees receive, in addition to their wages, a share of the net profits of a business. The purpose is to give them an incentive to increase their output through enhanced morale, less wasteful use of materials, better care of . There is no limit on the percentage of the borrowers' shares that may be the subject of these equity kickers. It is our understanding that such equity kickers are increasingly being used, with the options or warrants sold into the market or exercised by a nonbank non·bank
Of, relating to, or done by a business or an institution that is not a bank but performs similar services. affiliate. In a number of states, state banks are permitted, under state law and the Federal Deposit Insurance Act, to participate in real estate investments and various types of equity securities through subsidiaries of the bank. Moreover, a national bank itself or any bank holding company already can invest up to 5 percent of its capital in a small business investment company that, in turn, can own up to 49 percent of the voting shares of any small business; the banking organization can also make loans to those businesses. In addition, national banks can invest up to 10 percent of their capital in Community Development Corporations that also take equity positions in companies designed to provide jobs in, or otherwise help improve, low- and moderate-income neighborhoods.
Finally, the Financial Services Competitiveness and Regulatory Relief Act of 1995 would permit any bank holding company with a securities subsidiary to purchase all of the equity of any company, so-called merchant banking investments. This bill, sponsored by Chairman Leach, would require such investments to be passive, but there is no limit in the statute on the aggregate amount of such investments. The bill this subcommittee is considering also requires the investments to be passive but limits the amount of both the individual and aggregate equity investments. Moreover, the bill does not require these small holding companies to have a securities subsidiary in the holding company as a prerequisite pre·req·ui·site
Required or necessary as a prior condition: Competence is prerequisite to promotion.
n. for engaging in limited equity financing Equity Financing
The act of raising money for company activities by selling common or preferred stock to individual or institutional investors. In return for the money paid, shareholders receive ownership interests in the corporation. activities.
Banking organizations are in the business of taking risks; that is their economic purpose. But the Congress and the banking regulators have to be concerned about excessive risk. We thus support the provisions that require the Board of Governors to supervise and regulate this activity. But we should be clear that the authority to require divestitures may not provide the relief anticipated because these shares, as I noted, may not be readily marketable. We would consider using our authority to take a close look at the desirability of limiting the sum of loans to, and equity investments in, a single firm to guard against excessive concentration of risk in the banking organization.
The provisions of the bill before you recognize the inherent riskiness of equity investments by smaller bank holding companies and call for the prudential limits I have summarized. But, in a spirit of caution, and in recognition of future business cycles, the subcommittee might want to consider additional prudential provisions:
* Require that all the subsidiary banks not only be well capitalized, but also rated CAMEL camel, ruminant mammal of the family Camelidae. The family consists of three genera, the true camels of Asia (genus Camelus); the wild guanaco and the domesticated alpaca and llama, all of South America (genus Lama 1 or 2, as a prerequisite to equity purchases by the holding company. Capital ratios generally are acceptable screens, but asset quality, management, asset diversification Diversification
A risk management technique that mixes a wide variety of investments within a portfolio. It is designed to minimize the impact of any one security on overall portfolio performance.
Diversification is possibly the greatest way to reduce the risk. , and other factors also play a role. The addition of this provision would make very little difference in the number of bank holding companies that would be eligible to purchase equity now, but it could in the future.
* Require that the parent holding company (as well as all the subsidiary banks) be well capitalized before it could make an equity investment. Such a provision would have a significant effect on many quite small bank holding companies. The Federal Reserve does not apply risk-based standards to parent bank holding companies with assets of less than $150 million. Many of these parents borrow heavily to finance the equity of the subsidiary banks. As a result of this so-called double leverage, many of the parents do not have very much, if any, capital in excess of the well-capitalized minimum. Note that adding this provision would mean that minimum capital requirements Capital requirements
Financing required for the operation of a business, composed of long-term and working capital plus fixed assets. would be applied to small bank holding companies only for purposes of investing in stocks under the bill.
* Limit the equity investments of eligible banking organizations to 50 percent of the capital in excess of the well-capitalized minimum standard of the subsidiary banks (as in the bill) or 50 percent of the capital in excess of the well-capitalized minimum standard for bank holding companies, whichever is smaller. Our best estimate is that applying this and the previous suggestion would reduce the permissible per·mis·si·ble
Permitted; allowable: permissible tax deductions; permissible behavior in school.
per·mis maximum aggregate equity investment quite sharply at the smallest banking organizations whose parent holding company capital is not as strong as at other small banking organizations. Banking organizations with more than $150 to $200 million of assets would not be affected very much.
These suggestions are designed to minimize the risk that could occur with equity investments by smaller bank holding companies. They may sound excessively prudent but seem to us desirable because of the limited experience of equity purchases by smaller banking organizations. The Board believes that its suggestions for revisions would not be in significant conflict with the purpose of the bill.
Statement by Lawrence B. Lindsey Lawrence B. Lindsey was Director of the National Economic Council (2001-2002), and the Assistant to the President on Economic Policy for the U.S. President George W. Bush. He played a leading role in formulating President Bush's $1. , Member, Board of Governors of the Federal Reserve System, before the Subcommittee on Financial Institutions and Consumer Credit of the Committee on Banking and Financial Services, U.S. House of Representatives, April 25, 1996
The Board of Governors of the Federal Reserve System appreciates this opportunity to comment on issues concerning fees imposed on electronic fund transfers at automated teller machines automated teller machine (ATM), device used by bank customers to process account transactions. Typically, a user inserts into the ATM a special plastic card that is encoded with information on a magnetic strip. (ATMs). ATM fees have received considerable attention recently and are the subject of bills introduced in the House by Representatives Charles E. Schumer and Bernard Sanders San´ders
n. 1. An old name of sandalwood, now applied only to the red sandalwood. See under Sandalwood. .
This hearing is focusing on an examination of the existing ATM fee structure, the current regulatory scheme regarding surcharges, and the potential impact of these charges. The existing fee structure has been, or will be, addressed by witnesses representing the industry, who are better able to provide current detailed information on the subject. I will tell you about the regulatory scheme concerning fee disclosure under the Electronic Fund Transfer Act (EFTA EFTA: see European Free Trade Association. ), which the Board is responsible for implementing; provide some data about consumer complaints, the level of compliance with the EFTA found in bank examinations, and the incidence and amount of ATM transaction fees reported in Federal Reserve surveys; and make some observations about the legislative proposals.
Let me start by differentiating between two categories of ATM fees: fees charged by a financial institution to its own customers for use of ATMs and fees charged directly to a consumer by another ATM owner or operator for use of its machines. This latter type of fee is sometimes referred to as an ATM surcharge An overcharge or additional cost.
A surcharge is an added liability imposed on something that is already due, such as a tax on tax. It also refers to the penalty a court can impose on a fiduciary for breaching a duty. .
The Federal Reserve does not have any direct information on ATM surcharges; we do have data on ATM fees charged by institutions to their own customers. Fees charged to a consumer by the account-holding institution can include fees charged for the use of the institution's own ATMs and fees charged for use of ATMs operated by others. Our studies show that a relatively small number of financial institutions charge customers for use of the institution's own ATMs. Data developed for the Board's Annual Report to the Congress on Retail Fees and Services of Depository Institutions indicate that in 1995, 9.6 percent of banks charged their customers fees for cash withdrawals at the banks' own ATMs; the fee amount averaged $0.61. Among savings associations, 8.8 percent charged their customers, with a fee averaging $0.65.
The more common, and long-standing, practice is to charge customers for use of other institutions' ATMs--so-called nonproprietary ATMs. ATM networks charge account-holding institutions for handling transactions that their customers initiate at a nonproprietary ATM, and the institutions often pass on to their customers all or a portion of the network charge or impose a flat fee for such transactions. Again referring to the Board's study of retail fees and services, for cash withdrawals from nonproprietary ATMs in 1995, the percentage of institutions that charged their customers was higher: 85.3 percent for banks, with fees averaging $1.03, and 83.1 percent for savings associations, with fees averaging $0.97.
The trend in the incidence and level of charges has generally been upward. In 1990, 61.7 percent of banks charged their customers for use of nonproprietary ATMs; the fees averaged $0.90. For savings associations in 1990, 40.3 percent charged their customers fees that averaged $0.85.
In the past, ATM operators were limited to recovering costs through network agreements; generally they could not impose surcharges directly on ATM users. Until recently, Visa and MasterCard rules prohibited pro·hib·it
tr.v. pro·hib·it·ed, pro·hib·it·ing, pro·hib·its
1. To forbid by authority: Smoking is prohibited in most theaters. See Synonyms at forbid.
2. surcharges at ATMs in the networks they operate. In some areas the regional ATM network rules prohibited surcharges. A few states enacted limits on surcharges, without prohibiting them outright. ATM surcharges could be imposed in approximately fifteen states in which state law explicitly disallowed the prohibitions in network rules.
Visa and MasterCard have now repealed their prohibitions on ATM surcharges, effective April 1. Thus, many financial institutions that could not previously do so are now permitted to impose surcharges on ATM users, and some institutions have opted to impose such a fee. Because the consumer pays an ATM surcharge in addition to any fee imposed by the consumer's own account-holding bank for use of nonproprietary ATMs, a question has been raised about whether the fees are adequately disclosed to the consumer.
The EFTA and Regulation E require debit card debit card, card that allows the cost of goods or services that are purchased to be deducted directly from the purchaser's checking account. They can also be used at automated teller machines for withdrawing cash from the user's checking account. issuers to disclose fees they charge for ATM and other electronic transactions. Disclosures are given at the time a consumer opens an account or signs up for an EFT eft: see newt.
(Electronic Funds Transfer) The transfer of money from one account to another by computer. See ACH.
EFT - electronic funds transfer service and on periodic statements, typically monthly, of account activity. If an institution later increases the fees charged, it must provide a notice of the change twenty-one days in advance. Under Regulation E, these disclosures must be provided in a written, clear, and readily understandable form.
An account-holding bank is not required to disclose ATM surcharges imposed by others because it would be impractical im·prac·ti·cal
1. Unwise to implement or maintain in practice: Refloating the sunken ship proved impractical because of the great expense.
2. to monitor and disclose the dollar amount of a surcharge that might be imposed at any given time by some other financial institution nationwide. However, the EFTA and Regulation E do require disclosure of a surcharge at the ATM. The surcharge must appear on a sign posted at the ATM. Alternatively, the ATM operator has the option of displaying the fee on the terminal screen (instead of a sign) provided consumers are given the option to cancel the transaction after having received notice of the fee. In addition, surcharges must also be disclosed after the ATM transaction on the terminal receipt. Although the receipt disclosure generally comes after the transaction has been completed, the sign or screen requirement is designed to give machine users advance notice of the imposition of the fee and an opportunity to avoid the fee.
The EFTA provides for civil liability for violations in the amount of actual damages Noun 1. actual damages - (law) compensation for losses that can readily be proven to have occurred and for which the injured party has the right to be compensated
compensatory damages, general damages plus punitive damages Monetary compensation awarded to an injured party that goes beyond that which is necessary to compensate the individual for losses and that is intended to punish the wrongdoer. of between $100 and $1,000 in an individual action, or up to $500,000 or 1 percent of the defendant's net worth in a class action, together with court costs court costs n. fees for expenses that the courts pass on to attorneys, who then pass them on to their clients or, in some kinds of cases, to the losing party. and attorneys' fees. The act also provides for criminal liability ($5,000 fine or one year imprisonment Imprisonment
See also Isolation.
former federal maximum security penitentiary, near San Francisco; “escapeproof.” [Am. Hist.: Flexner, 218]
German prison ship in World War II. [Br. Hist. , or both) for knowing and willful Intentional; not accidental; voluntary; designed.
There is no precise definition of the term willful because its meaning largely depends on the context in which it appears. violations.
It is our understanding that in addition to the EFTA and Regulation E, a number of state laws, as well as the MasterCard and Visa operating rules, require disclosure of ATM surcharges.
Data on examinations of financial institutions show general compliance with Regulation E. For each of the years 1993, 1994, and 1995, for instance, the five federal financial institution regulatory agencies regulatory agency
Independent government commission charged by the legislature with setting and enforcing standards for specific industries in the private sector. The concept was invented by the U.S. reported that 90 percent of institutions examined were in full compliance with Regulation E. There appear to be few violations involving fee disclosures. The data for state member banks of the Federal Reserve System show that out of 1,943 banks examined during the period January 1, 1993, to the present, twenty were cited for failing to disclose EFT fees in the initial disclosures; one institution failed to properly disclose EFT fees on a periodic statement; and four institutions were cited for failing to comply with the change-in-terms notice requirement (but it is not clear that these occurrences involved a change in EFT fees). No institutions were cited for failure to provide the proper notices at their ATMs.
Consumer complaint data also suggest few problems with electronic fund transfers generally. For example, in 1994, the Federal Reserve System received 1,177 complaints against state member banks; of these, twenty-seven related to EFT services. One of them involved EFT fees (but not at ATMs). Similarly? in 1995, the Federal Reserve System received a total of 1,238 complaints against state member banks; thirty-nine dealt with EFT services. Again, only one complaint concerned EFT fees (and the complaint did not concern use of an ATM). Of all consumer complaints--involving both state member banks and other types of institutions--received by the Federal Reserve over the past five years, only ten involved EFT fees, and only four of these related specifically to ATM fees.
The subcommittee has requested that we comment on the proposed legislation. H.R.3246, the "ATM Fee Disclosure Act of 1996," has been introduced by Representative Schumer. The bill would amend the EFTA to require disclosure at ATMs of all fees imposed in connection with a transaction by any person, whether the ATM operator, the account-holding institution, or a national, regional, or local network. We believe that because Regulation E, network operating rules, and laws in ,a number of states already require fee disclosures, the proposed legislation may be unnecessary. As I mentioned, Regulation E requires disclosure of a surcharge by the ATM operator at the time of the transaction and requires disclosure of fees imposed by the account-holding institution in the initial disclosures, in periodic statements, and in notices of changes in terms for fee increases.
There is a real question whether it is operationally feasible for an operator of an ATM to disclose fees imposed by the thousands of account-holding institutions whose customers have access to the ATM. Fees vary, and there is no practical way for the ATM operator to find out the fee amounts imposed by all institutions so as to comply with the proposed disclosure requirements. The ability to access funds through ATMs in almost any location nationwide is a valuable benefit to consumers; the costs of compliance with the requirements of the legislation, or the potential liability for failure to comply, could tend to discourage expansion of this service.
H.R.3246 would require disclosure of fees not only at ATMs operated by persons other than the consumer's institution but also at ATMs of the consumer's own institution. This latter type of transaction does not, by definition, involve a surcharge, only a charge imposed by the consumer's bank. As I mentioned earlier, this type of charge is imposed by relatively few banks and is not a new development. Consumers are likely fully aware of the charge, given that disclosure is required under Regulation E.
H.R.3221, the "Electronic Fund Transfer Fees Act of 1996," introduced by Representative Sanders, would amend the EFTA to totally prohibit pro·hib·it
tr.v. pro·hib·it·ed, pro·hib·it·ing, pro·hib·its
1. To forbid by authority: Smoking is prohibited in most theaters. See Synonyms at forbid.
2. ATM surcharges. In general, the Board believes that substantive limitations on prices, if adopted at all, are better left to state legislatures A state legislature may refer to a legislative branch or body of a political subdivision in a federal system.
The following legislatures exist in the following political subdivisions:
There is also the possibility that a surcharge prohibition may be ineffective in keeping costs to consumers down. The network charge imposed on the account-holding bank is generally shared by the network with the operator of the ATM. ATM operators, if unable to impose surcharges, may be able to negotiate for an increase in the amounts received from networks, and such an increase could be passed on (via the account-holding bank) to consumers.
In conclusion, the Board believes that consumers benefit substantially from the availability of regional, nationwide, and worldwide ATM service. The Board also believes that the current disclosure scheme provides adequate and straightforward information to consumers about ATM fees. Although the level of fees paid by consumers for bank services is a matter of importance for consumers, competition in the marketplace--when combined with clear and full disclosure to consumers of fees--should be sufficient to keep fees at a level commensurate com·men·su·rate
1. Of the same size, extent, or duration as another.
2. Corresponding in size or degree; proportionate: a salary commensurate with my performance.
3. with the value provided in return and to give consumers a range of choices.
Statement by Edward W. Kelley, Jr., Member, Board of Governors of the Federal Reserve System, before the Committee on Banking and Financial Services, US. House of Representatives, April 30, 1996
I am pleased to be here today to discuss with you issues concerning the supervision and regulation of the U.S. banking system. Let me begin by pointing out that the overall condition of the American banking system is very strong. At home and abroad, U.S. banks are viewed as highly competitive, extremely innovative, and financially sound.
The focus of these hearings, as I understand it, is the effectiveness of the current regulatory structure and the desirability of changing the regulatory and supervisory structure for insured depository institutions, an issue considered by the Congress two years ago. You have asked several questions that I want to respond to, but first I would like to indicate that the Board believes that it is important to keep certain principles in mind as we assess the need for changes in the U.S. bank supervisory system.
First, the federal supervisory system should complement market evolution, and adjustments to its structure should follow, not precede, changes in the structure of the banking system that will result from statutory and regulatory proposals to alter substantially the powers of banking organizations. I need not explain to this committee how the forces of technological change and globalization globalization
Process by which the experience of everyday life, marked by the diffusion of commodities and ideas, is becoming standardized around the world. Factors that have contributed to globalization include increasingly sophisticated communications and transportation of financial markets are blurring traditional distinctions between financial institutions that we all once took for granted. Thus there is an urgent need to modernize mod·ern·ize
v. mo·dern·ized, mo·dern·iz·ing, mo·dern·iz·es
To make modern in appearance, style, or character; update.
To accept or adopt modern ways, ideas, or style. the U.S. banking structure. Among the more important modifications in structure being considered, now that the Congress has taken action to allow interstate in·ter·state
Involving, existing between, or connecting two or more states.
One of a system of highways extending between the major cities of the 48 contiguous United States.
Noun 1. banking and branching, are those dealing with a new charter for thrift institutions Thrift institution
An organization formed as a depository for primarily consumer savings. Savings and loan associations and savings banks are thrift institutions. and new activities for banking organizations. Repeal The Annulment or abrogation of a previously existing statute by the enactment of a later law that revokes the former law.
The revocation of the law can either be done through an express repeal of the Glass-Steagall Act's separations of commercial and investment banking and authorization of insurance activities for banking organizations are the most important changes being considered by the Congress.
Each of these proposals raises complex matters of regulatory structure. Once these issues have been resolved, then we will have a better idea of what changes are needed in our supervisory system. In the meantime Adv. 1. in the meantime - during the intervening time; "meanwhile I will not think about the problem"; "meantime he was attentive to his other interests"; "in the meantime the police were notified"
meantime, meanwhile , it seems premature to make any far-reaching decisions altering the structure of our bank and financial supervisory system. Such changes could easily prove to be a poor fit once industry restructuring restructuring - The transformation from one representation form to another at the same relative abstraction level, while preserving the subject system's external behaviour (functionality and semantics). takes place. In the interim, the existing regime seems to be sufficiently effective so as not to require legislative changes.
As a matter of principle, we should also guard against the unintended extension of the safety net, an issue that has been of long-standing concern to the Board, the Congress, and many observers of, and participants in, the U.S. financial system. The Board is of the view that the business risks from securities and most other financial activities are manageable for banking organizations. However, we must not forget a more subtle and corrosive corrosive /cor·ro·sive/ (kor-o´siv) producing gradual destruction, as of a metal by electrochemical reaction or of the tissues by the action of a strong acid or alkali; an agent that so acts. risk. The federal safety net--deposit insurance, the discount window, and access to Fedwire--creates moral hazard Moral Hazard
The risk that a party to a transaction has not entered into the contract in good faith, has provided misleading information about its assets, liabilities or credit capacity, or has an incentive to take unusual risks in a desperate attempt to earn a profit before the , risk of loss to taxpayers, and--importantly--a competitive advantage over firms that do not have safety net protection. That safety net reflects society's need to reduce systemic risk Systemic Risk
Risk common to a particular sector or country. Often refers to a risk resulting from a particular "system" that is in place, such as the regulator framework for monitoring of financial_institutions. and its desire to protect small depositors, but the line at which that safety net is drawn is important for minimizing moral hazard and maintaining both market discipline and competitive markets. The Board continues to believe that the holding company structure creates the best framework for limiting the transference TRANSFERENCE, Scotch law. The name of an action by which a suit, which was pending at the time the parties died, is transferred from the deceased to his representatives, in the same condition in which it stood formerly. of the subsidy provided by the safety net. We have concluded that the further the separation of new activities from the bank the better the insulation. The present regulatory structure supports this notion.
Another important principle is to preserve the dual banking system, which has served the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. so well. The current federal regulatory structure supports the dual banking system by linking the federal regulator regulator,
n the mechanical part of a gas delivery system that controls gas pressure that allows a manageable flow of drug vapor to escape.
see reducing valve. to charter class. The dual system has facilitated diversity, inventiveness Inventiveness
(287–212 B. C.) invented military engine which saved Syracuse. [Gk. Hist.: Hall, 31]
Bell, Alexander Graham
(1847–1922) inventor of telephone (1876). [Am. Hist. , and flexibility in American banking, characteristics that are vital to a market economy subject to rapid change and challenge. It has also provided a safety valve safety valve, device attached to a boiler or other vessel for automatically relieving the pressure of steam before it becomes great enough to cause bursting. to protect against the potential for inflexible federal and state positions. The most recent example is the evolution of interstate banking, an evolution that was begun by the states in the mid-1970s and was well advanced by the time federal laws were revised. Such state actions also provide arenas for limited experiments in financial reform, experiments that can provide valuable insights for designing policies at the federal level. The Federal Reserve Board believes that any actions taken by the Congress to change the federal bank supervisory system must be designed in a way that preserves the vitality of the dual banking system. In the supervisory process, the Federal Reserve and the Federal Deposit Insurance Corporation Federal Deposit Insurance Corporation (FDIC), an independent U.S. federal executive agency designed to promote public confidence in banks and to provide insurance coverage for bank deposits up to $100,000. (FDIC FDIC
See: Federal Deposit Insurance Corporation
See Federal Deposit Insurance Corporation (FDIC). ) have already arranged in a large number of states extensive sharing arrangements with state authorities, eliminating examination duplication duplication /du·pli·ca·tion/ (doo-pli-ka´shun)
1. the act or process of doubling, or the state of being doubled.
In considering the need to revise the current regulatory structure, it is important to clarify the nature of the concerns. The period of most vocal criticism of the regulatory structure by banks was exactly the interval when those organizations were suffering the most significant financial stress in more than fifty years. It is understandable that clashes between those responsible for safety and soundness and those experiencing financial reversals would result in criticism by each of the other. It is instructive in·struc·tive
Conveying knowledge or information; enlightening.
in·structive·ly adv. to note that as banking conditions improved, criticisms of supervisors and the supervisory structure have receded. Nevertheless, the earlier period of conflict exposed a number of inefficiencies in the current regulatory system. As I shall discuss in a moment, the regulatory agencies have, in particular, attempted to address the burden of regulatory overlap and to increase coordination of efforts, major concerns highlighted in the late 1980s and early 1990s. However, before doing so, it is important to clarify the dimensions of the existing overlap in bank supervision and to consider whether realignment re·a·lign
tr.v. re·a·ligned, re·a·lign·ing, re·a·ligns
1. To put back into proper order or alignment.
2. To make new groupings of or working arrangements between. of supervisory responsibilities would in fact reduce the supervisory burden on depository institutions.
About 40 percent of banking and thrift thrift: see leadwort. organizations are subject to only one federal regulator: the independent banks and thrift organizations and the holding companies whose subsidiaries are state member banks. A significant proportion of the statistical measure of multiple supervision among the remaining entities reflects the Federal Reserve's jurisdiction over holding company parents with national or state nonmember bank Nonmember bank
Depository institution that is not a member of the Federal Reserve System. Specifically, a state-chartered commercial bank that has elected not to join the System. and thrift subsidiaries. However, most holding company parents do not engage in significant, if any, nonbank activity, and these so-called shell holding companies thus have always been subject to only minimal onsite supervision by the Federal Reserve. If we remove the shell holding companies from the statistics, the proportion of depository institutions supervised essentially by a single federal regulator increases from about 40 percent to more than 75 percent. Moreover, consolidated bank holding company organizations generally have a quite small proportion of their depository institutions' assets supervised by an agency other than the one responsible for their lead bank. In those remaining, one-fourth of institutions with multiple supervisors (for example, a holding company with a national bank subsidiary supervised by the office of the Comptroller of the Currency The Office of the Comptroller of the Currency (or OCC) was established by the National Currency Act of 1863 and serves to charter, regulate, and supervise all national banks and the federal branches and agencies of foreign banks in the United States. , a state nonmember bank subsidiary supervised by the FDIC, a state member bank supervised by the Federal Reserve, and a savings and loan association savings and loan association, type of financial institution that was originally created to accept savings from private investors and to provide home mortgage services for the public.
The first U.S. savings and loan association was founded in 1831. supervised by the office of Thrift Supervision The Office of Thrift Supervision (OTS) was established as a bureau of the Treasury Department in August 1989 as part of a major Reorganization Plan of the thrift regulatory structure mandated by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) (12 U.S.C.A. ), the non-lead federal bank supervisors, taken together, oversee, on average, less than 10 percent of the consolidated institution's banking and thrift assets.
The federal and state dual supervision of insured state-chartered banks is another area of potential overlap and is not included in the above statistics. However, as I noted earlier, the FDIC and the Federal Reserve have worked out arrangements with most states in which either the appropriate federal authorities join the state supervisor in joint examinations or conduct the examinations in alternate years. In such cases, federal and state supervisors do not separately examine the bank in the same year.
No matter how small the proportion of bank and thrift assets subject to multiple supervisors, every effort should be made to reduce the resultant burden on depository organizations. Toward that end, the agencies have for many years divided examination responsibilities so that only one federal agency examines a given depository institution. In supervising a parent bank holding company, for example, the Federal Reserve relies principally on the evaluation of subsidiary banks or thrift institutions by that subsidiary's primary supervisor and does not attempt to reexamine re·ex·am·ine also re-ex·am·ine
tr.v. re·ex·am·ined, re·ex·am·in·ing, re·ex·am·ines
1. To examine again or anew; review.
2. Law To question (a witness) again after cross-examination. the bank or thrift institution.
In evaluating credit risk, the principal risk to banks, the agencies have long had procedures designed to enhance consistency and increase cooperation across the agencies. For large, syndicated loans--those involving credits of more than $20 million held by two or more banks--the agencies have the Shared National Credits Program in which supervisors from all banking agencies agree annually on a single evaluation that all examiners use whenever they encounter the credit. This program covers more than $700 billion of unused commercial loan commitments and some $400 billion of outstanding commercial loans of the U.S. banking system. The outstandings represent roughly one-third of all commercial loans booked in U.S. offices of commercial banks, including the U.S. branches and agencies of foreign banks. For many years, a similar process has also existed for evaluating the so-called transfer risk inherent in loans to borrowers in foreign countries that are not denominated in the borrower's local currency. Once a rating is determined for a specific country and for particular types of credit extensions to that country, examiners of all agencies treat the credit uniformly.
I do not mean to imply that there is no burden for those banking and thrift organizations dealing with more than one supervisor. One area, in particular, that can present difficulties in coordinating supervisory activities relates to larger and more complex banking organizations. These institutions are often characterized by multiple bank and nonbank subsidiaries that manage and control their consolidated activities through risk management and operating policies and procedures Policies and Procedures are a set of documents that describe an organization's policies for operation and the procedures necessary to fulfill the policies. They are often initiated because of some external requirement, such as environmental compliance or other governmental developed and monitored at the parent holding company level. Similarly, as bank activities and management practices have evolved in recent decades, these large financial institutions have structured their daily activities increasingly along product lines, with less regard to legal entities. For example, many large banking organizations control, hedge, and otherwise manage their investment securities and trading position across all of the subsidiary bank and nonbank entities on a consolidated basis.
The banking agencies recognize that these trends in management practices can increase the potential for overlapping supervisory efforts and have, accordingly, sought to minimize the overlap that might occur. In June 1993, the federal banking and thrift agencies adopted an interagency in·ter·a·gen·cy
Involving or representing two or more agencies, especially government agencies. agreement under which they would coordinate the timing, planning, and scope of examinations and holding company inspections; conduct joint examinations or inspections when necessary; hold joint meetings with bank and bank holding company management related to examination findings; and coordinate information requests and enforcement actions. This agreement delineated de·lin·e·ate
tr.v. de·lin·e·at·ed, de·lin·e·at·ing, de·lin·e·ates
1. To draw or trace the outline of; sketch out.
2. To represent pictorially; depict.
3. the supervisory responsibilities of each agency regarding particular entities within a consolidated organization. It also recognized that there are legitimate situations when an agency other than an entity's primary supervisor needs to participate in examinations or inspections to fulfill ful·fill also ful·fil
tr.v. ful·filled, ful·fill·ing, ful·fills also ful·fils
1. To bring into actuality; effect: fulfilled their promises.
2. its regulatory responsibilities. Although this agreement is not a panacea Some antidote or remedy that completely solves a problem. Most so-called panaceas in this industry, if they survive at all, wind up sitting alongside and working with the products they were supposed to replace. , it has helped to reduce the burden of multiple supervisors on banking organizations.
However, even if every banking and thrift organization were subject to the jurisdiction of only one agency, some of the inherent overlap in examiner duties would still occur simply because of the size and diversity of the institution's activities. The overlap would be less apparent to the institution because examiners would all be from the same agency and any differences in supervisory judgments would be minimized. However, the number of inquiries and onsite visitations might not decline materially.
Even with one supervisor per organization, different laws and regulations apply to different elements of an institution, and its diverse activities often require examiners to have specialized spe·cial·ize
v. spe·cial·ized, spe·cial·iz·ing, spe·cial·iz·es
1. To pursue a special activity, occupation, or field of study.
2. expertise. Reviewing the adherence of a parent company to the provisions of the Bank Holding Company Act and its implementing regulations requires different skills than are necessary in reviewing the trading activities of a London subsidiary bank. More generally, at large organizations safety and soundness examinations require a large number of individuals with special expertise in such diverse areas as credit evaluations, with experts needed for each type of credit market; securities trading securities trading, financial activity involving transactions of property such as stocks, bonds, commodities, and currency (see securities). Although the trading of stocks and bonds dates back several centuries in many Western nations, the development of the ; foreign exchange; risk management; evaluation of credit and market risk models; and compliance with safety and soundness laws and regulations, such as lending to affiliates and loans to one borrower. To this list must be added specialty examinations for trust activities, the Community Reinvestment Act Community Reinvestment Act (CRA)
Enacted by Congress in 1977, the CRA encourages banks to help meet the credit needs of their communities for housing and other purposes, particularly in neighborhoods with low or moderate incomes, while maintaining safe and sound operations. , and data processing data processing or information processing, operations (e.g., handling, merging, sorting, and computing) performed upon data in accordance with strictly defined procedures, such as recording and summarizing the financial transactions of a .
Scheduling, training, and coordinating the personnel to conduct these varied activities throughout the organization and to communicate as necessary with each other would still be a complex task under a single agency. Moreover, some institutions--large and small--prefer that examiners not arrive simultaneously because of the demands that would place on their resources. Thus, as now, a single regulatory agency would still spread out its examinations over time, either because of limitations of agency staff or because of the preferences of the institution.
You asked about the Federal Financial Institutions Examination Council The Federal Financial Institutions Examination Council, or FFIEC, is a formal interagency body of the United States government empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions by the Board of , established by the Congress in 1979 to provide a facility through which the agencies could address policy and operating differences, and thereby reduce the costs of their activities to the supervised institutions and to the public. The council has been largely successful in this by providing a useful forum for both the principals and the staffs to discuss issues of common concern. It has facilitated consistency in regulations, accounting, and information collection. It has also devised ways to lessen less·en
v. less·ened, less·en·ing, less·ens
1. To make less; reduce.
2. Archaic To make little of; belittle.
To become less; decrease. regulatory burden and has sponsored extensive training and education for examiners and bankers. These are no small matters. However, candor can·dor
1. Frankness or sincerity of expression; openness.
2. Freedom from prejudice; impartiality.
[Middle English, from Old French, from Latin, from requires that I report that some substantive and complex issues have proved to be difficult to resolve by the council.
Outside the council framework, the three banking agencies have had success in developing guidelines guidelines,
n.pl a set of standards, criteria, or specifications to be used or followed in the performance of certain tasks. to coordinate the planning, timing, and scope of examinations when multiple agencies are involved. Efforts continue to carry such guidelines further, particularly by working to implement the concept of unified examinations pursuant to section 305 of the Riegle Community Development and Regulatory Improvement Act of 1994. This legislation requires the federal banking agencies to implement a system by September 1996 that determines which one of them shall be the "lead" agency responsible for managing a unified examination of each banking organization. In conclusion, the U.S. banking system today is extremely healthy and competitive in both its domestic and international operations Internal Operations (I.O., IO or I/O) is a fictional American Intelligence Agency in Wildstorm comics. It was originally called International Operations. I.O. first appeared in WildC.A.T.S. volume 1 #1 (August, 1992) and was created by Brandon Choi and Jim Lee. . The degree of actual multiple supervision of banking organizations is less than a cursory cur·so·ry
Performed with haste and scant attention to detail: a cursory glance at the headlines.
[Late Latin curs review of statistics might suggest. In addition, federal bank supervisors and the Congress have made substantial progress in recent years in improving our supervisory policies and procedures for ensuring bank safety and soundness, and also in reducing regulatory burden, reducing supervisory overlap, and improving the consistency of our rules and regulations. While we can and should do more, and the agencies are working toward such improvements, modifications and reforms should be evaluated against certain principles. First among these is that changes in regulatory structure should follow, and not precede, adjustments to the basic structure of our insured depository system and the modernization modernization
Transformation of a society from a rural and agrarian condition to a secular, urban, and industrial one. It is closely linked with industrialization. As societies modernize, the individual becomes increasingly important, gradually replacing the family, of its activities. Choices made by the Congress on bank and thrift structure and authorized au·thor·ize
tr.v. au·thor·ized, au·thor·iz·ing, au·thor·iz·es
1. To grant authority or power to.
2. To give permission for; sanction: powers should be fundamental determinants of the regulatory structure. The Federal Reserve continues to encourage the Congress to take legislative actions needed to further the evolution of our banking and financial system.