# O **NEWS RELEASE**

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| ## Comptroller of the Currency      | ##### NR 2001- 89              |
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| Administrator of National Banks     |                                |
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FOR IMMEDIATE RELEASE Contact: Robert M. Garsson

October 15, 2001 (202) 874-5770

Remarks by

John D. Hawke, Jr.

Comptroller of the Currency

Before the

New York State Department of Banking

New York, NY

October 15, 2001

A few years ago Chairman Greenspan of the Federal Reserve remarked to a
former Comptroller of the Currency that the OCC had an important but
little recognized advantage in the bureaucratic competition that goes
with the territory the banking agencies share. He was referring to our
history. After all, the OCC has been around since the Civil War,
eclipsing such newcomers as the FDIC and the Federal Reserve itself by
50 years or more. History [is]{.underline} important to the OCC \--
important enough that we have been steadfast in resisting suggestions
that we change our name to something more closely approximating our
actual mission, which has had virtually nothing to do with the currency
for roughly 75 years \-- something I am condemned to explain at every
cocktail party I attend.

So I take special pleasure in recognizing the remarkable history of the
only financial regulatory agency in this great country to which the OCC
must defer in terms of longevity: the New York State Department of
Banking, now 150 years old. And I hope that when the OCC itself reaches
that milestone twelve years from now, in 2013, we will have the
opportunity to repay the hospitality you have extended to me today.
Needless to say, I am honored to be with you on this historic occasion.

It also gives me an opportunity to express our heartfelt admiration for
the way you and all New Yorkers have borne up under the awful and
unprecedented strains of the past month. The Banking Department deserves
a large share of the credit for the way that the financial institutions
that make this great city their home were able to bounce back as quickly
as they did. It is exactly what we would have expected from the most
venerable of our financial regulatory agencies.

By itself, of course, longevity proves little beyond an aptitude for
self-preservation, but that is hardly the case with the New York Banking
Department. Indeed, New York State legislators and regulators have been
responsible for many of the basic concepts upon which the structure of
bank regulation in this country is based.

When the New York State legislature passed the Safety Fund Act (as it
came to be called) in 1829, it broke ground in two essential ways. For
one thing, it established an effective mechanism for insuring bank
obligations. How serious a problem this had become is illustrated by
this contemporary newspaper account of the scene that erupted when a
Pennsylvania bank stopped redeeming its notes:

"Hundreds of poor laborers were running in every direction with their
hands full of the trash and not able to induce a broker to give
six-pence to a dollar for them. We passed in the market a woman who
makes her living by selling eggs, butter, and vegetables, who had almost
all she was worth, about \$17, in the bank's notes. When apprised that
it was worthless, she sank down in agony upon her stool and wept like a
child. This is but one of a hundred similar cases."

Such poignant scenes prompted the New York law, requiring banks to pay
an amount equal to one-half of one percent of their capital each year
for six years into a fund, from which the obligations of failed banks
would be paid out. A half dozen states adopted similar laws of their
own. In New York, the Safety Fund worked wonders in restoring public
confidence, and when the fund was liquidated in 1866, it even had a
small surplus to show for it. But this happy experience was not
universal. Losses had put the safety funds of states like Michigan and
Vermont out of commission in short order. How can we account for this
mixed record of success?

According to most historians, the answer lies in a key feature in the
New York law that was missing in the others. New York provided for the
appointment of three bank commissioners to examine the financial status
of banks and report annually to the legislature. With that provision,
professional bank supervision in the United States essentially began.

More than a century later, the safety fund concept came to the nation at
large in the form of federal deposit insurance. But the FDIC is not the
only federal banking agency inspired by New York. The OCC \-- and the
national banking system \-- owe a similar debt to New York banking law
and practice.

In the Free Banking Act of 1838, the Albany legislature \-- in an
historic act of self-denial \-- sought to expand the availability of
banking services for a rapidly growing economy by curtailing its own
power to grant bank charters one at a time by legislative action. That
requirement had inevitably introduced political considerations into the
chartering process, and New York lawmakers wisely recognized that this
was an area in which politics did not belong. So it decided that bank
charters would henceforth be available to any qualified organizers who
met certain standards and conditions. Among them was that the organizers
deposit with a state official \-- the Comptroller of the Currency \-- an
amount of government securities, which would serve as the basis for the
new institution's notes. In the event of insolvency, the securities
would be sold to redeem the notes.

Congress adopted precisely the same provisions in the National Currency
Act of 1863. In a real sense, the national banking system that the OCC
supervises today was the banking system of the State of New York on a
national scale. Again, what began in New York became a blueprint for the
nation.

The history I've just cited certainly supports the argument we often
hear in support of the dual banking system, namely that the states have
been the main engines of the innovation in the banking industry. That
argument has more than a grain of truth to it. But it lacks refinement
and ultimately does not comprehend the real value of duality in our
banking system. While the states have surely been innovators, national
banks and the OCC also have a proud record of innovation. Just by way of
example, national banks issued the first negotiable certificate of
deposit in 1961, securitized loans for the first time in 1984, and
introduced a whole range of new financial products and services to the
banking public over the past several decades. The wild card statutes on
the books in most states \-- which effectively tie state bank powers to
innovation in the national system \-- testify to that leadership.

The fact is that innovation is inherent in the dual banking system \--
and perhaps the most powerful argument that can be offered in its
defense. State banks led the way with new products and services in the
19^th^ century because they had to do so as a matter of survival. In the
National Bank Act of 1864, Congress had deliberately stacked the deck
against them, fully expecting that state banking would succumb to the
competitive disadvantages imposed against them in the law. Indeed, in
1865 Congress passed a "death tax" on state bank notes, intended to
drive state banks to the national charter. Instead, state bankers proved
resourceful in pursuing deposit banking and in developing new markets
and new ways to serve existing ones. They ensured that they would be
around for many years to come. By the same token, national banks, facing
increasing competition from state banks and nonbanks in the 1960s and
since, were obliged to come up with ways of reinvigorating the national
charter \-- and they did, in the ways I've just mentioned.

In short, neither the state [nor]{.underline} national banking systems
have had a monopoly on innovation, at least not for more than a few
years at a time. For no sooner has one side gained the lead, then the
other has redoubled its efforts to take it back. The result has been a
dynamic, competitive, and creative industry, responsive to the people
and communities it serves.

This happy outcome could hardly have been predicted. Indeed, some people
still scratch their heads in wonderment that the dual banking system,
with its further division of [federal]{.underline} authority among a
number of agencies, has worked as well as it has. Its most ardent
supporters concede that on paper, it probably shouldn't. The idea of
duality has withstood repeated assaults \-- beginning with Congress in
1863 \-- from those who saw it as unwieldy, if not irrational, that the
banks of the country should be free to choose the regulatory regime
under which they would operate. It is true \-- but not widely known \--
that the laws creating the Federal Reserve system and the FDIC had an
ulterior purpose: the elimination \-- or at least the reduction \-- of
state banking, which many thoughtful people saw as a less safe and sound
brand of banking than the U.S. economy could afford.

How then do we account for the persistence of the dual banking system in
America? Part of the answer, I believe, is that the dual banking system
is a true expression of our national character \-- reflecting core
national values of competition, federalism, and freedom of choice.

It took a while for this truth to sink in, but once it did, Congress
reversed its opposition to the dual banking system and instead worked
diligently to nurture it, intervening at critical intervals to ensure a
healthy balance between the state and national bank charters. Through
legislation, Federal regulators and national banks obtained the
authority to match innovations and incentives coming from their state
counterparts. For example, following a Supreme Court decision holding
that national banks did not have the right to branch, Congress in 1927
passed the McFadden Act, granting national banks branching powers
roughly equivalent to those already enjoyed by many state banks. And it
relaxed other legal restrictions \-- such as those barring national
banks from offering safe deposit boxes and making most real estate loans
\-- which were eroding the value of the national bank franchise.

At the same time, Congress has been cautious about encroaching on the
authority of the states to charter and empower banks. For example,
excepting only insurance underwriting, the states have been left free to
allow their banks to engage in activities not permissible for national
banks so long as the FDIC determines the activity would not pose a
significant risk to the insurance fund.

Let me add that this process has not been a one-way street. As I've
already noted, many states have enacted wild card" statutes \-- laws
that allow state-chartered banks to exercise powers available to
national banks. More recent federal legislation has equalized many of
the powers of state and national banks in the context of interstate
branching. And working through the Conference of State Bank Supervisors,
state authorities have been able to streamline the process of interstate
branching by state banks.

Nor \-- despite what some critics say \-- has the process been a race
to the bottom. For example, in early 1960s, under Comptroller James J.
Saxon, the OCC concentrated on upgrading the qualifications and skills
of its examination force. This led to calls from state bankers and
action by state supervisors to match these improvements. The quality of
examinations improved significantly on both sides, and the whole dual
banking system emerged the stronger for it.

In short, what former Federal Reserve Board chairman Arthur Burns called
\-- in memorable if misleading terms \-- a competition in laxity
between state and Federal banking authorities \-- has actually been a
textbook case of federalism in action. The competitive tension between
state and national authority has produced a safe and sound banking
system, an efficient and effective supervisory regime, and regulatory
structures capable of adapting to the demands of an evolving
marketplace. The financial system's response to the events of September
11 offers the latest proof of its adaptability and strength.

One lesson we can draw from this history is that while the dual banking
system today [is]{.underline} healthy and strong, it requires care and
feeding to keep it that way. Experience teaches us that the absence of
needed legislation \-- or the enactment of the wrong kind of legislation
\-- can do the dual banking system real harm.

For example, while Congress has not encroached upon the chartering
authority of the states, the balance of responsibility for the
supervision and regulation of state-chartered banks has steadily shifted
toward their [federal]{.underline} regulators. For more than 30 years,
almost every time Congress has imposed new federal bank supervisory and
regulatory responsibilities, it has parceled that authority and
responsibility among the three federal banking agencies. That approach
was originally shaped by concerns that some states lacked the resources
to carry out Congress's mandates. As a consequence, the Federal Reserve
and the FDIC today perform for state banks virtually every supervisory
function that the OCC performs for national banks. The result has been
to deprive the states of much of the opportunity to take full
responsibility for the supervision of their own state-chartered banks.

A related issue concerns the funding of bank supervision. Today the
total cost of supervising state-chartered banks is significantly
subsidized \-- not only by the two federal agencies that supervise such
banks, but also by national banks, primarily through their contributions
to the deposit insurance fund from which FDIC supervisory expenses are
drawn. This anomaly has had the effect of magnifying the assessment
disparity between state and national supervisors, encouraging many banks
to make charter choices based on comparative costs, rather than on the
values inherent in the charter or the quality of supervision. This has
tended to undermine the substantive and qualitative competition between
the charters that has always been our system's hallmark.

My hope is that this matter will be addressed \-- if not when Congress
reconsiders the subject of deposit insurance reform, as it has pledged
to do, then in the not too distant future. The preservation of a strong,
competitive dual banking system is crucial to our ability to meet the
very real economic challenges our country faces, and putting supervisory
funding on a more rational basis, I believe, is crucial to the future of
the dual banking system. Under a plan that we have put forward, the
costs of both national bank supervision by the OCC and state bank
supervision by our state counterparts would be paid out of the FDIC
insurance fund, under a formula that made the allocations automatic and
nondiscretionary.

In the meantime, we can never forget, particularly at this moment in our
nation's history, that whatever differences may separate us are far, far
less important than what unites us. In our case, it's a common
commitment by federal and state regulators to a safe, sound, and
competitive banking system \-- a commitment that has expressed itself
through cooperation [and]{.underline} competition. And I can think of no
better model for that relationship than the one that the Office of the
Comptroller of the Currency and the New York State Department of Banking
have had for much more than a century.

Again, heartiest congratulations on your 150^th^ anniversary.

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  The OCC charters, regulates and examines approximately 2,200 national
  banks and 52 federal branches of foreign banks in the U.S., accounting
  for more than 54 percent of the nation's banking assets. Its mission is
  to ensure a safe and sound and competitive national banking system that
  supports the citizens, communities and economy of the United States.
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