Remarks by

John D. Hawke, Jr.

Comptroller of the Currency

before

Women in Housing and Finance

Washington, D.C.

July 27, 2000

There's been a surprising degree of confusion about the roles assigned
by Congress to the various financial regulators under the
Gramm-Leach-Bliley Act. Some say that the legislation exacerbated an
already balkanized system of financial regulation \-- that it parceled
out responsibilities among the agencies based on considerations of
industry politics and regulatory turf. Others view it as having created
a new hierarchical structure, under which a single "umbrella" regulator,
with unique responsibilities for guarding against systemic risks, is to
assume a position of preeminence among the financial regulators. Each of
these views is, in my opinion, unfounded \-- and confused.

A little confusion can actually be a healthy thing when it's the product
of an inquisitive and critical mind \-- one that rejects facile analysis
and simple solutions to complex problems. The legendary journalist
Edward R. Murrow once said, in trying to explain the nuances of the
Vietnam War: "anyone who isn't confused doesn't really understand the
situation."

Of course, confusion has been a hallmark of our financial regulatory
structure for nearly a hundred years \-- ever since Congress started
layering new agencies on top of old ones and giving them overlapping
jurisdictions. Certainly, no sensible person would characterize our
structure as straightforward \-- and no one would recreate the present
structure if they were designing it from scratch today. But underlying
the complexity of the structure is a great deal more consistency and
simplicity than meets the eye.

In my view, Congress didn't intend to create a new hierarchical
structure of regulation in GLB. Nor did it mean to further fragment an
already complex system of financial supervision. On the contrary, GLB
strongly reaffirmed the existing roles of each of the financial
regulatory agencies, and emphasized the importance of the special and
complementary roles they play.

In doing so, it adopted an approach that puts a tremendous premium on
cooperation and coordination among the various participants \--
something that has always been of key importance in our multipartite
structure \-- both in order to assure that each can perform its
respective role properly, and to reduce the burden of overlapping
supervision on the regulated entities themselves.

This conclusion, it seems to me, is compelled both by the text of the
new law and the history behind it. A brief review of that history not
only explains how we came to the structure we have today, but provides a
frame of reference for interpreting what Congress intended in GLB.

We can pass over Congress' early experiments with federal involvement in
banking in its creation of the First and Second Banks of the United
States, for while the Banks assumed something of a regulatory role, it
was the result more of aggressive management than legislative intent. In
1863, however, when Congress created the national banking system and the
Office of the Comptroller of the Currency, it took an explicit move --
its first such move \-- into the realm of financial regulation. Since
the expectation at the time was that state chartered banks would find
the new national charter irresistible and would convert in droves, there
was no need for Congress to address the question of state regulation --
although when that expectation was not vindicated, Congress attempted to
eliminate the state charters by imposing a discriminatory tax on state
bank notes.

As we know, of course, state banks survived, by moving to deposit
banking and away from note issuance. Thus, by 1913, when the Federal
Reserve was created, no less than 16,000 state banks remained in
business. Congress made Fed membership optional for these institutions,
and established the Fed as the regulator of state member banks.

In 1933, when Congress created the Federal Deposit Insurance
Corporation, it provided that all national banks and state member banks
would automatically be covered by deposit insurance, and it extended the
option of coverage to state nonmember banks. For those nonmember banks
that elected coverage, the FDIC became the primary federal regulator,
just as the Fed had been tapped for state member banks. Thus, coming out
of the Great Depression we had the basic tripartite structure of federal
bank regulation that's remained with us ever since \-- the OCC
responsible for national banks, the Fed for state member banks, and the
FDIC for state nonmember insured banks.

During the 1950s, Congress became alarmed that the prudential and
regulatory rules applicable to banks, both state and national, might be
evaded through the use of holding companies. While holding companies
had, ever since Glass-Steagall in 1933, been required to obtain permits
from the Federal Reserve in order to vote their shares in the banks they
held, the limitations that generally applied to banks -- such as the
restrictions on permissible activities and constraints on geographic
expansion -- did not apply to holding companies.

Faced with the prospect that the regulatory structures for the banking
industry might be circumvented through the use of holding companies,
Congress enacted the Bank Holding Company Act of 1956. This legislation
designated the Fed as the regulator of holding companies. At the time,
fewer than two percent of all banks were controlled by holding
companies, and Congress felt comfortable applying the new law only to
those companies that controlled two or more banks.

By the late 1960s, however, the holding company format had been
rediscovered as a mode of diversification, and following Citibank's
conversion to the one-bank holding company format in 1968, banks by the
score followed suit, primarily in order to expand into nonbanking
financial activities. Congress responded in 1970 by amending the Bank
Holding Company Act to cover one-bank companies.

While the Fed's work expanded significantly with the extension of the
BHCA to one-bank holding companies, Congress, both before and after the
1970 amendments, reinforced its dedication to the tripartite division of
primary supervisory authority that had been the pattern since 1933. In
1964, for example, it coined the term "appropriate federal banking
agency," or AFBA, to refer to the primary regulator, to which the other
agencies were expected to defer in carrying out their own
responsibilities. And since then, in one law after another, whenever new
supervisory responsibilities have been conferred on the federal banking
agencies, Congress has almost always dispersed them in parallel form to
the respective agencies.

As time's gone on, the roles of the AFBAs have become almost
indistinguishable. The OCC, for example, has cradle-to-grave
responsibilities for national banks \-- responsibilities that range from
approving new charters to declaring insolvencies. We determine for
national banks what the business of banking consists of, and what's
incidental to that business. In our role as AFBA for national banks,
we're charged by Congress with the responsibility for setting and
enforcing requirements relating to capital adequacy, risk management
systems, internal controls and audit, information systems, loan loss
reserves, loan documentation and credit underwriting, and interest rate
exposure, among other things.

We're required to pass on mergers and changes in control involving
national banks, the establishment of bank subsidiaries, and the
permissibility of bank investments. We're empowered to impose an array
of sanctions and remedial measures against national banks, and we
enforce a lengthy catalogue of safety and soundness and consumer
protection laws and regulations. Finally, we and we alone are charged
with the responsibility of performing regular, on-site, full-scope
examinations of national banks. While the FDIC and the Federal Reserve
do not charter or close banks, they pass on membership and insurance
applications, and across the board their responsibilities are virtually
identical to ours in their roles as the AFBAs for state banks.

While these jurisdictions unquestionably overlap at various points --
the Fed, for example, has some duties that apply to all member banks,
state and national; and the FDIC has some responsibilities for all
insured banks \-- the basic pattern has been well established: primary
supervisory authority is vested in the respective AFBAs, and the holding
company regulator stands as a backup protector to assure that the
activities of corporate owners of banks will not prejudice the interests
of the banks themselves.

Let's now turn back to Gramm-Leach-Bliley. GLB is surely one of the most
far-reaching pieces of banking legislation of the 20^th^ Century. It
took a significant new direction and broadly expanded permissible
activities for banking organizations. But what did it do to \-- and
what, if anything does it imply for \-- the structure of financial
regulation? Does it represent a break with the past or a reaffirmation
of it? And does it alter in any fundamental way the respective
responsibilities of the federal banking agencies or the nature of the
relationships among them?

In my view, GLB strongly reaffirms Congress' commitment to the
preexisting structure of financial regulation among the three banking
agencies. It reinforces the roles of the AFBAs as the primary line of
defense for the safety and soundness of depository institutions. It
perpetuates the role of the Federal Reserve as the regulator of holding
companies, with its traditional function of helping to protect banks
from risks that might arise elsewhere in the corporate family, outside
the bank.

To be sure, GLB might have been an opportunity for Congress to
rationalize the structure of financial regulation by unifying it under a
single agency \-- in much the same way as has been done in the United
Kingdom and Japan. But it chose not to do so. Consolidation of financial
regulation is not an issue that has any public constituency; no one was
arguing for it in the context of GLB; and the last few times any
initiative has been pursued to achieve consolidation, the result has
been dismal failure.

Congress' reaffirmation of the role of the AFBAs runs throughout the new
law. Jurisdiction for enforcing the new privacy and CRA "sunshine"
provisions of GLB, for example, was allocated on the conventional
pattern. Similarly, in conditioning eligibility to engage in new
financial activities, whether through financial holding companies or
financial subsidiaries of banks, on the respective banks being well
capitalized and well managed, Congress made clear that these
determinations had to be those of the AFBA, not a third party.

GLB also reinforced the role of the primary bank regulators in two
important additional ways. First, it required the Federal Reserve, in
its role as the holding company regulator, to limit to the fullest
extent possible, the focus and scope of its holding company examinations
to the holding company itself and to nonbank subsidiaries that could
have a materially adverse effect on the safety and soundness of any bank
subsidiary.

Second, it required the Fed to give deference to the primary federal or
state supervisor when seeking information on bank subsidiaries,
requiring that the Fed use the examination reports of the primary
supervisors to the fullest extent possible. In both regards, it
reinforced the precept that the primary role of the holding company
regulator is to protect the bank against risks that emanate from the
holding company, and not to duplicate bank regulation itself.

In both cases, moreover, the new law used stronger language than has
ever been used before in this context, in order to underscore its
intention that the work of the primary bank regulator not be needlessly
duplicated, and that the burdens of regulation on banks be kept to the
absolute minimum. By thus reemphasizing the AFBA's responsibility for
assuring the safety and soundness of the bank, and the holding company
regulator's role with respect to activities outside the bank, Congress
effectively underscored its intention that the bank safety net not be
extended to the holding company affiliates of banks \-- an intention
that might have been clouded were holding company regulation to have
become more integrated with bank supervision.

At the same time, Congress preserved the role of the Federal Reserve as
the regulator of all bank holding companies \-- a result that was by no
means taken for granted in earlier versions of financial modernization
legislation. As you'll recall, some proposals, such as that advanced by
Chairman D'Amato in an earlier Congress, would have created a new type
of financial services holding company that would not have been subject
to Fed supervision.

Nevertheless, the final version \-- just as the legislative proposal
sent to the Hill by former Secretary Rubin \-- retained the Fed in its
conventional role as the bank holding company regulator. While the Fed
lost the ability to pass on applications for new financial activities,
and was required to share with Treasury some of the rulemaking
jurisdiction it previously had to itself, its fundamental role remained
unchanged.

GLB's strong focus on functional regulation \-- that is, recognizing the
primacy of securities and insurance regulators as to the matters
traditionally within their jurisdictions \-- is completely consistent
with its retention of the long-established pattern of allocating
supervisory authority with respect to banks to the agencies having
principal expertise in banking.

Congress determined that, in the world of financial conglomeration, the
old exemptions that banks enjoyed, and the assumption by bank
supervisors of supervisory responsibilities over bank-related insurance
and securities activities, no longer made sense. Congress made the
judgment that consumers of insurance and securities products should be
entitled to exactly the same legal protections irrespective of whether
those services were offered by a bank or by an entity not related to a
bank. This objective was assured by making clear that the functional
regulators would have primary jurisdiction in these areas.

It's certainly fair to ask whether, in an unconsolidated system of
supervision, there may not be matters that fall between the chairs. Many
large institutions, for example, pay little heed to internal
organizational format in the way they actually conduct their operations
or manage their risks. The insurance and securities departments of some
banks may be no more than the people at the adjacent desks. And what
about "systemic" risk? Who's looking out for that?

The simple answer, I believe, is that [all]{.underline} of the relevant
regulators have a legitimate and important interest in these matters.
The securities regulator will be just as interested in knowing how a
holding company's consolidated risk management affects its securities
operations as will the holding company regulator. And if a bank engages
in transactions with or related to the operations of an insurance
affiliate, both the bank regulator and the insurance regulator will have
an interest, just as the bank regulator will have an interest in what's
going on at other holding company affiliates that are not functionally
regulated. The very nature of modern financial conglomeration will
necessarily involve the concerns of all of those agencies having
responsibilities for some portion of the company's activities.

Similarly, systemic risk is not an esoteric or proprietary concern,
unrelated to the responsibilities of individual regulators. The Federal
Reserve has a clear concern from the perspective of its discount window
and payments system functions. The FDIC, as the guardian of the deposit
insurance funds, has a strong interest in the health of the banking
system, as does the OCC, as the supervisor of the predominant number of
large banks. The SEC, the Commodity Futures Trading Commission, and
state insurance regulators have comparable concerns. None of these
agencies can carry out its responsibilities without taking due regard of
the potential for contagion \-- both for problems within their areas of
responsibility affecting other markets and other intermediaries, and for
external problems affecting the entities they regulate.

What all of this makes clear is that close coordination and cooperation
among the individual agencies \-- as well as due regard for the specific
responsibilities Congress has expressly imposed on each \-- will be of
utmost importance. The establishment of close working relationships,
particularly at the field level, will be essential. When a bank examiner
in the field identifies a problematic bank transaction involving an
insurance or securities affiliate, and needs information, there may not
be time for high level deliberations.

Similarly, if a bank is facing problems that give rise to concerns about
its solvency, the interests of the FDIC as insurer of deposits, the
interests of the Fed as the provider of liquidity and the holding
company supervisor, even the interests of the SEC in its oversight role
with respect to corporate disclosure and securities trading, are likely
to be involved.

Coordination and cooperation are also essential to minimize the burdens
on the regulated entities. If every agency having an interest were to
make its own separate information demands on a bank, for example, each
desiring information in a different format \-- or if each were to decide
to send its own examiners into every institution as to which they might
have a colorable jurisdictional claim whenever they felt the need \--
the resulting burdens could be intolerable. Congress clearly had this in
mind in its GLB mandate that deference should be paid to the functional
regulator of an entity, or to the primary federal or state regulator, in
the case of a bank, when information is sought or examinations desired
by the holding company regulator.

Coordination and cooperation are certainly not new concepts. Congress
has made clear for many years that it has little patience for
inconsistencies and disparities among financial regulators, and it has
repeatedly expressed its desire that overlapping jurisdictions not
result in the imposition of costly and needless burdens on regulated
entities.

We at the OCC are committed to the course of cooperation and
coordination. We've been engaged in discussions with our counterparts at
the other banking agencies, as well as the functional regulators, aimed
at assuring that we are all able to fulfill our respective
responsibilities without stumbling over one another's feet or imposing
needless burdens on the banks we supervise.

We believe that productive understandings are emerging from these
discussions. We've reached an agreement with the Federal Reserve on the
key principles of a pilot effort to coordinate our supervision of large
national banks and their holding companies. We're in the midst of
extensive discussions with the FDIC to ensure that both agencies have
access to full and complete information about problem and non-problem
banks under our respective supervision.

Our large bank examiners-in-charge meet quarterly with their
counterparts at the Fed and FDIC to share information, discuss changes
in their banks' risk profiles, and coordinate supervisory activities.
Our large bank EICs now also routinely brief FDIC senior managers on
supervisory strategies at their banks, and we're inviting the FDIC to
participate in the examination of troubled banks at an early stage.

We're currently discussing information-sharing arrangements with the
SEC, and we've concluded a model agreement with the National Association
of Insurance Commissioners to share information about insurance
complaints involving national banks. That model has provided the basis
for agreements with 28 individual insurance regulators, and discussions
with many of the others are underway as we speak. In the field, OCC
supervisory staff has begun holding regular meetings with their
regulatory counterparts in the insurance industry. The goal throughout
is to expand the types of information shared by the OCC and state
insurance agencies, to ensure effective and efficient supervision of
bank insurance activities.

Key to each of these efforts is an understanding on the part of all
concerned that we're operating neither in a fractionalized system of
unrelated jurisdictions, nor in a hierarchical system in which one
agency's role or interest is superior to that of another. Rather, we're
in it together, bringing to bear different perspectives and different
expertise, but all in the name of protecting the public interest.

It's really not so confusing, when you stop to think about it.