Remarks by

John D. Hawke, Jr.

Comptroller of the Currency

A Session on Banking Supervision

With the

People's Bank of China

Beijing, China

October 14, 2002

I am honored to be with officials of the People's Bank of China, and I
am grateful for the many courtesies extended to me since my arrival in
your country. I have come to the People's Republic not only to build on
the excellent working relationship that has developed with the PBOC and
Governor Dai, whom I admire and respect, but also to build on the many
years of Sino-American cooperation. China and the United States have
much to learn from one another, and I trust that I will take home with
me at least as much of value as I leave behind with you. I hope that my
visit extends and enriches the long and constructive dialogue between
our two great peoples.

The kindnesses you have extended to me are not only gratifying on a
personal level. China's eagerness to hear from foreign visitors like
myself, I think, speaks to the vast promise of its future. We Americans
sometimes flatter ourselves by thinking that our economic success
stemmed entirely from domestic sources and from our particular genius
for invention. But the truth is more complicated than that. Over the
course of our history, America, like all successful countries, has
borrowed liberally from other societies \-- adapting principles and
practices to the unique circumstances of our own culture, geography, and
institutions.

In other words, the [ideas]{.underline} exchanged across international
borders may be just as valuable as the more tangible trade in goods and
services in which nations engage.

That has been true in many areas, including banking and bank
supervision. Americans have always had conflicting views toward banking,
and that too was part of our inheritance from Great Britain. In the
Tunnage Act of 1694, authorizing the incorporation of the Bank of
England, the British Parliament recognized that it must have an orderly
means of raising loans to conduct the affairs of state, and particularly
to wage war. Then twenty-six years later, when Parliament passed the
so-called Bubble Act, it essentially shut the door to further banking
corporations, declaring, in what appeared to be a spirit of regret for
its earlier actions, that such institutions were dangerous instruments
of privilege and speculation.

These contradictory attitudes were transplanted to American soil. Even
during our colonial period, Americans recognized that banks were
necessary to meet the financial needs of the modern state and a
developing economy. At the same time, banks were viewed with deep
suspicion, if not hostility. Thomas Jefferson, the primary author of our
Declaration of Independence, believed that banks were "more dangerous
than standing armies."

Yet even Jefferson did not believe that the country could afford to
dispense with banks altogether. Indeed, America needed banks even more
than Britain did, for ours was a young, undeveloped, and far-flung
country noticeably lacking in the great private accumulations of liquid
wealth with which England was blessed. In order to mobilize capital in
such a place, banks were essential. In fact, Americans concluded that if
we were to have any banks at all, we should have many of them -- not
only to serve potential customers for bank services, but also to
discourage the rise of a small number of large and powerful institutions
capable of exercising dangerous dominance over local economies.

From this reasoning flowed one of the most distinctive characteristics
of the U.S. banking system. At its high water mark, in 1921, there were
no fewer than 29,000 independent commercial banks in America. Even
today, after decades of industry contraction, there are more than 8000
U.S. banking companies, a number not equaled anywhere else in the world.
(The slide in your package entitled "the banking industry is
consolidating" reflects this.)

Viewed purely as an economic arrangement, this banking structure has
probably never made much sense. Any system based on thousands of
independent, mostly small, institutions might be viewed as a system
inevitably lacking in stability and efficiency. But Americans were
willing to sacrifice those qualities in a conscious trade off to
preserve other values they cherished even more: competition, individual
initiative, local responsiveness, and opportunity. Branch banking,
despite its real economic benefits, was seen as a threat to those values
-- and as a step toward financial concentration and monopoly. That's why
branching and bank consolidation were systematically suppressed by state
and federal laws -- some of which remained in effect until just a few
years ago.

Americans did not depend entirely on the [structure]{.underline} of
their banking system to curb potential abuses of banking power.
Government oversight and enforcement were also viewed as essential. But
here too there have been inhibitions. Americans have always been uneasy
with the idea of government intervention in the economy. Our experience
as a colony left our people with deep suspicions of government authority
\-- suspicions that linger to this day. The arrangements formalized in
the U.S. Constitution, with its provisions for checks and balances and
power sharing between the national government and the states, reflected
these suspicions. Thus, in the same way -- and for many of the same
political reasons \-- that U.S. banks were encouraged to proliferate, a
system of multiple bank chartering and regulatory authorities arose.

During the first half of the 19^th^ century, the states dominated the
field of banking. Each carried out its own program of bank chartering
and supervision, reflecting wide variances in rigor and competence. The
federal government's involvement was sporadic \-- and generally
unwelcome. Not until the American Civil War, which redefined the
relationship between the central government and the states, did a
federal presence become a permanent part of the U.S. banking system in
the form of the Office of the Comptroller of the Currency and the
national banking system, which our office supervises. I am proud to be
the 28^th^ person to hold the Office of the Comptroller of the Currency
since our founding in 1863.

It is significant that when the U.S. Congress created the national
banking system, it did not choose to abolish state-chartered banking at
the same time. Given the advantages they built into the national
charter, some lawmakers felt that such an outcome \-- a system
consisting exclusively of national banks \-- was assured. But the state
banks proved equal to the competitive challenge, and, as your slide
shows, the U.S. has ever since had a dual system of state and national
banks, under which national banks operate under the primary supervision
of the OCC and state banks under the primary supervision of the 50 state
banking departments.

Dual banking made for a complicated regulatory system that would soon
grow more complicated still. But Americans didn't necessarily see
regulatory complexity as a bad thing. It was viewed instead as a
safeguard against the dangers of regulatory hegemony and abuse -- and as
an incentive to regulatory responsiveness and efficiency. Dividing
regulatory authority between the federal government and the states --
and then dividing it again, over a period of years, among three separate
[federal]{.underline} agencies -- ensured that no single agency would be
able to gain meaningful dominance. And because regulatory authority was
checked and balanced in this way, Congress felt safe in endowing the OCC
with considerable independence, both from its own control as well as
from that of the executive branch within which the OCC was positioned.

The decision to create the OCC as an independent agency was quite an
extraordinary step, and it was one that reflected Congress's
understanding of the importance of supervision in the nation's overall
banking scheme. Although formally a "bureau" of the Treasury Department
-- indeed, until the 1970s, the Comptroller's offices were actually
housed within the main Treasury building in Washington \-- the OCC has
always enjoyed considerable operational autonomy. Although appointed by
the President with Senate confirmation, the president cannot remove the
Comptroller before the expiration of the statutory five-year term
without providing to the Senate in writing a statement of his reasons
for doing so.

Just within the past decade, Congress passed additional legislation
reaffirming the OCC's ability to submit legislative recommendations and
testimony to Congress without prior approval or review in the Executive
Branch. Moreover, Congress has forbidden the Treasury Department from
intervening in any matter or proceeding before us, or from delaying or
preventing the issuance of any rule or regulation by the OCC. I speak
from personal experience -- as Under Secretary of the Treasury for
Domestic Finance before moving to the OCC -- when I say that these rules
have been scrupulously respected.

These structural firewalls have made it possible to successfully
insulate the OCC from occasional pressures to support particular fiscal
or monetary policies or to appoint politically connected individuals to
supervisory positions. One measure of that success lies in the fact that
my staff in Washington consists of civil servants who work under the
merit system; while national bank examiners, of which there are
currently more than 1500, have been recruited from the nation's
universities and financial institutions, and commissioned after passing
through a rigorous program of classroom instruction, on-the-job
training, and continuing education. I hope you will not accuse me of
being immodest when I say that our peers at home and abroad regard the
OCC as the premier bank regulatory agency. But it's true.

So far, I have just spoken of one phase of OCC independence --
independence from the executive branch of the federal government. Our
relationship with Congress is somewhat different. Of course, the OCC is
subject to all laws that Congress may make, and the Comptroller is
regularly called upon to provide testimony on subjects of interest to
legislators. But a crucial element of this relationship is the fact that
we -- unlike virtually all other agencies of our government \-- do not
depend upon Congress to provide the funds we depend upon to finance our
activities.

That is in accordance with Congress's own plan. In creating the OCC and
the national banking system, it chose to remove the OCC from the normal
budget and appropriations process -- to remove it, that is, from its own
direct control. It recognized that the power to approve a budget may
confer an ability to direct policy, and that subjecting bank supervisors
to the give-and-take of budget negotiations would inevitably lead to
pressures for supervisory compromises. Thus, in a historic act of
self-denial, Congress chose to restrict its [own]{.underline} influence
and authority rather than compromising the ability of the OCC to conduct
its operations objectively and with independence. Instead, in a system
that has continued to operate without interruption since the 1860s,
banks are subject to annual fee assessments by the OCC, which since 1914
have been asset-based. They also pay fees to cover the cost of
processing corporate applications. Those two sources together account
for nearly 97 percent of the OCC's \$413 million annual budget.

Our ability to deliver independent and professional bank supervision
owes in large measure to the wisdom and selflessness of those who
created the national banking system as a self-supported, self-financing
entity.

Our longstanding belief that independence is crucial to effective bank
supervision has received repeated confirmation elsewhere in the world.
Indeed, the absence of supervisory independence has been implicated in
almost every national financial crisis the world has recently seen. In
Argentina, South Korea, Thailand, Japan, Turkey, and Indonesia, bank
supervisors were unable to operate with the independence their
responsibilities demanded. In each case, supervisors became instruments
of government or central bank policies that subordinated the safety and
soundness of financial institutions to other goals. In each case, banks
were permitted \-- or even encouraged \-- to make loans in defiance of
good credit practices in order to promote certain policy objectives,
such as protecting inefficient industries. Moreover, in each case, the
result was the same: supervision was discredited; the condition of the
banking system deteriorated; the national economy suffered; and the
process of recovery was seriously impeded by a crippled banking system.
Some countries are still struggling with the consequences of such
ill-advised supervisory policies.

These experiences help explain why, when the Basel Committee on Banking
Supervision adopted its core principles for effective supervision in
1997, \"operational independence and adequate resources\" headed the
list. And the experiences of other countries remind us of the importance
of vigilance in defending supervisory independence here at home.

On another crucial issue of supervisory structure, however, global
practice is less conclusive. That is the role of central banks -- and,
to a lesser degree, the deposit insurance agencies -- in the supervisory
arena. In this area there have been a wide variety of experiences and
results. Many of the world's countries have opted to separate monetary
policy from bank supervision. Austria, Canada, Germany, Japan, Norway,
Mexico, and, recently, the United Kingdom, among others, have taken the
step of removing the central bank from the supervisory function. The
rationale is that there are inherent conflicts of interest between the
two roles -- that the goals of monetary policy -- and a solvent deposit
insurance fund -- may not coincide with the demands of a safe, sound,
and competitive banking system. For example, a central bank may decide
that its overall monetary and macroeconomic objectives are better served
by infusing capital into an insolvent institution, whereas the pure
supervisor might have opted to close the bank. Similarly, the deposit
insurer, if also endowed with supervisory responsibilities, may take a
supervisory position that is highly adverse to risk-taking -- good for
the loss-ratios of the insurance fund, but perhaps not so good for the
competitiveness of banks and their customers.

In the United States, nonetheless, we entrust the Federal Reserve and
the Federal Deposit Insurance Corporation with significant
responsibilities for bank supervision. As your slides show,
state-chartered banks in America, in addition to their state
supervisors, each have one primary federal bank supervisor: the FDIC if
it's a state-chartered bank that is [not]{.underline} a member of the
Federal Reserve system (membership is optional for all state banks and
mandatory for OCC-supervised national banks), and the Federal Reserve if
the state bank [is]{.underline} a Fed member.

We are often asked to explain why this complicated regulatory structure
arose -- and why we have not attempted systematically to simplify it.
The question of origins has a relatively straightforward answer. I have
already spoken of Americans' enduring suspicion of concentrated
political authority and their belief that establishing multiple and
competing government bureaucracies would serve to check their ambitions
and excesses. Thus, when the Federal Reserve System was created in 1914
-- becoming the second federal agency with a bank supervisory mission --
Congress simply layered it on top of the existing supervisory structure
and parceled supervisory authority between the new Fed and the OCC. The
same pattern held in 1933, when the FDIC -- the third of the federal
banking agencies \-- was created.

So it was not political cowardice, as some have suggested, that led
Congress to avoid trying to abolish one agency when creating another to
perform essentially the same, or a complimentary, function \-- although
as you well know, abolishing government bureaucracies is never an easy
task. There is a positive rationale for multiple agencies: that
competition can be as productive in the public sector as in the private.
In the case of bank supervision, the assumption has been that the
agencies would each do their jobs better with bureaucratic competitors
in the mix, challenging them to excel. Whether or not this was
Congress's rationale, most agree that it has been the happy result.

In the case of U.S. banking, regulatory competition can take on a
particular edge, because U.S. banks have the extraordinary ability not
only to choose their chartering agency, but also to switch charters if
they grow dissatisfied with the manner in which they're supervised. It's
in the direct self-interest of the primary supervisors that depend upon
assessment funding -- the states and the OCC --to provide high quality,
cost-effective supervision. And by most accounts, we do just that.

The other main reason why this somewhat unwieldy structure arose was
because both the Federal Reserve and the FDIC made compelling cases in
favor of their receiving significant supervisory responsibilities. The
Fed has argued that it needs a "window" into the banking system to
assist it in carrying out monetary policy, and the FDIC has made a
plausible argument that the insurer's interests -- and the health of the
deposit insurance funds \-- must be taken into account in supervisory
decisions that are likely to affect them. Thus, in addition to their
routine responsibilities for state-chartered banks -- responsibilities
that, as already noted, are shared with state authorities \-- both the
Fed and the FDIC have back-up supervisory authority for national banks
that can be exercised in problem bank situations.

Once the Federal Reserve and the FDIC became permanent parts of our
supervisory structure, the complexion of the U.S. dual banking system
changed. Laws passed by Congress that were meant to apply to state as
well as national banks were increasingly entrusted for administration to
the [federal]{.underline} supervisors of state banks, whose compliance
with Congress's wishes could be better monitored. Thus, as your chart
shows, most of the supervisory activities concerning state-chartered
banks are carried out not by the states, but by the Federal Reserve and
the FDIC. So there is probably less "duality" today than there has ever
been in the 140-year history of the U.S. dual banking system.

As to why our system has persisted despite its unwieldiness, there are a
couple of points to consider. The first is that there has never been a
clear and compelling consensus for change. The U.S. banking industry and
other interest groups have learned to live with -- and take advantage of
-- our existing system. For them, change would be unwelcome. But even
those groups that might be expected to support supervisory
rationalization -- consumer and public interest groups, for example \--
have been not expressed that support in any consistent or unified way.
And the regulatory agencies themselves have never been enthusiastic
about proposals to simplify supervision -- especially when
simplification would occur at their expense.

A second reason why our structure has remained in place is that the U.S.
regulatory agencies, through trial and error, have learned to work
effectively within it. We have created formal mechanisms for
coordinating our efforts and avoiding duplication and unnecessary burden
on U.S. financial institutions, as well as informal avenues for
information sharing and consultation. I believe that the relationships
that exist among U.S. supervisors validate the concept that lies at the
heart of our structure -- that competition among regulatory agencies can
enhance the quality of supervision and help prevent it from becoming
unduly burdensome for financial institutions.

The final and perhaps most important reason why our regulatory structure
works is that it is an authentic reflection of our country's habits of
mind and practice. While international experience suggests certain core
principles of effective bank supervision -- independence being chief
among them \-- every country must find its own way of implementing those
principles, in a manner consistent with its own culture and
institutions. That is what the United States has successfully done over
a period of many years. And that is one of the great challenges that
confront the People's Republic of China. We at the OCC are delighted to
assist in any way in that effort.