Remarks by

John D. Hawke, Jr.

Comptroller of the Currency

before the

New York Bankers Association

April 6, 2000

Anyone assessing the impact of the Gramm-Leach-Bliley Act, which was
signed into law five months ago, has to be struck by the magnitude of
the changes it brought about. First and foremost, it tore down the wall
between commercial banking and investment banking that was erected in
the Glass-Steagall Act of 1933. Second, it obliterated a major premise
of the Bank Holding Company Act of 1956 \-- that special measures are
needed to avoid concentrations of economic power in financial
conglomerates.

Yet, as far reaching as the new law is, it left entirely unchanged the
structure of financial regulation \-- a fact that some observers have
found surprising. "Why," asked editors of [The Economist]{.underline},
"if politicians are at last to do something about the depression-era
rules that govern financial firms, have they not tried to update
America's supervisory structure at the same time?"

The decision in Gramm-Leach-Bliley not to address fundamental issues of
supervisory structure struck some as particularly curious in light of
developments in financial regulation in other countries. The irony is
stark: while other major financial powers continue to look to the United
States for new approaches to financial regulation, they are increasingly
rejecting the confusing structural model of U.S. supervision in favor of
a unified agency approach, such as that adopted by Great Britain in
1997, and many other countries, including Canada and Japan, since then.

Of course, the idea of consolidating the federal banking agencies in
this country is not a new one. Even defenders of the present structure
concede that no one would ever design it that way from scratch. The
product of a long accretion of legislative decisions, piled one on top
of the other, the U.S. financial regulatory structure is complicated,
confusing, duplicative, and, at least at the margins, costly. It's not
surprising that our colleagues from abroad would seek positive
inspiration elsewhere.

Proposals to rearrange the responsibilities of the federal financial
agencies have been a perennial of public policy for many years. Such
proposals began surfacing almost from the moment that complexity was
introduced into supervision on the national level, with the creation of
the Federal Reserve in 1913. At that time, of course, the Comptroller of
the Currency and the Secretary of the Treasury sat as members of the
Federal Reserve Board. Between 1917 and 1923, no fewer than three
separate bills were introduced in Congress \-- none of them acted upon
\-- to fold the 50 year-old OCC into the fledgling Fed. In the 1930s and
1940s, private and government proposals variously contemplated merging
the OCC into the FDIC; or the OCC and the FDIC into the Federal Reserve;
or the FDIC into the OCC. In 1971, the Hunt Commission recommended the
transfer of the Fed's supervisory authority to the FDIC.

In more recent years, agency consolidation proposals have looked to the
creation of a new independent agency, to which the bank supervision and
regulation functions of each of the existing agencies would be
transferred. During the 1970s, Senator William Proxmire advocated the
creation of a new federal banking commission. A similar proposal was
made during the 1980s, in the Reagan Administration, by a task force
headed by Vice President Bush. And to underscore the bipartisan appeal
of such proposals, the Clinton Administration offered a regulatory
consolidation bill of its own in 1993.

Yet none of the proposals for consolidation of bank supervision in a
single agency came to fruition, and it may be instructive to consider
why. A major reason why the idea of agency consolidation has not been
accepted \-- despite its appeal to neatness \-- has undoubtedly been the
lack of agreement on a basic assumption implicit in all of the more
recent proposals: that the federal deposit insurer and the central bank
do not need involvement in the banking system in order to discharge
their primary responsibilities. The FDIC has argued that controlling
risk at the source is essential to protecting the deposit insurance
interest, and the Federal Reserve has said that it needs a "window" into
the banking system, to help it prepare to meet the threat of systemic
crises and to be a more effective administrator of the country's payment
and settlement systems.

Another reason for opposition to the consolidation of federal bank
regulation has been a concern about its impact on the dual banking
system. State banking interests have been concerned that banks might
lose interest in state charters if [all]{.underline} banks were to have
the same federal regulator.

But what these proposals for regulatory consolidation have lacked most
of all is a compelling [practical]{.underline} reason for restructuring.
While our system surely does not conform to any standard model of
bureaucratic orderliness, it has worked extremely well. Indeed, if our
current system were as flawed as some critics suggest, you might expect
the banking industry to be leading the charge for structural reform.
After all, it's bankers who have to put up with the system's
complexities and any cost burden resulting from the structure. But the
industry has been at best lukewarm \-- and often hostile \-- to most
consolidation proposals. Bankers know the system's not perfect. But they
also recognize the risk in discarding one that works.

The system works for a variety of reasons \-- not the least of which is
that the regulatory agencies have learned over many years to capitalize
on its strengths and maneuver around its weaknesses. Regulatory
competition has stimulated innovation and efficiency. Competition keeps
all of us on our toes, and provides incentives to add real value to our
supervision. While the system unquestionably provides opportunities for
regulatory arbitrage, there is little evidence that it has stimulated
the "competition in laxity" that former Federal Reserve Chairman Arthur
Burns discussed 30 years ago.

Above all, the agencies themselves have learned the importance of
coordination, both substantive and procedural, as well as the need to
avoid inconsistencies in their policies that might encourage arbitrage.
To this end, the agencies, on their own, formed an interagency
coordinating committee during the mid-1970s, which was formalized by
Congress in 1978 as the Federal Financial Institutions Examination
Council, or FFIEC.

For more than 20 years, the FFIEC has served as a forum for promoting
common standards for bank supervision and for reconciling many
interagency differences. The tradition of coordination has become so
ingrained that the agencies now routinely confer on [all]{.underline}
matters of common interest and concern, both within and beyond the
purview of the FFIEC.

Moreover, Congress has not merely tolerated the multipartite division of
supervisory and regulatory jurisdiction; it has resoundingly reaffirmed
it in virtually every major piece of banking legislation since 1964. It
was then that Congress coined the term "appropriate federal banking
agency," or AFBA, to refer to the primary federal regulator of each
class of regulated depository institution, to which the other agencies
were expected to defer in carrying out their own responsibilities.
Whenever Congress has imposed new supervisory and regulatory duties on
federal banking agencies, it has almost always parceled them out to the
respective AFBAs. As a result, each agency has an extensive set of
parallel responsibilities for the institutions it supervises \-- the OCC
for national banks and their subsidiaries, the Fed for state banks that
have elected to be members of the Federal Reserve System, the FDIC for
state nonmember insured banks, and the Office of Thrift Supervision for
most federally-insured thrifts, whether state- or federally-chartered.
The Federal Reserve has also been designated the AFBA for bank holding
companies and their nonbank subsidiaries.

In the case of national banks, the OCC has "cradle to grave"
responsibilities, which range from approving new charters to declaring
insolvencies. We determine for national banks what "the business of
banking" consists of, and what is "incidental" to that business. In our
role as the AFBA for national banks, we are 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 are
required to pass on mergers and changes in control involving national
banks, the establishment of bank subsidiaries, and the permissibility of
bank investments. We are empowered to impose a formidable 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 have virtually identical responsibilities as ours
in their roles as the AFBAs for state banks.

This principle of allocating parallel jurisdictions has repeatedly been
reinforced and reaffirmed \-- in the International Lending Supervision
Act of 1983, the Competitive Equality Banking Act of 1987, the Federal
Deposit Insurance Corporation Improvement Act of 1991, the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994, and most
recently in Gramm-Leach-Bliley.

There have, of course, been occasions when Congress has imposed
regulatory responsibilities on a single agency. The Federal Reserve, for
example, has been given the task of drafting most consumer protection
rules, while enforcement of those rules has been allocated in the usual
manner to the respective AFBAs. Bank holding company regulation has been
similarly treated. From the time they first appeared, in the early
decades of the 20^th^ century, bank holding companies have been viewed
as a potential threat to bank safety and soundness \-- as the means by
which bankers might evade legal restrictions applicable to the bank
itself. In 1956, these concerns led to the passage of the Bank Holding
Company Act, with the Federal Reserve denominated as the federal
regulator of bank holding companies. But the consistent goal of that law
has been to supplement the work of the primary bank regulators by
protecting insured banks from risks that might emanate from activities
outside the bank, elsewhere in the corporate family, where the
jurisdiction of the primary regulator might not reach.

In Gramm-Leach-Bliley, the unique structure of U.S. bank supervision has
again received strong affirmation. As in the past, Congress has
dispersed many new supervisory responsibilities in parallel across the
federal banking agencies. Some early versions of this legislation
permitting financial conglomeration would have authorized new
unregulated financial holding companies, outside the scope of the Bank
Holding Company Act. But both the Administration's proposed bill, as
well as the final enactment, preserved the Federal Reserve's role as the
regulator of bank holding companies, with the mission of supplementing
the work of the primary bank regulators by focussing on risks arising
outside the bank.

At the same time, Congress reinforced the role of the primary bank
regulators, both federal and state, in two ways: first, it required the
Federal Reserve, in its role as 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 from
bank holding companies by using their examination reports "to the
fullest extent possible." In both cases, the new law used stronger
language than has ever been used before in this context, in order to
underscore its intention that the role of the primary regulator not be
needlessly duplicated, and that the burdens of regulation on banks be
kept to the absolute minimum. By thus reemphasizing the primary
regulator'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 implicitly underscored its
intention that the bank safety net not be extended to holding company
affiliates of banks.

One novel aspect of Gramm-Leach-Bliley is its emphasis on the role of
"functional regulation" \-- the principle that just as banking
activities should be regulated by banking regulators, and holding
company activities by the holding company regulator, securities
activities should be regulated by securities regulators, and insurance
activities by insurance regulators. Where prior law imposed no
constraints on the authority of bank and bank holding company regulators
to examine into the operations of insurance and securities affiliates of
banks and bank holding companies, respectively, the new law limits the
circumstances under which they may examine or require reports from such
functionally supervised subsidiaries and affiliates. Only if there is
reasonable cause to believe that the subsidiary or affiliate is either
engaged in activities that pose a material risk to the bank or is
operating in violation of a law for which that regulator has specific
jurisdiction may the banking regulator cross this barrier. Otherwise the
bank regulator must rely on the functional regulator for this
information.

Some have expressed a concern that, by limiting the authority of the OCC
and our sister banking agencies to examine functionally regulated
companies, GLBA will make it more difficult for us to assess the
consolidated risk of banks and bank holding companies. This would be
serious if it were true.

But I don't believe it is. Viewed in perspective, I believe the new law
simply extends the existing multi-agency concept of financial
supervision that we've been refining for nearly a century. In fact,
Gramm-Leach-Bliley adds depth to supervision by drawing on the
specialized expertise of insurance and securities regulators to ensure
that these highly complex activities \-- which some banking
organizations will be engaging in for the first time \-- are conducted
safely and soundly, in a way that lends strength to the bank instead of
detracting from it.

Certainly the new law presents a major challenge to all financial
regulators: to pursue the kind of interagency cooperation and
coordination that is needed to ensure the safety and soundness of our
financial services industry. The banking agencies are already discussing
this objective with their counterparts in the insurance and securities
industry, and with each other. What is essential is not only a common
recognition of, and respect for, the primary regulatory roles assigned
to individual agencies, but recognition by each of the
interrelationships among these roles.

When Congress passed the Financial Institutions Reform, Recovery, and
Enforcement Act in 1989, the [Washington Post]{.underline} published a
wiring diagram purporting to show how FIRREA had changed \-- and vastly
complicated \-- the relationships among the various supervisory
agencies. It was a maze of solid and broken lines almost impossible to
unravel. The diagram was widely reprinted, usually without comment, for
the implication was clear: that the U.S. financial regulatory structure
was hopelessly tangled and getting worse. If ever there was proof of our
national penchant for convoluted bureaucratic "solutions" to critical
public policy questions, this seemed to be it. If ever the case for
rationalizing the structure of regulation had any force, it was then.

That was more than a decade ago. During that decade, we have been given
new supervisory tools and have developed new approaches to supervision.
We have been tested by crisis, and have learned from the experience. And
we have seen an era of unparalleled prosperity for the U.S. banking
industry. I think it is quite clear that we do a better job supervising
banks today than we did when FIRREA was enacted.

There will always be purists who won't be satisfied with anything less
than wholesale restructuring of financial regulation. Their day may yet
come. But I believe the odds are against it, as long as the financial
regulatory agencies \-- all of us \-- work together in the spirit of
cooperation that has long been the system's strength. By carrying out
our respective responsibilities with a view to minimizing duplication
and maximizing coordination, and with mutual regard for our respective
roles and responsibilities, we can assure that our present regulatory
structure will serve us as well in the future as it has in the past.