Remarks by 
John D. Hawke, Jr.
Comptroller of the Currency
Before the
University of North Carolina School of Law
Center for Banking and Finance
Charlotte, North Carolina
April 5, 2001

     Its a pleasure once again to be a participant in the University of 
North Carolina School of Laws Banking Institute, being offered for the first 
time under the auspices of the new Center for Banking and Finance.  The 
Centers commitment to teaching, scholarship, and service to the banking 
and law communities will be of immense value -- and a source of immense 
pride -- to North Carolina and the whole nation in the coming years.  
I congratulate the faculty and staff who have worked so hard to transform 
the Center from a vision into a reality. 

     The last time I was with the Institute was in Chapel Hill, and I spoke 
to you then about financial modernization and the legislation that went on 
to become the Gramm- Leach-Bliley Act of 1999.  Since we have decamped to 
Charlotte for this program, it seems fitting to turn to a subject that, 
for many, virtually defines this great city.  That subject is consolidation 
in the financial services industry -- a trend that gave impetus to 
GLBA, and that has, in turn, been given impetus by it.

     The FDIC recently released its "Quarterly Bank Profile," covering the 
last three months of 2000, and that report reminded us again of how far 
industry consolidation has come.  In 1985, there were no fewer than 14,400 
insured commercial banks in the United States.  That number has shrunk every 
year since then, leaving us with around 8300 banks today.  And of course this 
shrinkage understates the true level of merger and acquisition activity, for 
the aggregates include the new charters that are added to the system each year.  

     Closer inspection of the FDICs latest numbers actually reveals some 
slowdown in the rate of consolidation from the frenetic pace of earlier years, 
and that trend also seems likely to continue for some time.  It may be related 
to the slowdown in the economy or it may simply indicate that the industry is 
still busy digesting earlier acquisitions -- or both.  But I have not heard 
anyone suggest that weve finally reached critical mass, and, with more than 
8000 independent banks still on the scene, there seems to be ample opportunity 
for further consolidation to occur. 

     If history is a guide, North Carolina will be in the forefront of whatever 
innovations are in the industrys future.  This is a safe prediction now, but 
who would have predicted 15 or 20 years ago that Charlotte would become one of 
the worlds great banking centers -- or, indeed, that the structure of banking 
in the United States would look like it does today?  So much has changed over 
that time that its easy to forget what the banking landscape looked like before 
the leaders of Charlottes banking community set out to transform it.  

     Twenty years ago, banking was essentially a local business.  Indeed, a guiding 
principle for antitrust analysis of bank mergers, first articulated by the Supreme 
Court in the mid-1960s, was that banking markets are primarily local in character.  
That principle was buttressed by pervasive legal constraints designed to prevent 
the geographic expansion of banks -- constraints that protected competitors, but 
deprived banking customers of the efficiencies of open markets and real competition.  
During the 1980s, those barriers started to fall as leaders like Hugh McColl and Ed 
Crutchfield brought their intellect, imagination, and energy to bear on the business.  
Because of their vision -- and their relentless pursuit of a competitive marketplace -- 
we have today a genuinely national, and enormously competitive, banking system.  
Charlotte has become one of its capitals.  

     Those who opposed these efforts and sought to retain the insulation from 
competition that banks had traditionally enjoyed argued that a more consolidated 
industry would be unresponsive to local needs and impossible to supervise.  But 
neither concern has been borne out.  Changes of name and ownership involve 
adjustments on all sides, but most customers have found that they now enjoy the 
best of both worlds -- personalized, highly responsive service and access to a 
comprehensive range of financial products.  For example, the evidence suggests 
that small business loans and financing for community development projects are 
more readily available now than they ever have been.  And where there was any 
basis for believing that a merger might result in less responsiveness to local 
needs, new entrepreneurs have been quick to enter the market with newly chartered 
institutions.

     For our part, I believe that regulators have demonstrated over time that 
were fully capable of adapting to the supervisory challenges presented by a 
restructuring industry.  Today large bank supervision has become a continuous 
process rather than an episodic event.  In our large bank program, which covers 
almost 30 of the countrys largest banks, we now maintain full-time teams of 
resident examiners, who cover not only basic safety and soundness supervision, 
but all of the other specialties, as well -- capital markets, compliance, asset 
management, MIS, and so on.  More than 350 dedicated OCC examiners and support 
staff -- men and women specifically trained to identify and address the existing 
and emerging risks associated with complex banking organizations -- staff our 
large bank program, which has been widely studied and emulated by other U.S. 
and many foreign bank supervisory agencies.  With this experience in supervising 
Iarge, complex banking institutions, Im confident that our capabilities are 
equal to whatever supervisory challenges a consolidating industry poses in the 
years ahead -- just as they have been in the past.  

     However, there is an Achilles heel in our supervisory system, and its a 
vulnerability thats grown increasingly troublesome as the industry confronts a 
possible turn in the economy, and that is the way in which supervision is funded.  
It was considered quite a significant reform when, back in the early twentieth 
century, the country converted from an arrangement under which banks paid a flat 
fee for their examinations to one that assessed banks on a sliding scale based 
initially on their total capital and then on their assets.  That reform eliminated 
the incentive for examiners to cram as many exams as possible into a workweek in 
order to maximize their income. 

     This change also introduced other, less desirable incentives.  For a long time, 
higher supervisory assessments were considered a small price to pay for growth, and 
banks paid them, for the most part, without a second thought.  But two recent 
developments changed that.  First, a more competitive financial marketplace and 
intensifying cost pressures have made bankers more attuned even to relatively small 
opportunities for savings.  Second, and more important, we have seen a change in the 
nature of the competition for membership that lies at the heart of our dual banking 
system.  Traditionally, a bankers choice between a national or state charter centered on 
such qualities as supervisory philosophy and responsiveness, examination quality, 
permissible activities, and cost.  But with the narrowing of differences between the 
powers available to state and national banks, in large part due to state wild-card statutes, 
and with the lessening of burdens on state banks interstate operations brought about by 
parity legislation and by agreements among the states, that competition has focused more 
and more on assessments and the cost of supervision. This has had both positive and negative 
consequences.  On one hand, sensitivity to supervisory costs has encouraged the OCC and 
state supervisors to be extremely careful about their spending.  Efficiency has long 
been heralded as a major advantage of the dual banking system, and theres little doubt 
that the burdens of supervision, financial and otherwise, might be greater but for the 
responsiveness of the OCC and state supervisors to the need to be more efficient.  
Of course, the most substantial portion of the costs of supervising state banks are 
those of the Federal Reserve and the FDIC, who perform for state-chartered banks exactly 
the same functions that OCC performs for national banks, but without imposing any charge 
for their services, as must the OCC.  Because those agencies are essentially self-funded -- 
unlike the OCC, which is almost totally dependent on the assessment revenue it collects 
from national banks -- they are not subject to the external pressures for efficiency 
that work alike on state supervisors and the OCC. 

     Still, it has to be recognized that the effectiveness of supervision can suffer, and 
serious inequities can result, if these pressures get out of hand.  Consider, for example, 
what happened during the wave of large bank failures in the late 1980s and early 1990s -- 
a period of stress in the banking system that had not been seen since the Great 
Depression.  Excruciating demands were placed on supervisors to staff up in order to 
manage the exigencies of a banking system under severe pressures.  Yet just as these 
demands were being felt, the system was contracting as banks failed, thereby reducing 
the base on which fees could be increased to support the increased costs.  At the OCC this 
meant significant increases in assessments -- 14 percent in 1989, another 11 percent in 
1991, and a whopping 30 percent in 1992.  To be sure, there was a series of reductions in 
subsequent years, but one conclusion is inescapable: well-managed banks -- the survivors 
-- were forced to bear significant additional costs to support the supervisory resources 
needed to deal with problem institutions.  This is a perversity in the system that must be 
addressed before we experience any repeat of the conditions that created such pressures. 

     Even in good times there are perversities in an assessment-based system of 
funding supervision.  The restructuring of the industry over the past 15 years, for 
example, has had adverse effects on both the OCC and state bank regulators.  Every time 
there is a merger between a state bank and a national bank, one or the other system will 
lose a member -- and the larger the bank, the larger the loss of revenue.  Even apart from 
mergers, where a large multibank holding company with banks in several states "rolls up" 
its subsidiaries into a single bank with an interstate branch network -- something thats 
happening ever more frequently since the passage of the Riegle - Neal Interstate Banking 
and Branching Efficiency Act of 1994 -- there will be a loss to either system.  The OCCs 
assessments will be diminished because marginal assessment rates decline as the size of 
the consolidated bank increases.  And in the case of a state bank "roll up," each state in 
which a separate charter previously existed other than the home state of the consolidated 
bank will lose dues-paying members. 

     The effect of these changes on state banking systems, which already spread their 
expenses over a smaller base of institutions, can be very significant.  In 24 of the 50 
states, a single large state-chartered institution accounts for 25 percent or more of all 
state chartered assets -- and, presumably, more than 25 percent of the total assessment 
revenues of the state banking authority.  Thus, the loss of a large state bank in those 
states has the potential for significantly weakening the support for state bank supervision. 

     A healthy system of state bank supervision is very much in the national interest -- 
not only to maintain a vigorous and dynamic dual banking system, but also to protect 
important federal interests, for the federal "safety net" stands behind all insured banks, 
irrespective of charter.  Thus, to paraphrase John Donne, dont ask for whom the bell tolls 
when a large state bank exits the state system: it tolls for all of us. 

     The question, of course, is what to do about this.  I have already stated publicly 
that the direct imposition of new federal fees on state banks is not a politically viable 
approach -- even though there is no basis for justifying the federal subsidy that is 
presently delivered by the Fed and the FDIC.  I believe we must come up with a new 
method of funding bank supervision -- a method that will strengthen both the federal and 
state supervisory processes, protect them from the impact of random structural changes, 
and ensure that all supervisors, state and national, have adequate, predictable resources 
available to carry out effective supervisory programs. 

     There are a number of alternative approaches that one might consider, and I 
believe that now is the ideal time to do so, as the whole topic of the role of deposit 
insurance is being reexamined.  An idea that I think has considerable appeal would draw 
on the earnings of the FDICs insurance funds to defray the costs of both state and 
national bank supervision.  Today, with the funds aggregating about $41 billion, and 
generating earnings of more than $2 billion per year, there would be considerably more 
funds available to defray the costs of FDIC, OCC, and state supervision than those 
agencies today spend in total.  Working together, and using the present costs of 
supervision as a baseline, state and federal supervisors could develop an allocation 
formula that would reflect not only the breadth of responsibilities of the agencies, 
but the condition, risk profile, size, and operating environment of the banks they 
supervise.  All agencies would remain free to impose supplemental assessments if they 
chose, but competitive pressures would presumably work to keep these charges at a minimum.

     This arrangement would offer several meaningful advantages.  First, it would 
remedy the inequity to national banks that exists today, resulting from the fact that the 
FDIC already funds its supervision of state banks out of the earnings of the deposit 
insurance funds, to which all banks have contributed.  We estimate that national banks 
account for 52 percent of the contributions to the bank insurance fund since the resources 
of that fund were exhausted in 1991.  Considering that the FDIC spent about $590 million 
on state nonmember bank supervision in 1999, national banks can be viewed as having 
contributed about $300 million to the FDICs costs of supervision -- this in addition to 
the $384 million in assessments they paid to the OCC for their own supervision. 

	Of course, there are other roads we might take to placing our supervisory funding 
on a sounder and fairer basis.  The inequity of requiring national banks to pay a share of 
the cost of supervising state-chartered banks could be remedied by having the FDIC 
return to national banks -- or to the OCC, for pass-through to national banks -- that 
portion of their insurance premium that is currently diverted to supervision.  Such an 
approach would get national banks out of the business of subsidizing their competitors, 
with relatively minor impact on FDIC resources. 

	But ending this anomaly is not just a matter of fairness to national banks.  The 
very constructive debate now taking place on the future of deposit insurance, and the role 
that a truly risk-based system of insurance can play in bank supervision, has stressed the 
importance of allocating the costs and benefits of insurance in an equitable and efficient 
manner.  Separating the actual costs of the FDICs supervisory functions from the costs 
of providing deposit insurance is an essential step toward efficient and rational pricing of 
both. 

     Theres a second major advantage of a system under which the OCC and the state 
supervisory agencies would be funded out of the earnings on the insurance funds.  I 
believe it would reinvigorate the dual banking system.  Although there has always been 
an assessment differential between state and national charters -- and, given the federal 
subsidy to state banks, it has often been substantial -- most banks are likely to choose 
their charters more on the basis of such non-financial factors as regulatory philosophy, 
access, and the perceived quality of supervision.  Indeed, the size and health of the 
national banking system is testimony to this conclusion.  Banks would still be free to 
choose under the system Ive described, but those factors would almost certainly loom 
larger in a regime that was more equitable with regard to supervisory charges, and that 
encouraged competition in those qualities that are more relevant to a safe and sound 
banking system. 

     The devil is always in the details, of course, and obviously the approach Ive 
suggested this evening is little more than that -- a concept that requires a full airing and 
fleshing out.  Thats what Im proposing to begin today.  I would like to stimulate a broad 
dialogue among all of the interested parties and policy makers.  Through such a dialogue, 
I believe we can develop concrete proposals to overhaul the current system, and replace it 
with one that supports rather than undermines our ability to achieve common goals.  

     Theres no doubt in my mind that we have the tools and the expertise to 
effectively supervise the banking industry of today and tomorrow, whatever form it takes.  
Thats especially true if all who play a role in our supervisory system work and compete 
constructively and not at cross-purposes.  The time to start is now.