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 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 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 19th 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 
28th 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 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 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 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 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 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.