Market confidence here and abroad in the Federal Reserve would be undermined. Asset prices could quickly build in an added risk premium, which might lead to tighter credit conditions. These unintended consequences would undermine the legislation’s intent. I’m also concerned about those proposals under consideration that would move the regulatory and supervisory functions now held by the Federal Reserve to other agencies, new or existing. At present, the Federal Reserve is the consolidated supervisor for bank holding companies, a group that has expanded recently as investment banks and other companies formerly outside the Federal Reserve’s purview have been brought under Federal Reserve oversight. In my view, further disaggregation or fragmentation of regulatory oversight responsibility is not the appropriate response to our increasingly interconnected, interdependent financial system. Funneling information streams into diverse institutional silos leads to communication breakdowns and too often to failure to “connect the dots.” In addition, there are clear synergies between the supervisory process and the Federal Reserve’s monetary policy and financial stability missions. The information we collect as part of the supervisory process gives us a front-line, real-time view of the state of the financial industry and broader economy. Monetary policy is more informed as a result. Only with this knowledge can a central bank understand how the monetary policy impulse will be propagated through the financial system and affect the real economy. Similarly, involvement in the supervisory process gives us critical information in fulfilling our lender-of-last-resort responsibilities.

Then there was a monobank, the most important financial institution, which performed both functions, of a commercial bank and of the central bank [however skewed that could have been in the centrally planned economy]. We should also understand that commercial banking was not about evaluating loan applications and looking at projects’ fundamentals or clients’ credentials. In the former socialist countries, there was a State Planning Commission that decided how much of certain production would get produced and by whom. The role of the banks was limited only to finding funds for financing the planned production. It is important to acknowledge the situation at the outset of economic and political reforms. This would also help us to understand some of the problems that the transition economies went through later on. Thirteen years ago there were basically no real banks, no capital markets, no experienced staff and no experienced management. In addition to that, there was no capital in the banks. The ratio of capital to banks’ assets was on average well below 1%. At the same time, there was a boom in entrepreneurial activities, with tens of thousands of new companies sprouting up. Their common characteristic was that they had no history, no experience, no capital, but great need for debt financing. On top of this, all the laws were changing, institutions [such as prudential banking supervision] were built only gradually, and the state as decisive owner in the banking sector was not up to its duties as good manager.