The nearly 12,000 federally insured banks and thrifts in the United States, which hold more than $5 trillion in assets, are regulated and supervised by four federal agencies with similar and sometimes overlapping regulatory and supervisory responsibilities. Although many industry representatives, legislators, and regulators have in the past recognized the need for consolidation and modernization of federal bank oversight, major reform proposals changing the structure of bank and thrift oversight have not been adopted. This report was prepared in response to a request from Congressman Charles E. Schumer that we provide information to help evaluate efforts to modernize the U.S. system of financial industry oversight and identify potential avenues for such modernization. Much of the information in this report is based on our studies of the structures and operations of bank regulation and supervision (oversight) activities in Canada, France, Japan, Germany, and the United Kingdom. This report focuses on the oversight of two major categories of depository institutions: commercial banks and thrifts. Commercial banks and thrifts originally served very different purposes and markets. Commercial banks issued debt payable on demand, which was backed by short-term commercial loans. The customers of commercial banks tended to be businesses and wealthy individuals seeking liquid deposit accounts. Savings and loan associations, however, used deposits to fund home mortgages of their members. But, because of the long terms of mortgages, members were restricted in their ability to withdraw their funds. Savings banks were initially designed to provide a range of financial services to the small saver. Their asset portfolios were generally more diversified than those of savings and loan associations to enable them to provide more flexible deposit terms. Despite the historical differences between these institutions, the powers and services of banks and thrifts have converged over time with few practical differences remaining in their authorities, except that these institutions continue to be subject to different regulatory schemes. (See app. I for more information on the history of U.S. bank and thrift oversight.) At the end of 1995, the United States had nearly 12,000 banking institutions. In this report, we refer to commercial banks and thrifts collectively as banking institutions. These institutions held about $5.3 trillion in loans and other assets (see table 1.1). As shown in table 1.1, the 9,941 commercial banks held 81 percent of total bank and thrift assets at the end of 1995. The 2,029 thrifts held 19 percent. Holding companies, which are established for a variety of business, regulatory, and tax reasons, are the dominant form of banking structure in the United States. In fact, 96 percent of the assets of all U.S. commercial banks are in banks that are part of a holding company. As of December 31, 1995, about 6,122 bank holding companies and 895 thrift holding companies were operating in the United States. Of those, 4,494 bank holding companies and 833 thrift holding companies each held only 1 bank or thrift. Holding companies may consist of a parent company, banking subsidiaries, nonbanking subsidiaries, and even other holding companies—each of which may have its own banking or nonbanking subsidiaries. Figure 1.1 is a simplified illustration of a hypothetical holding company with wholly owned banking and nonbanking subsidiaries. Parent companies own or control subsidiaries through the ownership of voting stock and generally are “shell” corporations—that is, they do not have operations of their own. Banking subsidiaries are separately chartered banks subject to the same regulation and capital requirements that apply to other banking institutions. Nonbanking subsidiaries are companies that may be engaged in a variety of businesses other than banking; however, any nonbanking activities of a bank holding company subsidiary must be closely related to the business of banking and produce a public benefit. Thrift holding companies may be owned by or own any type of financial services or other business. Many bank holding companies have established nonbank subsidiaries engaged in consumer finance, trust services, leasing, mortgage lending, electronic data processing, insurance underwriting, management consulting services, and securities brokerage services. Holding companies in the United States may also have multiple tiers. For example, as we mentioned above, holding companies may have subsidiary holding companies that have their own banking or nonbanking subsidiaries. Banking subsidiaries may also have their own subsidiaries. However, the activities of these bank subsidiaries are limited to those allowable for their parent institution. The largest holding companies in the United States often have very complex, multitiered structures. Bank and thrift holding companies are particular to the U.S. financial system. In many other countries, nonbanking activities may be conducted either in a bank or in subsidiaries of a bank rather than in subsidiaries of a parent company. The structure of the U.S. banking industry has changed substantially over the past 10 years. The industry is consolidating in response to the removal of legal barriers to geographic expansion, advancing technologies, and the globalization of wholesale banking, among other things. Between 1985 and 1995, the number of banks and thrifts in the United States fell by about 34 percent due to consolidation through mergers and also bank and thrift failures. The number of banks decreased by 4,476—from 14,417 to 9,941. The number of thrifts decreased by 1,597—from 3,626 to 2,029. Industry consolidation has been characterized by a greater concentration of deposits among the largest banking companies in the country. For example, the 10 largest bank holding companies controlled 17.4 percent of bank deposits in 1984; they increased this share to 25.6 percent in 1994. Similarly, the 10 largest thrift institutions increased their share of deposits from 12.4 percent to 17 percent. However, although nationwide concentration has been increasing over the past 10 years, increases in local market concentration have been much more modest relative to the changes at the national level. According to industry analysts, this has occurred because banking institutions not located in the same local market have merged, and constraints imposed by antitrust laws have helped to prevent increases in concentration at the local level. The nature of the activities that banking institutions engage in has also changed drastically over the past several decades. Although traditional lending still dominates banking institutions’ balance sheets, banking institutions have been moving toward more nontraditional products, such as mutual funds, securities, and derivatives and other off-balance sheet products. Banking institutions, with about $5.3 trillion in assets at the end of 1995, constitute the largest single segment of the financial services industry. However, banking institutions’ share of the financial services industry shrank from about 45 percent in 1985 to about 30 percent in 1995. This decrease has been attributed to greater competition in the financial services industry. Consumers can now choose from a variety of providers in obtaining financial services once offered only by commercial banks and thrifts. For example, money market mutual funds, securities firms, and insurance companies all now offer interest-bearing transaction accounts. Further, although banks and thrifts were long regarded as the primary providers of consumer credit, such credit is now routinely provided by finance companies as well as by a wide variety of retail firms through credit cards and other means. The federal system of oversight of banking institutions in the United States is a highly complex system. Federal responsibilities for bank authorization, regulation, and supervision are assigned to three bank regulators and one thrift regulator that have jurisdiction over specific segments of the banking industry (see table 1.2). Although Treasury plays no formal role in bank oversight, it has some related responsibilities. The Office of the Comptroller of the Currency (OCC) currently has primary responsibility for regulating and supervising national banks—that is, banks with a federal charter. OCC also has primary responsibility for regulating and supervising federal branches and agencies of foreign banks operating in the United States. As of December 31, 1995, OCC was the primary federal supervisor of 2,861 of the 11,970 banking institutions in the United States. Those banks held about 45 percent of the total U.S. banking assets in the United States. The Federal Reserve System (FRS) is the federal regulator and supervisor for bank holding companies and their nonbank subsidiaries, and it is the primary federal regulator for state-chartered banks that are members of FRS. It is also a federal regulator for foreign banking organizations operating in the United States. In addition, it regulates foreign activities and investments of FRS member banks (national and state), Edge corporations, and holding companies. As of December 31, 1995, FRS had primary supervisory responsibility for 1,041 of the 11,970 banking institutions in the United States. The assets of these banks represented about 18 percent of the total U.S. banking assets. As of December 31, 1995, FRS also had responsibility for regulating 6,122 bank holding companies, 393 foreign branches, and 153 foreign agencies operating in the United States. The Federal Deposit Insurance Corporation (FDIC) is the primary federal regulator and supervisor for federally insured state-chartered banks that are not members of FRS and for state savings banks whose deposits are federally insured. FDIC is also responsible for administering the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF).Additionally, FDIC is responsible for resolving failed banks and for the disposition of assets from failed banking institutions. At the end of 1995, FDIC was the primary federal regulator and supervisor for 6,632 of the 11,970 insured banking institutions. These banking institutions represented 22 percent of the total U.S. banking assets. The Office of Thrift Supervision (OTS) is the primary regulator of all federally- and state-chartered thrifts whose deposits are federally insured and their holding companies.