Abstract
Deregulation and financial consolidation have led to the development of financial holding companies — allowing commercial banking, insurance, investment banking, and other financial activities to be conducted under the same corporate umbrella — and the Federal Reserve has been named supervisor of the consolidated enterprise. This paper will suggest economies of scope between the Fed's inherent central banking responsibilities and those of an umbrella supervisor, and that these dual roles benefit both the Fed and functional regulators.
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References and Notes
GBLA formally added protecting the domestic and international payments systems as a role for the umbrella supervisor of financial holding companies. See Macey, J. R. Miller, G. P. and Carnell, R. S. (2001) ‘Banking Law and Regulation’, Aspen Law & Business, New York, NY.
Green, E. J. and Todd, R. M. (2001) ‘Thoughts on the fed's role in the payments system’, Federal Reserve Bank of Minneapolis, Quarterly Review, Vol. 25 (Winter), pp. 12–27.
Stevens, E. J. (1996) ‘The Founders’ Intentions: Sources of the Payment Services Franchise of the Federal Reserve Banks’, Financial Services Research Group Working Paper 03-96 (December).
12 USC; Chapter 6, 38 Stat. 251 (23rd December, 1913).
The importance of central bank liquidity facilities for financial and economic stability was discussed at length by Bagehot, W. (1874) ‘Lombard Street: A Description of the Money Market’, Scribner, Armstrong & Co, London. Bagehot described the role of the lender-of-last-resort function in financial system stability.
In his seminal work, Bagehot5 lays the foundation for the difference between financial stability and economic stability — a theory now commonly referred to as the ‘credit view’. See Bernanke, B. S. and Gertler, M. (1990) ‘Financial fragility and economic performance’, Quarterly Journal of Economics, Vol. 105 (February), pp. 87–124.
This is the case whether the shocks emanate from the collapse of a large hedge fund, a foreign banking crisis, new or renewed foreign conflicts, terrorist activities or other events that cause disruptions in financial markets and increase investor demand for liquidity.
12 USC 321. As amended by act of 21st June, 1917 (40 Stat. 232).
For discussions of these issues see Haubrich, J. G. and Santos, J. A. C. (2003) ‘Alternative forms of mixing banking with commerce: Evidence from American history’, Financial Markets, Institutions & Instruments, Vol. 12, No. 2, pp. 121–164. and GAO.11
Goodhart, C. A. E. (2000) ‘The organisational structure of banking supervision’, FSI Occasional Papers No. 1 (November).
See United States General Accounting Office (GAO) (2004) ‘Financial regulation: Industry changes prompt need to reconsider U.S. regulatory structure’, Report to the Chairman, Committee on Banking, Housing, and Urban Affairs, US Senate (October).
In many countries, including the United States, depository institutions are the only private sector entities allowed to have accounts with the central bank and thus the majority of payments flow through the depository institutions sector.
With a few exceptions, daylight overdrafts of reserve accounts are not collateralised and hence, the Fed extends unsecured intra-day credit essentially by guaranteeing finality of payments on its gross settlement system. There is no reason why collateral arrangements could not be established to protect the Reserve Banks from loss in the intra-day credit market; therefore, exposure to risk intra-day is not a compelling argument for Fed supervision of banks and thrifts.
Goodhart10 argues that in the case of emerging market nations, the opposite is true and hence, placing bank supervision in the central bank may be necessary to ensure the quality and independence of the supervisory function in these countries.
see Goodhart.10
Chapter 11 of Benston, G. J. Eisenbeis, R. A. Horvitz, A. Kane, E. J. and Kaufman, G. G. (1986) ‘Perspectives on Safe & Sound Banking: Past, Present and Future’, MIT Press, Cambridge, MA, looks at competition between bank regulators as a healthy check on the regulatory process, making regulatory agencies more accepting of innovations by the regulated. The GAO11 lays out the arguments, pro and con, for a consolidated regulator/supervisor of the new financial conglomerate, but stops short of recommending to the Congress that such a consolidation takes place. They do, however, push for the establishment of a single regulatory agency for each industry.
Rosen, R. J. (2003) ‘Is three a crowd? Competition among regulators in banking’, Journal of Money, Credit and Banking, Vol. 35, No. 6, pp. 967–998.
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See particularly Chapters 6 and 7 of Federal Deposit Insurance Corporation (FDIC) (1998) ‘Managing the crisis: The FDIC and RTC experience — Chronological overview’, http://www.fdic.gov/bank/historical/managing/Chron/index.html (accessed 1st April 2005).
For a discussion of enterprise-wide risk management in banking companies, see Bies, S. S. (2004a) ‘Enterprise perspectives in financial institution supervision’, Remarks at the University of Connecticut School of Law, Connecticut Law Review Symposium, Hartford, CT (21st October).
Bies, S. S. (2004) ‘Using enterprise-wide risk management to effectively execute business strategies’, Remarks at the Risk Management Association and Consumer Bankers Association Retail Risk Conference, Chicago, IL (16th July).
One has to look no further than the Office of Federal Housing Enterprise Oversight to see how dependence on Congressional appropriations to fund operations can interfere with the independence of a regulatory agency and hinder its ability to carry out its mission. See, Eisenbeis, R. A. Frame, W. S. and Wall, L. D. Resolving large financial intermediaries: Banks versus housing enterprises (October 2004)’, FRB Atlanta Working Paper No. 2004-23a. Available at SSRN: http://ssrn.com/abstract=639601.
This may require the Fed to rethink its role as a bank supervisor. The ongoing consolidation of the banking system and the attractiveness of the national bank charter, however, may reduce the importance of the Fed's primary supervisory responsibilities to the point where perceived conflicts of interest between its functional and umbrella supervisory roles are not economically important.
For a discussion of how competing objectives can lead to suboptimal monetary and/or supervisory policies, see Goodhart, C. A. E. and Schoenmaker, D. (1992) ‘Institutional separation between supervisory and monetary agencies’, Giornale degli Economisti, Vol. 51, pp. 9–12, 353–439.
Haubrich, J. G. (1996) Combining Bank Supervision and Monetary Policy, Federal Reserve Bank of Cleveland, Economic Commentary (November).
Ioannidou, V. P. (2005) ‘Does monetary policy affect the central bank's role in bank supervision?’ Journal of Financial Intermediation, Vol. 14, pp. 58–85.
Peek, J., Rosengren, E. S. and Geoffrey, M. B. T. (1999) ‘Using bank supervisory data to improve macroeconomic forecasts’, New England Economic Review, September, pp. 21–32.
Feldman, R. J., Kim, J., Miller, P. J. and Schmidt, J. E. (2003) ‘Are bank supervisory data useful for macroeconomic forecasts?’ Contributions to Macroeconomics, Vol. 3, No. 1, Art. 3, find similar results for forecasts of unemployment, although their forecast improvement was substantially smaller, leading these authors to question the value of supervisory information in macroeconomic forecasts.
Green, E. J. and Osband, K. (1991) ‘A revealed preference theory for expected utility’, Review of Economic Studies, Vol. 58, pp. 677–696.
Greenspan, A. (1994) ‘The views of the Board of Governors of the Federal Reserve on the consolidation of bank supervision and regulation’, Banking Industry Regulatory Consolidation Hearings before the Committee on Banking, Housing, and Urban Affairs, US Senate, S. Hrg., pp. 103–692, 130–156.
Pauli, R. (2000) ‘Payments remain fundamental for banks and Central Banks’, Bank of Finland Discussion Paper No. 6.
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Ferguson Jr., R. W. (2000) ‘Alternative approaches to financial supervision and regulation’, Journal of Financial Services Research. Additional citation details for this paper are unclear. The journal is bound as 1999, Vol. 16 (No. 2/3), but the pages list it as 2000, Vol. 17 (No. 1). The page numbers on the top of the page run from 297 to 303, but on the bottom run from 207 to 213.
Ferguson Jr., R. W. (2003) September 11, the Federal Reserve, and the Financial System, Remarks at Vanderbilt University, Nashville, TN (5th February).
Schuler, M. (2004) ‘Integrated financial supervision in Germany’, Centre for European Economic Research, Discussion Paper No. 04-35.
Sah, R. K. and Stiglitz, J. E. (1986) ‘The architecture of economic systems: Hierarchy and polyarchy’, American Economic Review, Vol. 76, pp. 716–727.
Notably, even consolidation of the OTS into the OCC is not actively under consideration, despite both agencies being housed within the US Treasury Department.
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Views stated in this paper are those of the authors and not necessarily those of the Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal Reserve System.
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1 Joseph G. Haubrich is a consultant and economist in Research at the Federal Reserve Bank of Cleveland, where he specialises in research relating to financial institutions and regulations. He also serves on the Bank Management Committee. Before joining the Bank in 1990, Dr Haubrich was Assistant Professor of Finance at the Wharton School of the University of Pennsylvania. Born in Oak Park, Illinois, Dr Haubrich earned his bachelor's degree in economics from the University of Chicago and his master's and doctoral degrees from the University of Rochester in New York. He has also been a referee for several professional journals.
2 James B. Thomson is Vice President and Economist in the Office of Policy Analysis at the Federal Reserve Bank of Cleveland. His research interests focus on financial markets and institutions, historical banking, and government-sponsored enterprises. Before joining the bank in 1986, Dr Thomson worked as a financial economist at the US General Accounting Office. He is currently a member of the American Finance Association as well as the Financial Management Association. He has published numerous papers on federal deposit insurance, bank structure, and bank capital regulation, including papers in the Journal of Finance, Journal of Money, Credit, and Banking, and Journal of Small Business Management. Dr Thomson received a bachelor's degree in economics from Georgia Institute of Technology and a master's and PhD in economics from The Ohio State University.
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Haubrich, J., Thomson, J. Umbrella supervision and the role of the central bank. J Bank Regul 10, 17–27 (2008). https://doi.org/10.1057/jbr.2008.21
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DOI: https://doi.org/10.1057/jbr.2008.21