Let’s look before we leap…

Since the founding of this country, the banking system has had its roots firmly planted in the individual States. While the dual banking system actually started with the National Bank Act of 1864, the Federal Banking system as we know it today had its start in the Great Depression, when the FDIC was founded. For over seventy years, we have lived in a dual banking system that has allowed for innovation and competition not only between the banks themselves, but also between the regulators, whether they are State or Federal regulators.

One group of regulators watched over and regulated those institutions that wanted a national presence, and  another group of more nimble regulators, together with the FDIC,  gave smaller community banks a more streamlined regulatory environment, and one in which local conditions could influence policy, and guidance. This system has provided enormous benefits, from competition between the states, regulatory innovation, the allowance for new and alternative ways of thinking, and the determination of what works on a state by state basis.

Because of the recent calamity of events that was spawned by the “Too Big To Fail,” our current administration is proposing a single super regulator for all banks…  This direction is one that needs to be studied carefully, not rushed into, and examined for the flaws that it contains.

The Administration states that it does not look to undermine the dual banking system with a single federal regulator that would have two divisions; one for national charters and one for state charters. That is functionally not workable. What would be the value of maintaining a State Charter? If 80% of deposits are currently held with national charters, what voice would the remaining 20% deposit share of state chartered banks receive?

In the rush to deal with problems caused by the systemically important institutions we need to be careful to not create regulatory monopoly that will stifle any innovation, and could in fact cause a credit crunch. We should all remember that during the real estate decline of the 90′s, Office of Thrift Supervision regulators used their negative experience in New England to mold their regulatory imperatives as they crossed the country, and either hastened the demise of many banks in places where there was not a real estate issue, or created a drought of lending due to their overzealous oversight… We have also seen the value of a system of checks and balances recently with the trepidation by the FDIC to accept the Basel II standards. Had the Fed had its way, we would have allowed for the lowering of capital standards at just the time that the financial meltdown occurred, which would have only exacerbated our current situation.

The combination of the Office of the Comptroller of the Currency with the Office of Thrift Supervision by itself would not pose any significant issue in this modern day banking environment. The FDIC should remain as the Federal Regulator for State Chartered institutions, and a new council of regulators should be established to oversee and advise on any systemically important institutions.

The administration should bolster the ability of the OCC and the FDIC in conjunction with the individual State’s Department of Banking to be in the position to regulate, and administer the failure of “any” institution, and not seek to create the path by which the extinction of all Community Banking is certain.

We should also not underestimate the complexity of this issue…

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