Bank supervision in the U.S. and the G-10: implications for Basel II

RMA Journal, The, June, 2003 by Daniel E. Nolle

The author compares the U.S. with other G-10 countries regarding key aspects of permissible banking activities. One conclusion is that banks in the U.S. face greater restrictions, and possibly more intensive supervisory oversight, than do banks in most other G-10 countries. Second, the majority of G-10 countries fund supervision in full or in part by levying fees on supervised institutions, a norm that is relevant to the ongoing debate in the U.S. on the most appropriate way to fund banking supervision.

Across the globe, recent banking and financial crises, as well as significant structural changes in the banking industry, have given impetus to policy discussions on the structure and implementation of bank supervision. Debate on these issues in G-10 countries has been further stimulated by the advent of the revised Basel Capital Accord, which emphasizes the role of market forces as well as individual bank judgment in managing risks. In addition, a few G-10 countries have recently implemented significant changes in the structure of banking supervision, such as assigning supervisory responsibility to a single authority. Others, including the U.S., debate changes in supervisory structure. (1)

Frequently, policy discussions on regulatory issues take only a national perspective. However, it can be useful to compare circumstances across countries. Doing so can yield insight into best practices and help identify norms in the nature of banking and banking supervision that might not be otherwise apparent.

Bank Powers in the G-10

Passage of the Gramm-Leach-Bliley Act in late 1999 widened the range of activities in which U.S. banking companies can engage, particularly those that choose to become financial holding companies. Nevertheless, that range within the U.S. is still narrower than for banks in most of the other G-100 countries. Table 1 summarizes those activities, including mixing banking and commerce through bank/nonfinancial firm ownership opportunities.

Most G-10 countries allow banks to engage in a full range of securities market activities, including underwriting, brokering, and dealing, and to undertake these activities directly in the bank, rather than through a subsidiary. Fewer G-10 countries allow as wide a range of insurance activities, but in general the main restriction is not on the type of insurance activities. Instead, the restriction lies in where the activities are housed; for example, some or all of a wide range of insurance activities must be done in a subsidiary. The degree of restriction on real estate activities for banks is somewhat greater, either in terms of the range of activities or the corporate organization of the activities (that is, in a subsidiary as opposed to directly in the bank), or both. The column in the middle of Table 1 shows an "Index of Activities Restrictiveness," which allows comparison between countries. Restriction values were assigned, from "1,, for the least restrictions--"unrestricted"--through "4" for the most restrictions--"prohibited." Values for a country were added across each of the three activities; the greater the degree of restrictiveness across activities, the higher the index number for the country Clearly, the U.S. is among the most restrictive countries in the G-10 in terms of the range of activities in which banks can directly engage.

In a similar manner, the right-hand portion of Table 1 compares the extent to which G-10 country banks are allowed to own nonfinancial firms and nonfinancial firms are allowed to own banks. In the majority of G-1O countries, banks are permitted to own nonfinancial firms, and nonfinancial firms have wide latitude to own banks. The U.S. is among a minority of G-10 countries that has somewhat greater restrictions on such mixing of banking and commerce. An index of overall restrictiveness, displayed in the far right-hand column, registers a higher number as the range of permissible activities and mixing banking and commerce opportunities becomes more restrictive. (2) Only the Japanese system records a greater "restrictiveness" score than does the U.S. among G-10 countries.

Banking Supervision in the G-10: Structure

The U.S. supervisory system has the most complex structure in the G-10, and in several key respects its banking supervisory structure puts it among the minority of G-10 countries. However, in one key respect--the funding of bank supervision as practiced by the OCC--the U.S. is similar to the majority of G-10 countries.

Table 2 shows that nine of the 11 G-10 countries assign banking supervision to a single authority. Only the U.S. and Germany have more than one (federal level) bank supervisor. The U.S. also is among a four-country minority of G-10 countries that assigns bank supervisory responsibility to the central bank. Further, the majority of G-10 countries' bank supervisory authorities have responsibilities beyond the banking industry, either for securities firms, insurance firms, or both. This compares to four G-10 countries, including the U.S., where bank supervisors just have responsibility for the banking industry.