Independent bank regulation is essential for sustained economic growth: its absence has sometimes proved to be catastrophic - Industry Overview

Business Economics, July, 2002 by John D. Hawke, Jr.

September 11, 2001 has provided new awareness of the security challenges facing international finance. Convergence in international financial practice and an increased sense of caution has improved bank supervision and practice, leading to more efficient resource allocation. However, it is unlikely that there will ever be a one-size-fits-all template for financial supervision: historical evolution and culture imply that different countries will find their unique solutions. Nonetheless, the work of the Basel Committee on Banking Supervision has developed important principles that should be followed everywhere. One is that banking supervision should be independent and non-political. A second is that supervision standards should not be allowed to become lax. These principles are illustrated by discussion of instances when they have not been observed, contributing to banking problems in Argentina, Japan, South Korea, Turkey, and the United States. Since September 11, 2001, the value of independent, firm supervisi on has been confirmed in the United States, where the banking system is strong and likely to remain so.

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There's a new realism in our thinking about the global economy since September 11, 2001. We now have a keener awareness of the special security challenges--as well as the more familiar political and financial challenges--that internationally active businesses have to contend with. This means adjustment, by all parties, to the realities of the new international environment.

This more balanced, more cautious, perspective on the global economy is an enormously positive development. To the extent that it contributes to a better deployment of our finite stock of human and financial assets, it bodes well for the future of international trade and investment, and therefore for our collective well being. Let me go further and suggest that the most commonly cited benefits of globalization--new markets, access to innovation, and production according to comparative advantage and specialization--are not the only important benefits that globalization has brought us.

I am not by any means discounting the importance of the bottom line, probably the second most powerful animating force known to mankind. But I do believe that we're profiting from the global convergence of financial practice, and a similar convergence in financial oversight and supervision, in other ways that have little to do directly with dollars or deutschmarks. Convergence has given us a wider range of experiences on which to draw--and from which to learn

As U.S. bank supervisors, we're intensely interested in the experiences of our supervisory colleagues around the world. We work closely with them, both bilaterally and through the Basel Committee on Banking Supervision. It's part of our ongoing effort to raise bank supervisory standards and practice, and to bring them into greater harmony among both the advanced nations of the world and the world's emerging economies.

In the U.S., our interest in the structure and operations of bank supervision in other nations isn't simply a matter of professional curiosity; it goes deeper than that. For more than a century, the structure of bank supervision in the United States has been a controversial subject. And although U.S. lawmakers have frequently tinkered with that structure, it's resisted fundamental change. As someone who has spent the better part of a long career working within that structure, I confess to a certain affection for it, in all of its convoluted glory. Moreover, the system works quite well; and the various players have learned how to live with it.

But there are some who think that it's not enough that a system works in practice. They believe it should work in theory as well, and our bank supervisory structure probably fails that test. It's not uncommon for those who have not lived within the present system to view it with chagrin on first exposure. Understandably, it presents an inviting target for rationalization and restructuring.

What the structure of bank supervision in the United States would look like if we were designing it from scratch is an interesting and provocative subject for those of us involved in the supervisory process, but it's not the subject I'll be addressing today. There's no reason to bog you down in the arcane politics of bank supervision and regulation, or in the details of how our system compares with those in other countries.

Indeed, one of the lessons we have already learned from the Basel Committee's work on a new international capital accord is that it's very difficult to find common institutional arrangements suitable for all countries at all times.

This shouldn't come as a surprise. Institutions spring uniquely from a country's culture and history. Whatever else one might say about the U.S. supervisory structure, which has emerged largely through historical accident, it has come to reflect distinctively American values and habits--competition, egalitarianism, and suspicion of authority (especially centralized authority).