Statement by John P. LaWare, Chairman, Federal Financial Institutions Examination Council and Member, Board of Governors of the Federal Reserve System, before the Subcommittee on Financial Institutions Supervision, Regulation and Insurance of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, February 18, 1993 - Statements to Congress - Transcript

Federal Reserve Bulletin, April, 1993

I am pleased to be here to discuss regulatory burden and particularly the study of this subject that the Federal Financial Institutions Examination Council (FFIEC) conducted last year in response to section 221 of the Federal Deposit Insurance corporation Improvement Act of 1991 (FDICIA). Some of you may recall that I testified before this subcommittee on behalf of the Federal Reserve on regulatory burden last June, while the FFIEC study was in progress.

The issue of the appropriate level of regulation of banking institutions in not new. Banking institutions serve a vital role in the U.S. economy because of the critical functions they perform in the payments mechanism, as chartered recipients of federally insured deposits, as credit intermediaries, and as the the principal vehicle through which monetary policy is implemented. The strength of the U.S. economy depends on a healthy banking system to support its operations and growth.

It is because of the important role that banking institutions play in the economy that they are regulated. Safety and soundness regulations were introduced in the past century to minimize the destabilizing effects on the economy of difficulties in the banking system. Federal deposit insurance, introduced in the 1930s, further increased the government's need to protect its interests. More recently, because of the banks' importance in providing financial services to consumers and others, they have been viewed as vehicles for implementing social policies, including consumer protection and law enforcement.

The ever-increasing number and detail of regulatory requirements and restrictions, whatever their purpose, have increased the cost and reduced the availability of services from banking institutions. Excessive requirements and restrictions have imposed a heavy burden on institutions. They have reached the point where the aggregate burden may frustrate the purposes of the individual regulations by driving traditional banking functions to alternative providers of these services that may not be subject to the same requirements and restrictions.

SECTION 221: STUDY ON REGULATORY

BURDEN

In enacting section 221 of the FDICIA, the Congress recognized the growing significance of this burden. Section 221 required that the FFIEC review the regulatory policies and procedures of the banking agencies and the Department of the Treasury to determine whether they impose "unnecessary" burden on banking institutions and to identify any revisions that might reduce burden without endangering safety and soundness or without diminishing compliance with or enforcement of consumer laws. The FFIEC was directed to report its findings by December 19, 1992.

During early 1992, the four federal banking agencies and the Department of the Treasury undertook extensive internal reviews of their policies, procedures, recordkeeping, and documentation requirements. In addition, an inter-agency task force assembled and reviewed the public comments that the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS) had received in response to their requests in spring 1992 for comments on regulatory burden. The FFIEC also requested and received public comments on ways that the burden might be reduced, and it held public hearings on this topic in Kansas City, San Francisco, and Washington, D.C.

At the outset, the FFIEC stated its belief that the goal of this process was not to examine and develop proposed revisions to the overall statutory scheme governing financial institutions. Rather, it appeared to the council that the congressional intent was to accept the statutory scheme as a given and instead to examine the manner in which the federal banking agencies and the Department of the Treasury have implemented that scheme through regulations, policy statements, procedures, and recordkeeping requirements.

Many commentators, as well as the four federal banking agencies themselves, recommended changes that were within the jurisdiction of the agencies. During the year, the agencies acted on many of these suggestions for regulatory improvement, particularly those related to required reports, examination procedures, and application processes. A summary of those actions is included in the study. Regulators have also increased their efforts to coordinate policies and procedures, which should lessen the burden on banking organizations.

Other specific recommendations from the public for regulatory change were reviewed by inter-agency working groups and divided into three categories. The first category consist of approximately sixty recommendations that warrant further consideration as changes that may be effective in reducing regulatory burden. In most cases, the federal banking agencies agreed on the general approach to a recommendation and developed a consensus position, which is described in the accompanying discussion. In a few cases, further consideration and possibly some compromise may be required to implement a change in current procedures, and in some cases a recommendation was controversial and an agency supported it only in part or preferred an alternative approach to meet the goal of the recommendation.