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

In the aggregate, this burden has become substantial, raising the costs of banking services and thus loans and services or higher-yielding investments from other financial intermediaries that are not subject to the same regulatory requirements and restrictions. The movement of business from banking institutions to other intermediaries and directly to money and capital markets may frustrate the purposes for which banking regulations were adopted. I believe this burden has already begun to threaten the competitiveness of the banking industry itself.

Fundamental review is needed of approaches to regulation in search of mechanism that will achieve the same goals but with less burden and without the problems that accompany the current approach. New approaches to regulation that are more sensitive to cost-benefit trade-offs must be sought and considered. In particular, existing market forces and incentives should be harnessed as much as possible to achieve regulatory goals, rather than relying on microlevel regulations that eliminate the flexibility that is important in a dynamic industry.

To the greatest extent possible, banking regulation should provide flexibility by tailoring requirements to specific facts and circumstances and by distinguishing among institutions according to meaningful criteria such as condition, size, and management competence. Regulations that provide insufficient flexibility can cause unnecessary regulatory burden and create inefficiencies by preventing depository institutions from finding the most cost-effective means of complying with the law or regulation and by impairing the ability of banking institutions to react to changing market conditions.

These approaches must be applied not only to future regulatory actions but also to existing regulations. Efforts to substantially reduce regulatory burden will undoubtedly raise difficult questions about the trade-offs to be made between competing public policies, much like the ongoing discussion of the federal budget. Because achieving political consensus for change may be difficult, in my judgment, an independent nonpolitical commission charged with exploring possibilities for legislative change would be useful. Such a commission could address a broad range of banking issues (such as regulatory burden and the competitive position of U.S. banking organizations), offer suggestions and guidance for legislative and regulatory changes, and assist the Congress in developing a specific legislative agenda.

SUMMARY AND CONCLUSION

Banking institutions serve a vital role in the U.S. economy. The regulatory burden that we have imposed, however, may now threaten their role in providing the services that are so important to the health of our economy. We must be careful not to constrain our banking system so much that it is not responsive to the country's needs. In an increasingly global and competitive financial market, the United States can ill afford to handicap its banking institutions - and therefore the individuals and business they serve - with stifling and constantly changing rules and regulations.