mary" regulator of one group of banks. The Comptroller of the Currency is the primary regulator of national banks. The Fed is primary regulator of insured State member banks. And the FDIC is primary regulator of insured State nonmember banks. All banks which are chartered by the States are simultaneously supervised by State banking authorities. Even the one group of banks not subject to Federal supervision— uninsured State nonmember banks-are subject to State regulation. These banks constitute roughly 1 percent of all commercial banks but account for a very small fraction of total U.S. deposits. State banking authorities vary widely in the extent and scope of their supervision. For example, in order to start a bank, the State of Hawaii requires $200,000 in capital regardless of population, whereas Connecticut requires capitalization of $100,000 in towns of less than 50.000 population and $200,000 in towns of 50,000 or more. They also differ in their reserve requirements, both in percentages required and the forms of reserves that are acceptable. Alaska, Louisiana and Wyoming are most stringent, requiring 20 percent of their demand deposits in cash or in balances with other banks. Other States generally range from between 7 to 161% percent. State laws governing branching also vary widely, with 12 States prohibiting it altogether.18 Twenty-two States have no minimum statutory qualifications for State banking supervisors, while 19 States statutorily require at least 5 years banking experience.19 In practice, five State bank supervisors have no prior banking experience while 13 have over 25 years experience.20 Salaries for State bank examiners also vary widely with New York paying its bank examiners a maximum of $36,754 and Massachusetts paving a maximum of $14.659.21 Finally, the budgets of State banking departments offer another example of significant differences. New York State leads with a budget of over $12.5 million. State banking departments with budgets of $3 million include Massachusetts, Texas, Pennsylvania, and Michigan. On the other hand, Delaware's department has a total budget of $110,000 and Maryland a total budget of $676.000.22 Some of these differences can be attributed to the number and size of the commercial banks within States. However, differences in statutory limits on loans to one borrower cannot. For example, Nebraska, Nevada, and Texas permit 25 percent of their capital and surplus to be loans to one borrower whereas Connecticut and Florida allow only 10 percent.2 23 The principal justification for bank examinations has been and, in a real sense, continues to be the early detection and subsequent prevention of unsound and unsafe banking practices. 18 Colorado. Florida, Illinois, Minnesota, Missouri, Montana. Nebraska, New Mexico, Oklahoma, Texas, and West Virginia prohibit branching. Wyoming neither prohibits nor authorizes it so that there are no branch banks in the State. 19 Profile of State-Chartered Banking, Conference of State Bank Supervisors, December 1975, p. 55. 20 Ibid., p. 66. 21 Ibid., pp. 57-58. 22 Ibid., pp. 25-27. 23 Ibid., pp. 100-103. Another justification for bank examinations revolves around limitations on entry and limitations on expansion. Entry is limited because the Comptroller and the relevant State banking authority are the only means by which a bank may be chartered. If neither institution grants a would-be bank a charter, that bank is out of business. Expansion is limited because a bank wishing to expand through merger with another bank must seek agency approval. Even if approval is granted, the decision is still subject to Justice Department antitrust action. Thus, banks already chartered are, to some degree, protected from competition and it falls to the regulatory agencies, through the examination process, to insure that those banks are acting in the public interest. Bank examinations therefore are critically important. They serve the fundamental purpose of detecting as soon as possible any unsafe or unsound banking practices which, if allowed to continue, can ultimately lead to bank failure. And although the FDIC insures deposits in the bank up to $40.000, a bank failure has serious psychological and economic repercussions on the entire economy. The unique structure of bank regulation permits banks to choose their examiners. A bank which seeks a national charter is effectively selecting the Comptroller as its examiner. A bank which seeks a State charter can select either the Fed or the FDIC as its examiner, depending on its membership in the FRS. Yet, unsafe and unsound banking practices do not differ from bank to bank-a State member bank which makes excessive loans to its officers puts its deposits in just as much jeopardy as a national bank which engages in the same practice. And, if there is a difference between what the Comptroller determines is excessive and what the Fed determines is excessive, this functional overlap can lead, as we will demonstrate in the area of bank merger policy and bank holding company policy, to encourage banks to choose the regulator that best suits their needs. Evidence suggests that there are indeed differences among the three regulatory agencies. Even though some of the differences are less pronounced than others, the differences are a cause for some concern. Bank examinations are major undertakings. Table 6.1 indicates the number of people on both the Federal and State levels involved in it. Table 6.2 indicates the annual costs. TABLE 6.1.-NUMBER OF PERSONNEL DIRECTLY WORKING IN EXAMINATION AND SUPERVISION 1Includes some personnel engaged in supervision of credit unions, small loan companies, and other financial institutions. other than commercial banks. * Not available. 1970. 1969 1968. 1967. 1966 1965. 1964. 1963. 1962. 1961. TABLE 6.2.-FEDERAL SUPERVISORY AGENCY COSTS OF EXAMINATION AND SUPERVISION 1 Total expenses. Direct costs of examination and supervision are not available separately. * Includes all bank supervision and regulation functions. Division of bank examination. • Not available. A national bank, chartered by the Comptroller, is examined exclusively by the Comptroller. By statute, it must be examined twice each year although the Comptroller is permitted to waive one examination for each bank in each 2-year period. A national bank, therefore, should be examined a minimum of three times in two years. A State bank which is a member of the FRS is examined once a year by the Fed and once a year by its State banking authority. A State bank with Federal insurance is examined annually by the FDIC and annually by its State banking authority. During 1974-75, the Comptroller examined only 75 percent of national banks the required three times. In 1975, the Fed examined 97.5 percent of its banks. And the FDIC examined 88 percent of its banks in 1975.25 Thus, there is a significant variation among the agencies in how diligently they perform their examination responsibilities. There are wide variations among State banking authorities in terms of whether they conduct their examinations independently of either the Fed or the FDIC. There have however been attempts to coordinate State examinations with Federal examinations. In June 1974, the Fed announced an experimental program of joint bank examination with the Indiana Department of Financial Institutions. Their purpose was "to test the feasibility of achieving more effective supervision of State member banks by avoiding duplication and increasing coordination." 26 The program placed a Fed examiner with a full team of State examiners on a particular examination. The Fed's examiner was given access to all information to ascertain the bank's compliance with relevant Federal laws. Previously, both authorities assigned complete teams of examiners to conduct separate examinations. This committee asked the Fed how it determines the States with which it conducts examinations jointly and with which it conducts examinations independently. 24 12 U.S.C. 481. 25 GAO report 168904, p. 4–1. 26 Response of Federal Reserve Board to question F.1 of the questionnaire submitted by the House Committee on Banking, Currency and Housing in connection with the FINE study, p. 632. The Fed normally gives State authorities the opportunity to participate jointly in examinations of State-member banks. Efforts are made to coordinate scheduling, and personnel is shared where appropriate. When examinations are conducted jointly, State examiners typically produce separate reports, except in six States where a common report is produced. The following table shows the number of State banking authorities that conduct bank examinations jointly with the Fed, or independently. The table shows whether the State authorities always, or usually, conduct examinations with the Federal Reserve and if there are irregular patterns, what the typical exceptions are. The FDIC, also in 1974, initiated an experimental selective examination withdrawal program for examining State nonmember banks in Iowa, Georgia, and Washington.27 Under this program, the FDIC examined the State reports on selected banks instead of performing its own examination. The year after the State's examination, the FDIC conducted its own examination and compared its findings with those in the previous year's report. In 1976, Iowa and Washington indicated they preferred not to continue with this experiment. Georgia has requested that independent examinations be made of all problem banks, banks requiring special supervisory attention and banks with deposits over $100 million. All other banks will be examined by Georgia and the FDIC in alternating years. The FDIC plans to make this available to other States or consider other suggestions.28 The following table shows the number of States that conduct bank examinations jointly with the FDIC or independently. These statistics indicate that in spite of wide variations in State supervision, efforts are being made by the Federal bank agencies to coordinate examination responsibilities and eliminate as much duplication as possible while preserving the dual system. The cost of bank examination and supervision is not borne by the taxpayer. Rather, each of the Federal agencies and the State authorities assess their banks in various ways. The FDIC assesses all insured GAO report B118535 and B114831, p. 10. GAO report 168904, p. 42. banks based on one-twelfth of 1 percent of their total deposits. Member State banks are charged by the Fed through the requirement that they leave a percentage of their deposits at their Federal Reserve Bank in a non-interest-bearing account. The Comptroller assesses national banks a basic charge plus an additional fee per branch plus an amount based on every $1,000 of total assets. Therefore, a State member bank pays fees to its State banking authority, the FDIC and the FRS. National banks are charged by the Comptroller, the Fed and the FDIC. Not all of these monies is targeted for bank examinations. The Fed does not examine national banks and yet national banks must keep non-interest-bearing reserves at the Fed. The FDIC does not examine State member banks and yet they pay fees to the FDIC. National banks are paying fees to the Fed for the services that accompany membership in the Federal Reserve System and to the FDIC for the benefits of being insured. When examiners from the three agencies go into a bank, they pay particular attention to the following: Quality of assets, Adequacy of capital structure, Concentrations of credit, Investment policies, The bank's premises and other real estate owned, Quality of management, Internal controls, and Compliance with laws and regulations. Given the current tripartite structure there will inevitably be differences in the way these areas are examined and the emphasis placed by individual examiners on each of these areas. Moreover, there are definite and well-documented differences in the amount of time spent on the examinations. The following table illustrates the number of independent Federal examinations performed by the three agencies and the number of staff days devoted to them.29 |