Two Radically Different Approaches to Analyzing Banking Policy

The recent announcement of a proposed merger between Citicorp and Travelers, which will result in the creation of a bank with more than $700 billion in assets is only the latest evidence that the financial sector is in the midst of a fundamental restructuring as ever larger and more diverse conglomerations compete to offer customers a wide array of new financial products and services. Even though the banking industry of the twenty-first century will be radically different from that of the1970s and 1980s, the need to maintain a safe and sound system will not have changed. If anything, the prospect of $1 trillion banks makes it even more crucial for the country to have a system of effective banking regulation and supervision. Given these concerns, it is not surprising that policy researchers have a renewed interest in the study of banking regulation.

In this review, I will consider two extremely different approaches to analyzing bank regulatory policymaking. In Checking on Banks, Anne Khademain focuses on how the cultures within the three regulatory agencies with primary responsibility for supervising commercial banks affects the examination process, while Worsham uses subsystem theory to analyze the passage of banking legislation within Congress over the past one hundred years.

Khademian begins with the general question of whether consolidation and downsizing to standardize procedures and eliminate overlap would result in more effective government bureaucracies. In 1992 and 1993 she conducted a series of open-ended interviews with bank examiners, supervisors, and administrators at the three federal agencies responsible for the regulation and supervision of commercial banks. She discovered that although officials at the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board (Fed), and the Federal Deposit Insurance Corporation (FDIC) have the same general mandate—to supervise the commercial banking industry—each has somewhat different supervisory responsibilities and very different conceptions of the best way to carry out the task. She also found differences in the agencies’ organizational structures and their relationships with political overseers; much of which she traced to differences in the degree of autonomy accorded them.

Khademian discovered that the OCC, which is responsible for supervising all banks with federal charters, has an ambiguous mandate. It is expected to promote aggressively the interests of national banks as opposed to state-chartered banks while simultaneously promoting stability within the system to ensure that the federal government can meet its financing needs. The OCC is generally recognized as the most innovative of the agencies, but as Khademian shows this is not an unmixed blessing. For example, in the 1980s the OCC developed a hierarchy of risk approach to regulation. Rather than scheduling regular on-site inspections of all nationally chartered banks, it focused on banks and banking activities that posed the greatest risk to the industry as a whole. This approach meant that small banks not deemed to pose a systemic threat were not closely supervised and they ended up comprising a disproportionate number of the bank failures in the 1980s.

The Fed, which is responsible for the supervision of all state-chartered banks within the Federal Reserve System and bank holding companies, defines its primary mission as crafting monetary policy to stabilize economic performance. Because the Fed must consider the effects of its policies on a wide range of competing economic and political interests, its mandate is far broader than the other two regulatory agencies. According to Khademian, the Fed is the most autonomous of the three and its staff has the highest level of expertise. In contrast, the FDIC, which is responsible for supervising state banks that have deposit insurance but do not belong to the Federal Reserve System, has a far more limited mandate—defend the deposit insurance fund. Success is measured by the health of the insurance...