Remarks
By FDIC
Chairman Don Powell
Western Independent Bankers Association
FOR IMMEDIATE RELEASE Media Contact:
PR-113-2004 (11-5-2004) David Barr (202) 898-6992
Good afternoon. It is great to speak to a roomful of independent bankers and bank
directors.
We at the FDIC have great respect for the challenging job you have—competing in the
marketplace, satisfying your regulators, responding to your customers, and succeeding
on the bottom line. Every day, independent bankers are doing these things and making
a difference in their communities.
Independent bankers walk in a different world than bankers who work in large financial
conglomerates. You compete in different niches, serve your customers in different
ways, and in many ways you are supervised and regulated differently. Yet your fortunes
are in part linked to those of the large banks. Your competitive opportunities are
influenced by how well large banks serve their customers and how they price their loans
and deposits. Your options for creating value for your shareholders can be influenced by
whether your bank is or should be a candidate for acquisition by a larger institution. And
the industry as a whole has a collective liability to fund the costs of deposit insurance.
Because of these linkages, trends in the supervision and regulation of the largest banks
can affect all banks. And we as banking policymakers must always be vigilant in
preventing the cost of the federal banking safety net from running out of control, which
is why ensuring appropriate supervision and regulation of large banks is of utmost
concern.
As the financial services industry evolves, large bank supervision inevitably becomes
subject to evolutionary pressures. In discussions of implementing Basel II for the largest
U.S. banks, one sometimes hears reference to a “new paradigm” for regulation and
supervision in which bank regulators, and holding company or consolidated regulators,
will need to work together more seamlessly. Indeed, regulatory achievement of such a
new paradigm is at the top of the wish list for many internationally active banks. With
this in mind, some U.S. legislators have expressed interest in at least exploring whether
our financial regulatory structure could be rationalized to keep pace with market
evolution.
In short, significant questions are being asked, and it is critical that we as regulators
respond thoughtfully to the challenges that financial evolution puts before us. Drifting
By FDIC
Chairman Don Powell
Western Independent Bankers Association
FOR IMMEDIATE RELEASE Media Contact:
PR-113-2004 (11-5-2004) David Barr (202) 898-6992
Good afternoon. It is great to speak to a roomful of independent bankers and bank
directors.
We at the FDIC have great respect for the challenging job you have—competing in the
marketplace, satisfying your regulators, responding to your customers, and succeeding
on the bottom line. Every day, independent bankers are doing these things and making
a difference in their communities.
Independent bankers walk in a different world than bankers who work in large financial
conglomerates. You compete in different niches, serve your customers in different
ways, and in many ways you are supervised and regulated differently. Yet your fortunes
are in part linked to those of the large banks. Your competitive opportunities are
influenced by how well large banks serve their customers and how they price their loans
and deposits. Your options for creating value for your shareholders can be influenced by
whether your bank is or should be a candidate for acquisition by a larger institution. And
the industry as a whole has a collective liability to fund the costs of deposit insurance.
Because of these linkages, trends in the supervision and regulation of the largest banks
can affect all banks. And we as banking policymakers must always be vigilant in
preventing the cost of the federal banking safety net from running out of control, which
is why ensuring appropriate supervision and regulation of large banks is of utmost
concern.
As the financial services industry evolves, large bank supervision inevitably becomes
subject to evolutionary pressures. In discussions of implementing Basel II for the largest
U.S. banks, one sometimes hears reference to a “new paradigm” for regulation and
supervision in which bank regulators, and holding company or consolidated regulators,
will need to work together more seamlessly. Indeed, regulatory achievement of such a
new paradigm is at the top of the wish list for many internationally active banks. With
this in mind, some U.S. legislators have expressed interest in at least exploring whether
our financial regulatory structure could be rationalized to keep pace with market
evolution.
In short, significant questions are being asked, and it is critical that we as regulators
respond thoughtfully to the challenges that financial evolution puts before us. Drifting
with the current is a risky course—the history of financial regulation shows how often
jagged rocks can lie just beneath the seemingly open waters. With respect to the
regulation and supervision of large financial conglomerates, we at the FDIC are
concerned that some of the plausible courses the regulators might steer would result in
a significant expansion of the federal banking safety net.
In particular, it is imperative that we resolve the tension between two potentially
incompatible realities. One, regulators’ ability to control the costs of federal deposit
insurance is based on the legal accountability that management and directors of insured
institutions assume for the governance of their institutions. This accountability is the
bedrock on which the possibility of effective bank supervision rests. Two, it is
increasingly being said that financial conglomerates manage risk by line of business
and not by legal entity. Yet if a movement toward enterprise risk management and
consolidated supervision of conglomerates is inevitable, so are questions about how
directors whose banks are owned by these conglomerates should balance their bank
governance responsibilities with the demands and strategies of the broader
organization.
There can be no ambiguity in the answer to this question. The duty to oversee the
management of a bank rests solely with its directors. In practice, bank boards and
holding company boards often share common members. What is critical for the sound
operation of this potentially ambiguous situation is that when a holding company director
sits on a bank’s board, that director must wear his or her banking hat. As a bank
director, he or she is required to act in the best interests of the bank, not of the holding
company.
Recent trends towards the active and integrated management of financial
conglomerates are likely to accelerate under Basel II, which in its complexity and
extensive systems requirements, clearly provides a financial reward for companies that
have centralized risk management. There is also an increasing tendency in recent
policy discussions to relate the trend toward integrated risk management to a need for
consolidated supervision. This is said to be needed both from a safety-and-soundness
perspective and for the convenience of the regulated entities that do not wish to contend
with the demands of multiple legal entity supervisors.
Consolidated supervision seems to offer a plausible model for regulating
conglomerates. This model, however, poses a major unresolved issue—that of
identifying and controlling the scope of the federal banking safety net. In the United
States, we have chosen to provide federal deposit insurance to depository institutions,
and not to other entities. The liabilities of holding company affiliates enjoy no federal
guarantee. Yet, if we are trending towards a situation where banks are so closely linked
to their affiliated entities as to be indistinguishable, or where they cannot measure and
manage their own risk, then we are clearly also trending toward expanding the scope of
the federal safety net to cover risks taken outside of banks.
jagged rocks can lie just beneath the seemingly open waters. With respect to the
regulation and supervision of large financial conglomerates, we at the FDIC are
concerned that some of the plausible courses the regulators might steer would result in
a significant expansion of the federal banking safety net.
In particular, it is imperative that we resolve the tension between two potentially
incompatible realities. One, regulators’ ability to control the costs of federal deposit
insurance is based on the legal accountability that management and directors of insured
institutions assume for the governance of their institutions. This accountability is the
bedrock on which the possibility of effective bank supervision rests. Two, it is
increasingly being said that financial conglomerates manage risk by line of business
and not by legal entity. Yet if a movement toward enterprise risk management and
consolidated supervision of conglomerates is inevitable, so are questions about how
directors whose banks are owned by these conglomerates should balance their bank
governance responsibilities with the demands and strategies of the broader
organization.
There can be no ambiguity in the answer to this question. The duty to oversee the
management of a bank rests solely with its directors. In practice, bank boards and
holding company boards often share common members. What is critical for the sound
operation of this potentially ambiguous situation is that when a holding company director
sits on a bank’s board, that director must wear his or her banking hat. As a bank
director, he or she is required to act in the best interests of the bank, not of the holding
company.
Recent trends towards the active and integrated management of financial
conglomerates are likely to accelerate under Basel II, which in its complexity and
extensive systems requirements, clearly provides a financial reward for companies that
have centralized risk management. There is also an increasing tendency in recent
policy discussions to relate the trend toward integrated risk management to a need for
consolidated supervision. This is said to be needed both from a safety-and-soundness
perspective and for the convenience of the regulated entities that do not wish to contend
with the demands of multiple legal entity supervisors.
Consolidated supervision seems to offer a plausible model for regulating
conglomerates. This model, however, poses a major unresolved issue—that of
identifying and controlling the scope of the federal banking safety net. In the United
States, we have chosen to provide federal deposit insurance to depository institutions,
and not to other entities. The liabilities of holding company affiliates enjoy no federal
guarantee. Yet, if we are trending towards a situation where banks are so closely linked
to their affiliated entities as to be indistinguishable, or where they cannot measure and
manage their own risk, then we are clearly also trending toward expanding the scope of
the federal safety net to cover risks taken outside of banks.