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The dual banking supervision system
The National Bank Act of 1863 created a system of banks throughout the United States that were chartered by the federal government. In 1865, an amendment to the act placed a tax on state bank notes, bringing all banks in the United States under federal supervision. However, a number of banks were exempt from the tax and continued under their state charters until the Federal Reserve Act of 1913 . This was known as the "dual banking system."
The Federal Reserve System, also the Federal Reserve, informally The Fed, is the central banking system of the United States. The Federal Reserve System is a quasi-governmental banking system composed of (1) a presidentially-appointed Board of Governors of the Federal Reserve System in Washington, D.C.; (2) the Federal Open Market Committee; (3) twelve regional Federal Reserve Banks located in major cities throughout the nation; and (4) numerous private member banks , which own varying amounts of stock in the regional Federal Reserve Banks .
The Federal Reserve Act of 1913 established the present day Federal Reserve System and brought all banks in the United States under the authority of the federal government, creating the twelve regional Federal Reserve Banks which are supervised by the Federal Reserve Board. Notwithstanding the Glass-Steagall Act of 1932 and the Banking Acts of 1933 and 1935, which were attempting to reform various banking abuses, the Federal Reserve System has remained more or less unchanged through to the present day. The Glass-Steagall Act was repealed in 1999, whereas the Banking Act of 1933 simply strengthened the supervisory powers of federal authorities and created the Federal Deposit Insurance Corporation.
The Federal Reserve System supervises and regulates a wide range of financial institutions and activities. The Fed works in conjunction with other federal and state authorities to ensure that financial institutions safely manage their operations and provide fair and equitable services to consumers. Bank examiners also gather information on trends in the financial industry, which helps the Federal Reserve System meet its other responsibilities, including determining monetary policy.
Roger Ferguson Jr, a Governor of the Federal Reserve Board, once clearly made the case for the Federal Reserve maintaining a significant role in banking supervision. He argued that ,
‘ In the last analysis, there simply is no substitute for understanding the links among supervision, regulation market behavior, risk taking, prudential standards, and- let us not lose sight-macro stability. The intelligence and know-how that come from our examination and regulatory responsibilities play an important, at times, critical-role in our monetary policy making. No less relevant, our economic stabilization responsibilities contribute to our supervisory policies. Observers and supervisors from single-purpose agencies often lose sight of how too rigorous or too lenient a supervisory stance-or a change in stance-can have serious and significant macro-economic implications, the consideration of which is likely to modify the supervisory policy. In short, I think the Fed’s monetary policy is better because of its supervisory responsibilities, and its supervision and regulation are better because of its stabilization responsibilities.’
Since 1863, commercial banks in the United States have been able to choose to organize as national banks with a charter issued by the Office of the Comptroller of the Currency (OCC) or as state banks with a charter issued by a state government. The choice of charter determines which agency will supervise the bank: the primary supervisor of nationally chartered banks is the OCC, whereas state-chartered banks are supervised jointly by their state chartering authority and either the Federal Deposit Insurance Corporation (FDIC) or the Federal Reserve System (Federal Reserve). In their supervisory capacity, the FDIC and the Federal Reserve generally alternate examinations with the states.
Several federal and state agencies regulate banks along with the Federal Reserve. The Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corp. (FDIC), the Office of Thrift Supervision (OTS) and state banking authorities also regulate financial institutions. The OCC charters, regulates and supervises nationally chartered banks. The FDIC, the Federal Reserve and state banking authorities regulate state-chartered banks. Bank holding companies and financial services holding companies, which own or have controlling interest in one or more banks, are also regulated by the Federal Reserve. The OTS examines federal and many state-chartered thrift institutions, which include savings banks and savings and loan associations.
Umbrella supervision mode
1. Federal Reserve as Umbrella supervisor
Gramm-Leach-Bliley , namely GLB, offers exciting opportunities for banking organizations to expand their lines of business and their range of customer services. It permits certain bank holding companies to affiliate with securities firms and insurance companies. Expanded permissible activities for these holding companies include securities underwriting and dealing, insurance agency activities and insurance underwriting, acting as a futures commission merchant, and merchant banking. The Federal Reserve Board and the Secretary of the Treasury have the authority to determine whether other activities are financial in nature or incidental to financial activities and hence permissible for these holding companies to engage in. To take advantage of the new powers, a bank holding company must become a financial holding company (FHC) , which requires that each of its subsidiary banks is well-capitalized and well-managed and that all of its insured subsidiary banks maintain a Consumer Reinvestment Act (CRA) rating of at least satisfactory.
The rationale for umbrella supervision is that most large and sophisticated financial services companies take an umbrella or consolidated approach to managing their risk. As a practical matter, the Federal Reserve expects all FHCs to evolve toward comprehensive, consolidated risk management in order to measure and assess the range of their exposures and the way those exposures interrelate.
Umbrella supervision seeks to balance the objective of protecting the depository subsidiaries of increasingly complex organizations engaged in a greater number of interrelated activities and incurring different risk with the objective of not imposing an unduly duplicative or onerous burden on the nonbank entities that are part of the organization. The legislation clearly intends that functional regulators, primary bank and thrift supervisors, and the umbrella supervisor will respect each other''s responsibilities and will acknowledge and make use of each other''s expertise.
Moreover, umbrella supervision requires strengthened relationships between primary bank and thrift supervisors and the umbrella supervisor and enhanced relationships with functional regulators and foreign nonbank supervisors. Finally, the Federal Reserve needs to place greater reliance on recent initiatives that promote a more risk-focused supervision process and market discipline.
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