Location of Repository

"The Limits of Prudential Supervision: Economic Problems, Institutional Failure and Competence"

By Bernard Shull

Abstract

Bank supervision typically receives little if any attention when banks are operating without difficulty. But when banks fail in large numbers, or large banks fail, and the system itself is threatened, supervision becomes a focal point for criticism and reform (see, for example, Conference Report, 1998, Title I, IX; Pecchioli, 1987, pp. 11 ff.; and Comptroller General of the U.S., 1977). On such occasions, institutional changes may take equal billing with the "improvement" of supervision. But as often as not, the only thing Congress can agree on is that supervision needs to be better. This usually translates into more supervisors operating with more authority. The repeated augmentation of bank supervision may give the impression that it is a solution rather that a symptom of recurring banking problems; and it is in the interest of supervisors to suggest that this is the case. Repeated disappointments about past performances never seem to undermine the promise that more and better supervisors, with more authority, will make things better in the future. The historical record suggests that this is not true. There are, however, independent reasons for questioning whether, in and of itself, more supervisors with more restrictive authority will help very much. It is argued below that the promise of supervisory enhancement is an illusion traceable to the belief that ignores the limitations of supervision in dealing with the problems that actually exist. These limitations include: (1) the existence of an intractable economic problem confronting depository institutions; (2) at least two distinct institutional failures, a fragmented regulatory system composed of multiple agencies and the growth of opportunism among banking organizations, that make it difficult to formulate and implement appropriate policies; and, finally, (3) the inability of the existing supervisory establishment to deal with these economic and structural issues. The nature of supervision is discussed. The limitations are reviewed in Section III, and the inadequacy of the current supervisory establishment to deal with the problems it must deal with to be successful is considered in Section IV. Some proposals to remedy the existing difficulties are presented in Section V. These include the consolidation of the "stand-alone" supervisory agencies with the monetary authority.

OAI identifier:

Suggested articles

Preview

Citations

  1. (1991). 1s Probability theory Relevant for Uncertainty? A Post-Keynsian Perspective," The Journal of Economic Perspectives,
  2. (1991). A Method for Evaluating Interest Rate Risk in U.S. Commercial Banks," Federal Reserve Bulletin,
  3. (1963). A Monetary History of the United States,
  4. (1960). A Treatise on Money, Vol.
  5. (1973). Bank Capital Adequacy, First National City Bank,
  6. (1932). Bank Failures in the United States," American Economic Review: Supplement,
  7. (1957). Banks and Politics in America,
  8. (1984). Blueprint for Reform: Report of the Task Group on Regulation of Financial Services,
  9. (1957). Central Banking and Money Market Changes,"
  10. (1984). Comptroller General of the United States, Federal Financial Institutions Examination Council Has Made Limited Progress Toward Accomplishing Its
  11. (1991). Comptroller of the Currency, "Letter" to
  12. (1992). Comptroller of the Currency, "News Release,"
  13. (1989). Conference Report to Accompany Financial Institutions Reform, Recoverv and Enforcement Act of
  14. (1977). Conflicts between Monetary Policy and Bank Supervision," Issues in Bank Requlation, Autumn,
  15. (1982). Consolidation of the Regulatory Agency Structure: Has the Time for It Come," Economic Review, Federal Reserve Bank of Atlanta,
  16. (1991). Department of the Treasury, Modernizing the Financial System,
  17. (1985). Dual Standards in Soundness and Safety Regulation,"
  18. (1984). Eurocurrency Banking: Alarmist Concerns and Genuine Issues, The Brookings Institution,
  19. (1912). Federal Regulation of Banking: A Plea for Unification," Law and Contemporary Problems,
  20. (1983). Federal Regulation of Banking: Analysis and Policy Recommendations,"
  21. (1992). Federal Reserve Board, "Press Release" (Risk-Based Capital Standards),
  22. Federal Response to Criminal Misconduct and Insider Abuse in the Nation's Financial Institutions,
  23. (1971). Financial Instability Revisited,"
  24. (1984). How the Financial Svstem Can Best Be Shaped to Meet the Needs of the American People,
  25. (1983). Insurance in a Changing Environment,
  26. (1975). Maintaining the Soundness of Our Banking System," Address to the Convention of the American Bankers Association,
  27. (1962). Management Policies for Commercial Banks,
  28. (1975). Markets and Hierarchies: Analysis and Antitrust Implications,
  29. (1991). Monetary Policy and the Condition of Banks," unpublished paper,
  30. (1990). Moral Hazard and the Thrift Crisis: An Empirical Analysis," Consumer Finance Law, Quarterly Report,
  31. (1933). Operation of the National and Federal Reserve Bankinq Systems,
  32. (1992). Oriqin and Development of the Examination Council, Federal Financial Institutions Examination Council,
  33. (1421). Our Discriminating Banking System," 55 Virginia Law Review,
  34. (1987). Prudential Supervision in Bankinq,
  35. (1987). Prudential Supervision to Manage Systemic Vulnerability, Proceeding of a Conference on Bank Structure and Competition, Federal Reserve Bank of Chicago,
  36. (1975). Reflections on Bank Regulatory Structure and Large Bank Failures,"
  37. (1976). Regulation and Administered Contracts,
  38. (1920). Reorganization of the Financial Regulatory Agencies,"
  39. (1971). Report on Research Undertaken in Connection with a System Study,"
  40. (1975). Statement," Federal Bank Commission Act, Hearings before the Committee on Banking, Housing C Urban Affairs,
  41. (1989). Statement," Treasurv News,
  42. (1975). Suggestions for a Cash Flow-Oriented Bank Examination,"
  43. Testimony on the Prosecution of Financial Crimes," Subcommittee on Criminal Justice, Committee on the Judiciary, U.S. House of Representatives,
  44. (1984). Testimony," before the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives,
  45. (1989). Testimony" before the Committee on Banking, Housing
  46. (1968). The Comptroller and Bank Supervision, Office of the Comptroller of the Currency,
  47. (1914). the Currency, Annual Report,
  48. (1977). The Dual Banking System: A Model of Competition in Regulation,"
  49. (1979). The Dual Banking System: A Model of Competition in Regulation," Issues
  50. (1985). The Economic Institutions of Capitalism,
  51. (1984). The Federal Reserve Position on Restructuring of Financial Responsibilities," Federal Reserve Bulletin,
  52. (1991). The Future of Bankinq,
  53. (1940). The Modern Corporation and Private Property,
  54. (1932). The Romance and Traqedv of Bankinq, The Bankers Publishing Co.,
  55. (1990). The Transmission Channels of Monetary Policy: How Have They Changed," Federal Reserve Bulletin,
  56. (1974). Theories of Economic Regulation,"
  57. (1988). Thrifts Under Sieqe,
  58. (1987). What Should Banks Do?, The Brookings Institution,

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.