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OCCAS IONAL PAPER SER IESNO. 35 / SEPTEMBER 2005

THE INSTITUTIONAL FRAMEWORK FOR FINANCIAL MARKET POLICY IN THE USA SEENFROM AN EU PERSPECTIVE

by Reinhard Petschnigg

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OCCAS IONAL PAPER S ER I E SNO. 35 / S EPTEMBER 2005

This paper can be downloaded without charge from the ECB’s website (http://www.ecb.int) or from the Social Science Research Network

electronic library at http://ssrn.com/abstract_id=752095.

THE INSTITUTIONAL FRAMEWORK FOR

FINANCIAL MARKET POLICY IN THE USA SEEN

FROM AN EU PERSPECTIVE by Reinhard Petschnigg1

1 The author is indebted to Ken R. Spong (Federal Reserve Bank, Kansas), Allen Berger (Board of Governors of theFederal Reserve System, Washington), M. Grande, N. Lenihan, L. ter Braak, C. Egea, S. Huemer, D. Ioannou,

J. Lindner and M. Spinella (all ECB) for useful comments and to D. Lapré (ECB) for technical support. Special thanks go to T. Martens (ECB) whose remarks critically influenced the overall direction of the paper.

The usual disclaimer applies.

© European Central Bank, 2005

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ISSN 1607-1484 (print)ISSN 1725-6534 (online)

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Occasional Paper No. 35September 2005

CONTENTSC O N T E N T SEXECUTIVE SUMMARY 4

1 INTRODUCTION AND OVERVIEW 8

2 INSTITUTION-BUILDING: THE ROLE OFREGULATORY AGENCIES 8

3 REGULATORY AGENCIES: OCC, FED, FDIC, SEC 12

4 RULE-MAKING BY REGULATORY AGENCIES:A CASE STUDY OF THE OCC 18

5 SPEED AND FLEXIBILITY IN RULE ANDLAW-MAKING 20

6 DRIVING FORCES AND ACTORS IN FINANCIALREGULATION 21

7 THE INTERPLAY BETWEEN REGULATORYAGENCIES: CO-OPERATION AND REGULATORYCOMPETITION 23

8 STREAMLINING OF SUPERVISION IN THE USA:A DIFFICULT EXERCISE 27

9 CONCLUSIONS 28

ANNEXES AND REFERENCES 31

4ECBOccasional Paper No. 35September 2005

EXECUTIVE SUMMARY

In recent years, financial market integrationhas become a topical issue on the Europeanagenda. Moreover, the importance of theinstitutional framework for the functioningof financial markets has generally beenacknowledged. With a view to benefiting fromthe experiences of other countries, this papertakes a closer look at the institutional set-up offinancial markets in the United States ofAmerica and investigates whether the US canserve as a model for the EU. For the purposeof this analysis, the institutional frameworkis defined as the organisational entities,procedures and practices of financialregulation and supervision, including issuessuch as competences and the distribution ofpowers.

The overall conclusion is that the USinstitutional set-up as a whole does not seemto be a suitable benchmark for the EU as itis the outcome of specific historical, politicaland economic circumstances, which differsubstantially from those in the EU.Nevertheless, there are features which couldprovide inspiration for further debate on the EUinstitutional framework, such as the prominentrole of federal regulatory agencies (includingthe central bank and its role as “umbrellasupervisor” over financial holding companies),the capacity of the Office of the Comptroller ofthe Currency (OCC) as a federal institution toremove barriers to cross-border activities, andthe elements of choice for the supervisedentities in the regulatory system, which allowfor some regulatory competition.

In analysing the US regulatory system andassessing it against the background of the EUsetting, the following key messages emerge.

First, in the US, the level for the substantiveregulation – federal or state level – as well asthe “institutional density” is different for thevarious segments of the financial market.While banking and, in particular, the securitiesmarket are dominated by federal legislation

and institutions, the regulation and supervisionof the insurance business is left to individualstates. By contrast, financial market legislationfor all sectors is an integral part of the internalmarket competence of the European Union.Moreover, at the EU level, the Lamfalussyframework provides for procedures andinstitutional structures that are basically thesame for banking, securities and insurance.

Second, the complex regulatory/supervisorystructure in the US involves a number of federalregulatory agencies1 alongside an estimated100 state supervisory bodies which areresponsible for the supervision of financialinstitutions and markets in the fifty states. Thefederal agencies are the outcome of a specifichistorical development of constitution/nationbuilding (e.g. the Civil War) as well as thereaction by policy makers to profoundeconomic shocks and crises (e.g. the GreatDepression). The setting-up of theseinstitutions implied a growing regulatory rolefor the federal level while the state agenciesremained in place. This federal institution-building happened “top-down”, with the statesplaying virtually no role in the process, asfederal law in the US can be developed withoutthe consent of the states. By contrast, there areno comparable federal regulatory agencies atEuropean Union level. Instead, there is aframework for collective decision-making thatbuilds upon the co-operation of Member States.This set-up is the result of the prior existence ofstrong nation states and the fact that the EU isnot a federal state like the US. While thisstructure is probably the main factor that makesthe EU level appear rather weak compared tothe federal power in the US, it corresponds tothe EU being a polity sui generis, where inmany respects the Member States, as “mastersof the Treaties”, continue to play a dominantrole.

1 e.g. the Off ice of the Comptroller of the Currency (OCC),the Federal Reserve System, the Federal Deposit InsuranceCorporation (FDIC), the Off ice of Thrift Supervision (OTS),the National Credit Union Administration (NCUA), theSecurities and Exchange Commission (SEC), theCommodity Futures Trading Commission (CFTC).

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Third, the US federal agencies generally havegreat discretion in delivering policyencompassing legislative/regulatory,executive/supervisory and even judicialfunctions. This is a marked difference to theEU, where these functions are separated, withthe EU level being competent for financialmarket legislation, and individual MemberStates – besides their participation in the rule-making process at EU level – having exclusiveauthority for implementation/supervision.Although under the Lamfalussy framework co-operation between the legislative/regulatorylevel and the executive/implementing level hasbeen gaining momentum in the EU, it cannotmatch the integration of regulation andsupervision that exists within the US federalagencies. However, while the US structuresfavour uniform implementation in the entitiessupervised by a particular regulatory agency,the high number of US regulatory agencies atthe federal level makes the adoption of uniformrules across the same type of business (e.g.banking) a time-consuming and cumbersomeprocess. If Congress, however, has a clear viewon what it wants to achieve, it can threaten tolegislate directly and thus speed up action byregulatory authorities. In the EU, theparticipation of Member States in rule-makingrisks slowing down the regulatory process as itrequires compromise and often leads to thelowest common denominator. The Lamfalussyprocess tries to tackle this, among other things,by aiming at a clearer distinction betweenframework legislation to be decided at thepolitical level and more technical rule-makingby the so-called level II committees.

Fourth, the US system provides scope for“active” regulatory competition. In USbanking, for example, both federal and statesupervisors strive to offer high-qualitysupervision at a reasonable cost because banksmay switch from a state to a “national” (i.e.federal) charter and vice versa. This element ofchoice does not exist in the EU. There is neitherthe possibility to switch to an “EU charter” andconcomitant EU supervision (analogous to thenational charter and OCC-supervision), nor the

opportunity to decide upon “membership” in anNCB of the Eurosystem (analogous tomembership in a Federal Reserve Bank), andthereby also making a decision on theregulator/supervisor at the “federal” level.Regulatory competition in the US is, however,constrained by federal law, which ultimatelydetermines the leeway of regulatory agenciesand state regulators. This can even be seen in anarea such as insurance, where at present thefederal level does not legislate. Under thethreat of the introduction of federal regulationor of an optional federal insurance charter, USstate insurance commissioners strive to co-operate effectively in order to allow smoothcross-border insurance activity.

With regard to the EU, it should be noted that, ifproperly applied, minimum harmonisation andmutual recognition provide room for regulatorycompetition among Member States, which maybe induced by the mobility of financialintermediaries to transfer their headquartersfrom one Member State to another. This kind of“passive” regulatory competition can beregarded as a potential force for achieving alevel playing field on the financial market.2 Themutual recognition principle would, however,have to be applied in a much broader way thantoday. Currently, Member States still tend toprotect intermediaries under their jurisdictionby imposing host country rules onintermediaries from other Member States.3

Fifth, the predominance of the federal level inthe US system implies that barriers to cross-border business arising from state law maybe easier to overcome than in the EU. Whilein US banking, the laws of the host stateregarding community reinvestment4, consumerprotection, fair lending and the establishment

2 The new legal framework for the cross-border transfer ofregistered off ices currently under preparation in theEuropean Commission must be seen in this context.

3 In the consumer protection area, for example, MemberStates generally invoke the so-called “general good clause”to justify the continued application of host country rules.

4 The Community Reinvestment Act of 1977 is intended toencourage banks to extend credit to low and moderate-income neighbourhoods.


of intrastate branches generally apply tointerstate branches, the OCC may pre-empt theapplication of such state law to branches ofnational banks. In the EU, while there is theprinciple of primacy of EU law over nationallaw, harmonised rules are not alwaysimplemented in a uniform fashion.Furthermore, as pointed out above, mutualrecognition does not work in a satisfactoryway.

Sixth, both in the US and in the EU, themultitude of regulators/supervisors puts apremium on co-operation. In the US, for thebanking sector, the co-operation has beeninstitutionalised at the federal level in theFederal Financial Institutions ExaminationsCouncil (FFIEC), established in 1979, and atthe state level in the Conference of State BankSupervisors (CSBS), which was founded aslong ago as 1902.5 The activities of the FFIECand the CSBS concern, inter alia, thedevelopment of common reporting forms,the common training of officials or theaccreditation of supervision programs.Furthermore, the CSBS played a decisive rolein providing a basis for co-operative effortsamong the state supervisors and as the naturalinterlocutor for discussion on supervisoryagreements with federal agencies in view ofliberalisation of interstate branching in themid-nineties. As for the EU, the institutionalco-operation among regulators/supervisors hasgathered momentum with the introduction ofthe euro, increasing financial integration andthe establishment of the Lamfalussyframework.

Seventh, the US experience shows howdifficult it is to fundamentally changeinstitutional set-ups. So far, such moves onlyhappened under conditions of deep politicaltransformation and/or major economic shocks.Once institutions have been set up, substantialinertia develops, making reform a dauntingtask. For example, recurrent efforts tostreamline the banking supervisory system inthe US have failed. The need for reform toremedy supposed or actual overlaps and

regulatory conflicts by creating a single federalbanking agency has not been convincing forCongress given the risks of changing theestablished structural features of the USfinancial system (dual banking system,regulatory role of the Fed) that such reformswould imply. While, so far, it has provedimpossible to streamline the structure ofsupervision in the banking sector, the US hasfound a specific answer to an increasinglyliberalised and de-specialised financial marketby making the Federal Reserve responsible forumbrella supervision. Thus, incrementalreform is feasible, while leaving the basicinstitutional structures intact and avoidingwide-ranging institutional overhaul.

Assuming a “path dependence” of institutionaldevelopments, a major shake-up ofinstitutional structures in the EU or thedelegation of regulatory competence to an EUregulatory agency would only occur in case ofextraordinarily strong political or economicpressure. The European model of integrationis, however, specifically characterised byincremental steps towards deeper integration.With the Lamfalussy process, the EU hasprovided itself with a framework that hasthe potential to foster viable Europeaninstitutional structures for regulation andsupervision. Consequently, a successfulimplementation of the Lamfalussy process thatleads to better rule-making, and is supported bytransparency, consultation and effectiveimplementation through supervisory co-operation, would make sweeping institutionalreform less likely. In the context of theConstitutional Treaty, the European Unionlevel, while continuing to lack a substantialexecutive role in financial services mightfurther strengthen its legislative role, since theCommission will be empowered to pass“delegated European regulations”. In thisregard, the EU framework may become even

5 In insurance, the National Association of InsuranceCommissioners (NAIC) was founded even earlier, in 1871,to address the need to coordinate regulation of multi-stateinsurers. Co-operation among securities regulators takesplace within the North American Securities AdministratorsAssociation (NASAA), founded in 1919.

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more streamlined than that of the US as theregulatory function would be concentrated in asingle entity. However, if the current EUapproach does not meet expectations, newmodels might need to be devised.


1 INTRODUCTION AND OVERVIEW

In recent years, financial market integrationhas become a topical issue on the Europeanagenda. Moreover, the importance of theinstitutional framework for the functioning offinancial markets has generally beenacknowledged. With a view to benefiting fromthe experiences of other countries, this papertakes a closer look at the institutional set-up offinancial markets in the United States ofAmerica and investigates whether the US canserve as a model for the EU. For the purposeof this analysis, the institutional frameworkis defined as the organisational entities,procedures and practices of financialregulation and supervision6, including issuessuch as competences and the distribution ofpowers.

This paper describes how the regulatoryagencies came into being, what their nature isand how they relate to each other. A particularfocus is on supervisory co-operation in USbanking, against the background of bankingderegulation in the second half of the 1990s, aswell as efforts to consolidate the supervisorystructure. Furthermore, light is shed on rule-making by regulatory agencies, with aparticular emphasis on aspects of speed andflexibility. Regulatory competition and crisesare identified as the main driving forces behindfinancial legislation and rule-making.References to the EU situation are madewhenever appropriate. This paper does not,however, intend to provide a detaileddescription of the EU regulatory system.Throughout, the terms “federal/state level” areused for the US and “European Union (EU)/Member State (MS) level” for the EU to depictthe two main levels of governance.

2 INSTITUTION-BUILDING: THEREGULATORY AGENCIES

The institutional regime of the US financialsystem is characterised by a high institutionaldensity, with both federal and state authorities

responsible for financial sector regulation/supervision. The Courts and the rule-makingpowers of Self Regulatory Organisations(SROs) such as the New York Stock Exchangealso play an important role. There are,however, important differences between theregulatory and institutional framework forbanking, insurance and the securities business.

As regards the regulation/supervision of the USbanking system, on the federal level, there arefour banking regulators, namely the Officeof the Comptroller of the Currency/OCC(responsible for “national banks”), the FederalReserve Board/FRB (responsible for statemember banks, i.e. state banks that aremembers of one of the 12 Federal ReserveBanks, and acting as “umbrella supervisor”of bank/financial holding companies), theFederal Deposit Insurance Corporation/FDIC(responsible for state banks that are notmembers of one of the Federal ReserveBanks) and the Office of Thrift Supervision/OTS (responsible for savings institutions)7/8.At the state level, fifty state banking agenciesare responsible for the award of charters tothose opting for state charter and state

6 Although it is understood that there is a conceptualdifference between regulation and supervision, in thecontext of the description/analysis of the US system, the twoterms will be used interchangeably in line with USterminology.

7 The OTS is the successor to the Federal Home Loan BankBoard, which was dissolved after the S&L-disaster. The OTSwas established by Congress in 1989, as the primary Federalregulator of all Federal and state-chartered savingsinstitutions across the nation that belong to the SavingsAssociation Insurance Fund (SAIF) (which is under thecontrol of the FDIC). The OTS headquarters are inWashington, D.C., but OTS staff – all in all about 900 –works out of local off ices organised into f ive regions andexamines and supervises savings institutions throughout thecountry. Its functions include issuing federal charters forsavings and loan associations and savings banks; adoptingand enforcing regulations to ensure that both federal andstate-chartered thrift institutions operate in a safe and soundmanner.

8 For the sake of completeness one should also include theNational Credit Union Administration (NCUA), whichsupervises about 9,000 federal and state credit unions. Theirtotal assets are about USD 600 billion, compared to USD7,600 billion for the commercial banks and USD 1,200billion for the thrifts. The NCUA was established in 1970 asthe successor of the Bureau of Federal Credit Unions (set upin 1934).

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supervision.9 (See Annex I on the structure ofbanking regulation in the US).

At present, insurance regulation/supervisionis exclusively done at the state level10 withstate insurance commissioners having directregulatory authority. While there is no federalinsurance agency, the National Association ofInsurance Commissioners (NAIC) serves as theforum in which state commissioners co-operateto develop common policies where needed.11

By contrast, regulation of the securities businessis almost exclusively done at the federal leveland under the supervision of the Securities andExchange Commission (SEC). Trading in equityand debt markets is supervised by the SEC12,while the supervision of commodities andfinancial derivatives markets falls under thecompetence of the CFTC. State securitiesregulators basically restrict themselves to actingas service organisations (e.g. for dealing withcomplaints) to the investors who are resident intheir state.

All in all, there are at least 110 financialregulatory authorities in the US, the bulk ofwhich are state authorities.13

Given the number of actors involved as well asthe varying competences at state and federallevel, the current institutional frameworkgoverning the regulation and supervision offinancial markets in the US is quite complex.It is the outcome of a specific historicaldevelopments in constitution/nation building, aswell as the reaction by policy makers to profoundeconomic shocks (e.g. the Great Depression,corporate scandals).14 While the politicalinstitutions – Congress, Government, theSupreme Court – were set up shortly after theRevolutionary war under the US Constitution(1789), the federal monetary and financialagencies were only developed at a later stage, butagain as a result of deep political and/oreconomic shocks: the Office of the Comptrollerof the Currency (OCC) in the 1860s following theCivil War and a chaotic currency system, theFederal Reserve System (Fed) in 1913 after

financial panics and bank failures, the FederalDeposit Insurance Corporation (FDIC) and theSecurities and Exchange Commission (SEC) in1933/1934 in the wake of the Great Depression.The creation of these institutions also entailed astrengthening of central government, i.e. agrowing fiscal and regulatory role for thefederation.15

9 Unlike the banking supervisory framework, which is basedon a distribution of responsibilities to the federal and thestate level, the authority to approve mergers and acquisitionsof banking f irms is assigned to the federal level. Dependingon the transaction, the federal supervisory authoritycompetent to rule on a merger or acquisition can be the:(i) the OCC; (ii) the Federal Reserve Board; (iii) the FDIC;or (iv) the OTS. The federal agencies which are in charge ofanti-trust policies for the corporate sector, i.e. the FederalTrade Commission and the Department of Justice as well asthe other banking supervisory authorities must be consultedbefore a decision is made.

10 When insurance companies operate under a FinancialHolding Company (FCH), the “umbrella supervisor”, i.e. theFed, can, however, exert some influence over their prudentialsupervision.

11 The NAIC was founded in 1871 to address the need tocoordinate regulation of multi-state insurers. It describesitself as a “multi-dimensional, regulatory supportorganization.” State insurance commissioners haveconsistently rejected ideas for federal pre-emption or anoptional federal charter, such as in banking.

12 The setting up of the Public Company Accounting OversightBoard (PCAOB) under the authority of the SEC by theSarbanes-Oxley-Act of 2002 shows the increasing importance ofthe federal level also in the area of corporate law and governance,which traditionally has been under state competence.

13 According to the US Government Accountability Off ice(GAO), in July 2004, 23 states supervised banking and eitherinsurance or securities in one agency. Fourteen statescombined banking, insurance and securities regulation/supervision in a single agency. See GAO (2004), p. 72. Theestimate for the total number of US regulatory agencies doesnot take into account the separate thrift and credit unionsupervisors in some states.

14 Calomiris (2000), p. xviii, referring to US bankingregulations states that: “The history of US bankingregulation repeatedly demonstrates the importance oftransient events (economic ‘shocks’) for influencing long-term institutional history. That phenomenon – sometimesreferred to as ‘path dependence’ – leads one to take anhistorical view of the evolution of regulation, that is, onethat recognises that the specif ic economic history of acountry matters. The long-run importance of shocks makesinstitutional change less predictable and less responsive tosmall changes in economic interests.” See also Bebchuk/Roe(1999), pp. 127 - 170.

15 As Donahue and Pollak (2002), p. 85, put it “… the Civil Warand reconstruction saw a marked shift of authority awayfrom the states and toward the federal government.Prosecuting the war itself accelerated the growth ofWashington’s power …” and with regard to Franklin D.Roosevelt’s New Deal: “An unprecedented degree ofgovernmental activism on the economy, orchestrated fromthe centre, meant an unprecedented concentration ofauthority.”


Interestingly, the US Constitution provides noexplicit basis for the regulatory agencies,which nowadays figure so prominently in theUS financial sector. Nevertheless, the SupremeCourt – taking account of a rapidly changingeconomic and social environment – hasallowed delegation of regulatory powers toindependent agencies by acts of Congressunder the condition that the legislature laysdown “intelligible principles” with which thedelegated body must comply when exercisingdiscretionary power. The so-called “non-delegation doctrine”, which claimed thatCongress may under no circumstances sub-delegate its legislative prerogatives conferredto it by the Constitution, has thus beenabandoned.

As for the European Union, the situationpresents itself very differently. While havingsome important federal characteristics, the EUis not a federation, and it is an open questionwhether it will be one in the future. Moreover,the integration process – albeit motivated bythe lessons of World War II – was not propelledby the sort of deep and fundamental crises theUSA has experienced in its much longerhistory. It is, therefore, not surprising that, inthe EU, integration has proceeded moregradually, with Member States playing animportant role in the decision-making processand EU structures being relatively “light”.The institutional structure for financialregulation and supervision at the EU level asredesigned under the Lamfalussy framework(see Annex II), has thus built on existingstructures in the Member States. Furthermore,it has been established in a proactivemanner after a thorough discussion involvingnational governments in the ECOFIN (andin its preparatory bodies), the EuropeanCommission, the European Parliament (EP)and the ECB, eventually resulting in a muchclearer structure than that in the US, whereinstitutional development occurred in amore haphazard way. (For a highly stylisedcomparative presentation of regulatorystructures see Annex III).

In the EU, the creation of US-style regulatoryagencies has not been an option because theprevailing consensus reflected in the so-called“Meroni doctrine” has been and still is thatagencies with discretionary regulatory powersneed to be explicitly set up by the Treaty.The Meroni doctrine was developed by theEuropean Court of Justice16 and implies thatEU institutions cannot delegate discretionaryregulatory powers which have been conferredon them by the Treaty to outside bodies asthis would threaten the balance of powersbetween the institutions.17 A sub-delegationof regulatory powers exercised by any ofthe Community institutions to an independentagency would, therefore, require explicitauthorisation by the Treaty.

This is in line with current mainstream thinkingthat the original source of legitimacy of EUaction lies with the Member States which, as“masters of the Treaty”, must unanimouslyagree on a delegation of competences.18 In thisway, the constitutions of the Member Statesand their sovereign powers are effectivelypreserved and protected. By contrast, in theUS, the source of legitimacy of the federation isprimarily derived from the citizens exercisingtheir sovereign power via their electedrepresentatives in the US Congress.19 In the

16 See Meroni e Co., Industrie Metallurgiche, SpA v. HighAuthority. Cases 9 and 10/56. ECR 11-48, 53-86. ECJ 1958.The High Authority was the precursor to the Commissionunder the European Coal and Steel Community Treaty.

17 The delegation of powers to outside bodies is to be seendistinctly from the delegation of implementing powers bythe Council to the Commission under the so-called“comitology” upon which the Lamfalussy framework isbuilt. “Comitology” is explicitly authorised by the Treaty(Art. 202).

18 However, the EU also has elements of a Union of citizens,notably reflected in the direct election of the Member of theEP and in the EP’s role as a co-legislator but also in Art. I-1of the Constitutional Treaty on the Establishment of theUnion referring to “… the will of the citizens and States ofEurope to build a common future …. ”

19 The US Constitution as adopted by the ConstitutionalConvention in Philadelphia in 1787 had to be ratif ied by 9 ofthe 13 original states to enter into force. Any change to theConstitution needs to be ratif ied by three fourths of thestates. In the EU, any change to the Treaty requires anIntergovernmental Conference and ratif ication by allMember States.

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US, both legislative chambers, the House ofRepresentatives and the Senate, are directlyelected.20 The senators thus neither act onbehalf of their state government, nor of theirstate legislature.21 When a law is about to bepassed by Congress or a rule is being adoptedby a regulatory agency, state governments,during the rule-making process, from a legalpoint of view, may present their interests likeany other interested external party.22 Bycontrast, in the EU, Member States advancetheir interests by directly participating in rule-making both with regard to the broadframework (Council acting in co-decision withthe EP) and the spelling out of the legislativedetails (in the financial markets field via thecommittees under the Lamfalussy framework(see Annex II)). Furthermore, the EuropeanCommission has to rely on the Member Statesand their administrations to implementlegislation, while in the US the federalregulatory power is backed by a sufficientfinancial and administrative capacity todirectly implement rules and to supervise theirapplication.23

In the EU, although there are no US styleregulatory agencies, there are currently 16agencies – none of them in the financialservices field24 – that were established from thebeginning of the 1970s with a view to fulfillingspecific tasks without, however, disposing ofregulatory powers.25 As the environment inwhich the institutions operate has changedfrom the time of the mid-1950s when theMeroni-doctrine was established, someobservers argue that it is time to reconsider theMeroni doctrine and to adapt it in a pragmaticway26 thereby coming closer to the US practiceas it has developed over time.

If EU regulatory agencies were to beestablished, they would have to be subject tosimilar accountability mechanisms as those in

20 The population of each of the f ifty states elects two senators.Being elected for a longer term than the House members(6 years vs. 2 years), senators are supposed to think/act witha longer time horizon and to provide a f ilter to “to short-

term passions of public opinion”, which might have moreinfluence on the House of Representatives, see http://usgovinfo.about.com (Why We Have a House and a Senate).

21 Even prior to the Seventeenth Amendment to the USConstitution of 1913, when US senators were appointed bythe State legislatures, senators were less closely linked totheir respective State governments than are the members ofthe EU Council or of the German Bundesrat. For example,senators were not subject to recall by the State legislaturesthat appointed them, did not have to develop a joint positionon behalf of their State, and were not off icially members ofState governments when they came to Washington. SeeHalberstam (2002), p. 237.

22 While in the US federal regulators have gained prominencewith more regulation on the federal level, in the EU –besides the Commission – it is the Member Statesregulators/supervisors that have increased their importance.More generally, regulators from Member States have overthe recent decades learned to work together in a “new patternof regulatory federalism based on partnership andnetworking”. This has even led to new and convergingregulatory structures on the MS level (see Majone (2002),p. 254). Moreover, the regulatory dialogue taking place withthird countries implies representation on the EU-side by theCommission and the chairpersons of the level III committees(see Annex IV).

23 The four federal banking agencies alone employ altogetherabout 12,000 staff (regulation, supervision and supportingstaff), while the European Commission employs 110 staffthat are responsible for the whole f inancial sector. So far, thefocus of the staff concerned with f inancial institutions andmarkets in DG MARKT has been primarily to developproposals for binding and non-binding rules in the context ofthe Financial Services Action Plan (FSAP) and to –selectively – monitor implementation by Member States.

24 The ECB, by virtue of the Treaty, has regulatory powers inthe f ields of monetary policy, statistics and paymentssystems, and can be authorised by the Council to perform“specif ic tasks concerning policies relating to the prudentialsupervision of credit institutions and other f inancialinstitutions with the exception of insurance undertakings.”(Art. 105/6).

25 These tasks comprise monitoring of the environment (e.g.the European Environment Agency), fostering co-operationin terms of vocational training (e.g. European Centre for theDevelopment of Vocational Training), or authorising therelease of products into commercial circulation (e.g. theEuropean Agency for the Evaluation of Medicinal Products).It is noteworthy that with regard to some of the agencieswhich were established more recently, some Commissionservices wanted to provide them with discretionaryregulatory powers. The Commission’s Legal Service,however, objected on grounds of the Meroni doctrine.Arguably, the Legal Service later moved away somewhatfrom its position by stating that agencies cannot exercise“regulatory powers of general character”, allowing theconclusion – a contrario – that these bodies can exercisespecif ic regulatory powers. See Yataganas (2001),Afterword.

26 They point especially to changes such as deregulation inimportant sectors of the common market, e.g.telecommunications, electricity, which make independentEuropean regulators more necessary than ever, but also tothe increasing importance of the EP being the expression ofa Union of citizens complementing the Union of MemberStates, which would make the traditional doctrine appearless convincing. See Yataganas (2001) or Pelkmans/Casey(2003), p. 19.


the US, where congressional oversight27,administrative procedures prescribed by law28

and courts keep regulatory discretion in check.

To some extent, the regulatory action of theCommission may be compared to that of the USregulatory agencies. Reflecting the dominantrole of Member States in the EU, theCommission’s regulatory action under theLamfalussy framework is kept in checkprimarily by the Member States in theregulatory committees (i.e. the level IIcommittees) and to a lesser extent by the EP.Although under the Lamfalussy framework theCommission has assumed obligations in termsof consultation and transparency vis-à-vis theEP and third parties, pursuant to the currentTreaty and comitology rules, the EP still onlyhas the right to be informed and to give itsopinion,29 but cannot call back a regulationpassed by the Commission.30/31

Below, some important US agencies dealingwith the regulation and supervision of financialmarkets (the OCC, the Federal ReserveSystem, the FDIC, and the SEC) will be brieflydescribed, touching upon their specific origins,tasks and competences. Furthermore, given theimportance of the OCC in creating a unifiedfinancial services market, a case study of arecent rule-making by the OCC will bepresented.

3 REGULATORY AGENCIES: OCC, FED,FDIC, SEC

THE OFFICE OF THE COMPTROLLER OF THECURRENCY (OCC)32 AND THE DUAL BANKINGSYSTEM

The OCC is the oldest of the federal bankregulatory agencies, established by theNational Currency Act of 1863 andstrengthened by the National Bank Act of 1864.Based on legislation elaborated by the LincolnAdministration, the OCC was designed as partof a new banking system to be made up of manyseparate, federally chartered and privately

27 Congressional oversight includes hearings in congressionalcommittees on a regular basis and powers to reject or tochange a specif ic agency rule, to change the remit of theagency or, furthermore, to dismiss a head of agency in caseserious misconduct.

28 Before the enactment of the Administrative Procedure Act(APA), in 1946, many US agencies paid little attention toprocedural matters. The New Deal trusted that technical andscientif ic expertise would – by def inition – excluderegulatory discretion becoming a problem. Judicial review ofthe evidence used in reaching a decision was even seen as aserious threat to “the very virtue of specialized knowledgewhich constitutes one of the chief justif ications for theestablishment of [regulatory] commissions” (Fainsod M.(1940), “Some Reflections on the Nature of the RegulatoryProcess”, quoted in Majone (2002), p. 258). With the APAand later legislation, such as the Freedom of Information Act(1974) and the Government in the Sunshine Act (1976), auniform framework for the conduct of agency activities andminimum standards of consultation and transparency werelaid down. They effectively codif ied techniques developed bycourts to limit the exercise of regulatory discretion, e.g.disclosure for comment, clear statement of legislative intent,and most importantly, giving reasons for their decisions. SeeMajone (2002), p. 265.

29 In 2002, the Commission committed, however, to “take theutmost account of the Parliament’s position” (see declarationof President Prodi before the EP plenary on 5 February2002). This commitment was preceded by a flexing ofmuscles by the EP which implicitly threatened to block or todelay legislation to be passed under co-decision. Moreover,the securities Directives adopted under the Lamfalussyframework contain a sunset clause, which means that thedelegation of implementing measures to the Commission willexpire after four years following their entry into force unlessrenewed prior to the expiry date under the co-decisionprocedure (see Inter-Institutional Monitoring Group – ThirdReport Monitoring the Lamfalussy Process (2004), p. 8)

30 With the entry into force of the Constitutional Treaty, the EP,like the Council, would have a call back right as regards“delegated European regulations” passed by the Commission.This would, however, be a two-edged sword, as technical rule-making might be subject to a politicisation through lobbyingdirected at the EP. In the US, the regulatory discretion ofagencies is probably less directly influenced by lobbyingand “political” consideration with the expertise andindependence of their officials acting as a f ilter.

31 The assessment that the accountability in the EU is relativelyweak compared to the US does not change when oneacknowledges the fact that the activities of level IIIcommittees, i.e. the committees of supervisors, arescrutinised during regular hearings in the EP. It is furthermorerecalled that the level III committees do not have regulatorypowers. Rather their activities are limited to giving advice tothe Commission and facilitating supervisory convergence.

32 The OCC is an autonomous bureau of the TreasuryDepartment and is headed by a single person – the so-calledComptroller of the Currency, who is appointed by thePresident for a five-year term and also serves as a director ofthe FDIC. The OCC’s headquarters is in Washington D.C., ithas four District off ices, plus a “Large Bank off ice” and a“Mid-size/Credit Card Banks off ice”. Around 2,800employees work for the OCC, the vast majority of whom arebank examiners. The Treasury off icials cannot involvethemselves in case-specif ic matters before the Comptroller(such as examinations, enforcement proceedings etc).Furthermore, it cannot block or delay OCC regulations. TheOCC funds itself from fees paid by national banks. SeeMacey/Miller/Carnell (2001), p. 70.

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3 REGULATORYAGENCIES :OCC, FED.FDIC, SEC

owned banks – the so-called national banks –that would be established throughout thecountry. Wherever located, they would operateunder a uniform set of federal powers, underfederal standards of operation, and federallymandated capitalisation, with a federalsupervisor – the OCC – exercising theoversight function. The national bank systemwas to provide the federal government with avital source of funds to finance inter alia theCivil War. At the same time, the banknotesissued by the banks with the Comptroller’sapproval were intended to be the first nationalcurrency.33

Originally, national banks had been expectedto crowd out the existing state bankscompletely, not least because the federal levelactively discriminated against them by taxingbanknote issuances by state banks. State banks,however, survived as demand deposits werebecoming a much more important part ofbanking compared to the power to issuebanknotes. In this way, the so-called dualbanking system consisting of state banks34 andthe national banks came into being, with theOCC having authority over national banks35.

One of the defining characteristics of the dualbanking system is the OCC’s nationwidejurisdiction over federally chartered banks.The OCC’s right of pre-emption of state laws isbased on a Supreme Court’s decision(M’Culloch v. Maryland, 1819) stating that“states have no power, by taxation orotherwise, to retard, impede, burden, or in anymanner control” national bank’s ability toexercise business activities authorised underfederal law. Whenever the OCC designates astate regulation as a “significant interference”with federal prerogatives, the Supreme Courtnormally follows the OCC and upholds pre-emption. The origins of pre-emption36 are welldescribed by Greve:

“Congress was clear-eyed about itsobjectives: it wanted to create nationalbanks as instruments for a national economyand currency. The events of that time gave

Congress a vivid sense of the states’centrifugal tendencies (to put it gently). Andso Congress readily concluded that nationalbanks needed a total prohibition againststate regulation. A federal charter is not apre-emptive floor, above which states arestill permitted to regulate. Rather, it trulyexcludes any state law that materiallyaffects the operation of national banks.”37

This does not mean, however, that federallychartered institutions are not subject to statelaws. When there is no conflict between federallaw (e.g. the National Bank Act) and state law,the latter is also applied. If there is a conflict,the OCC may use its pre-emptive power. 38

An important basis for the OCC’s powers liesfurthermore in the Supreme Court’s decision39

according to which the “business of banking” isnot limited to the enumerated powers (ofbanks) in the National Bank Act and the OCChas discretion to authorise activities beyondthose specifically mentioned.

33 As such, the national bank system was part of a nationalprogram of economic development, which can be tracedback to the so-called “American system” of mid-1800, whichconstituted a “visionary program of national economicdevelopment that included federal construction of interstateturnpikes and canals, federal funding for other internalimprovements, … and a national bank”. See Comptroller ofthe Currency (2003), p. 6.

34 About three out of four commercial banks currently operateunder a state charter. Nine of the top ten banks, however,operate under a national charter (see Annex III).

35 In simple terms, the OCC charters, regulates and supervises.It can, inter alia, revoke charters, remove bank off icials orimpose fines. The OCC supervises approximately 2,100institutions, i.e. approximately one quarter of allcommercial banks, among them the largest US-banks.

36 The term “pre-emption” is used in US legal language, interalia, with regard to the specific powers of the OCC, but alsoin the general context of the relationship between the federaland the state level.

37 See Greve (2003) p. 12.38 The Supremacy Clause of the US Constitution says that the

“Constitution and the laws of the United States … shall be thesupreme law of the land … anything in the constitutions orlaws of any State to the contrary notwithstanding.” Thismeans that any federal law – even a regulation of a federalagency – supersedes any conflicting state law. WhenCongress is not clear about its will to pre-empt state law, it isthe Court’s task to look beyond the express language offederal statutes. See http://www.law.umkc.edu/faculty/projects/ftrials/conlaw/preemption.htm

39 Nations Bank of North Carolina v. Variable Annuity Life Ins.Co., 513 US 251 (1995), quoted in Comptroller of theCurrency (2003), p. 14.


THE FEDERAL RESERVE SYSTEM40 AND“UMBRELLA SUPERVISION”

In 1913, after recurrent banking crises, whichwere exacerbated by the lack of an outsidesource of reserves for the banking system(which the OCC could not provide), Congresspassed the Federal Reserve Act. The FederalReserve Act instituted the Federal ReserveSystem, headed by a Board of seven members.To ease concerns regarding excessivecentralisation, Congress arranged for FederalReserve Banks to be established in twelvedistricts.

For national banks, membership in the FederalReserve System was and is mandatory, whilefor state banks it is optional. As the FederalReserve System was given the authority tosupervise and examine member banks, therewas an overlap with the OCC, which hadauthority over the national banks. This wassettled in 1917, when it was agreed that theOCC would supervise national banks, butwould also provide its reports to the FederalReserve, while the Federal Reserve wouldsupervise state member banks. As aconsequence, the Fed today directly supervisesapproximately 1,000 state banks out of roughly8,000 (state and national) commercial banks(see Annex I).41

In the wake of the Great Depression, morepowers were given to the Board within theFederal Reserve System under the Banking Actof 1935. The new legislation strengthenedthe Board’s administrative responsibility forReserve Bank supervisory duties, and alsoestablished the Federal Open MarketCommittee (FOMC) to decide upon openmarket operations.42 At the same time, the USTreasury Secretary and the Comptroller of theCurrency were removed from the Fed’s Board.

During the post-war period, the FederalReserve System was further strengthened, firstby the Bank Holding Company Act in 1956,which placed the formation of multi-bankholding companies and their acquisition of

banking and non-banking interests under thecontrol of the Federal Reserve,43 and later withthe Financial Services Modernization Act ofNovember 12 1999, the so-called Gramm-Leach-Bliley Act (GLBA). The GLBArepealed the parts of the Bank HoldingCompany Act which separated commercialbanking from the insurance business, as well asthe parts of the Banking Act of 1933 thatseparated commercial banking from thesecurities business (also known as “Glass-Steagall”). The new financial holdingcompanies were placed under the authority ofthe Federal Reserve System which retained allthe power it had under the Bank HoldingCompany Act.44 Consequently, for financialholding companies, the Fed either reviews orreceives notification of their formation andsubsequent expansion plans, and is alsoresponsible for supervising the overall bankingstructure. The Fed thus gains insight into theoperations of banks which are not directlyunder its supervision. All in all, the Fedsupervises about 640 financial holdingcompanies, the fifty largest of which have totalconsolidated assets of about USD 7,600billion, well above the total assets of USD5,500 billion of the fifty largest US commercialbanks taken together. (The primary supervisorsof the top 50 US banks are shown in Annex IV).

40 The Federal Reserve System consists of the Board ofGovernors and the 12 Federal Reserve Banks. The Board ofGovernors is located in Washington D.C. Its members arenominated for 14 years (except for the Chairman whose termis 4 years, renewable) and are independent. It hasapproximately 1,900 employees (approximately 370 ofwhich are in supervision). While the Board determines banksupervision policy, it generally delegates the task ofconducting the examinations to the 12 Reserve Banks(altogether about 2,600 staff in supervision, 1,200 of whichare field examiners).

41 In terms of total assets, however, the Fed directly supervisesonly some 10% of the commercial banking sector as two ofthe largest US banks, JP Morgan Chase and HSBC, havebeen changing their charter from a state to the nationalcharter.

42 See Spong (2000), pp. 21 and 24.43 Non-banking interests had to be closely related to banking.44 See Barth, Brumbaugh and Wilcox (2000). GLBA removed

the restrictions on aff iliations between banks and securitiesf irms, but banks and securities f irms each continue to beprohibited from engaging directly in the other industry’score activities.

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The Gramm-Leach-Bliley Act was designed toestablish a system of functional regulation45 byallowing each entity in a financial holdingcompany to be regulated by its primarysupervisor at the state or federal level. Inexercising its function as “umbrellasupervisor”, the Federal Reserve Board mustrely primarily on the functional regulators tosupervise the individual affiliates.46 The GLBArequires the Fed to use “to the fullest extentpossible” the reports and examinations of(i) other supervisors, including appropriatestate and federal authorities, for banks andthrifts, (ii) the SEC for registered securitiesbrokers, dealers, or investment advisers, and(iii) state insurance commissioners for licensedinsurance companies. Although the FederalReserve may examine a financial subsidiaryonly under certain conditions,47 it may well bethat the Fed uses its umbrella authority quiteextensively given its view of its own mission.This encompasses responsibility for thestability of financial markets as a whole and notonly of banks. It also includes crisismanagement such as in the cases of PennCentral (1970) or LTCM (1998). In theory, theFed’s role as umbrella supervisor may belimited by the possibility of national banksto diversify via subsidiaries into mostfinancial activities (although not insuranceunderwriting, merchant banking or real estate)thereby avoiding the use of a financial holdingcompany structure and, in turn, oversightby the Fed.48 However, from a practicalperspective, it would be hard for all but thesmallest national banks to avoid creatingholding companies, since the holding companyis the preferred vehicle to access US stock andbond markets.

Since the mid-1980s the Federal ReserveBoard, under the leadership of Chairman AlanGreenspan has became one of the main drivingforces behind regulatory reform, giving banksmore freedom to act in a highly geographicallyand functionally-restricted environment.Under competitive pressures from both outsideand inside the US, the case for liberalisingbanking regulation has become more and more

compelling. During this process, the Fed hasbecome an increasingly powerful regulator49 asthe arguments for having an umbrellasupervisor in an increasingly liberalisedfinancial market – both in functional andgeographical terms – have become ever moreconvincing.

45 Functional regulation, which is a securities law concept thathinges on the def inition of the product to be supervised andnot on the def inition of the institution concerned, was,however, impossible to achieve as banking law restsprimarily on the def inition of banking institution and thecombination of its activities (accepting deposits and makingloans) and not on the individual products a bank sells. Thus,banking regulation by def inition constitutes institutionalregulation. See Schooner (2002), pp 190f. The reference tofunctional regulation was inspired by the objective tostreamline regulation and to avoid regulatory overlaps.Given increasing product hybridisation, regulatoryspecialisation and clear attribution of roles is, however,diff icult to achieve. See Garten (2002), p. 168.

46 See Spong (2000), p. 266.47 These conditions are: Firstly, the subsidiary is believed to be

engaged in activities posing a material risk to aff iliatedfinancial institutions; secondly, an examination is necessaryto assess risk management systems, or, thirdly, there isreasonable cause to believe a subsidiary is not in compliancewith the Bank Holding Company Act or other laws enforcedby the Fed. The Fed may not set capital requirement forfunctionally regulated subsidiaries that are already incompliance with the capital standards of their primarysupervisor. Neither may the Fed require such subsidiaries toassist aff iliated depository institutions if that wouldmaterially harm their own condition. See Spong (2000),p. 48f.

48 See Garten (2002), p. 174.49 As a bank regulator, the Federal Reserve establishes

standards designed to ensure the safe and sound operationof f inancial institutions. These standards may take theform of regulations, rules, policy guidelines, orsupervisory interpretations and may be established underspecif ic provisions of law “or under more generallegal authority”. See Federal Reserve-Website http://www.federalreserve.gov/pf/pdf/frspf5.pdf Supervision andRegulation, p. 80. For some, the Fed has become “a probablytoo powerful regulator”. They refer to a potential conflictwith its monetary policy role. Furthermore, they criticise thepower of the Fed to decide what a “f inancial activity” is,thereby def ining the scope of their supervisory authority.See Calomiris (2002), p. 22.


THE FEDERAL DEPOSIT INSURANCECORPORATION (FDIC)50: A COMPONENT OF THEFEDERAL SAFETY NET

A further significant institutional changeconcerning regulation and supervision was thecreation in 1933 of the Federal DepositInsurance Corporation (FDIC), which alsoformed part of the restrictive legislation passedin response to the Great Depression. TheFDIC’s mission is to maintain publicconfidence in the US financial system byinsuring deposits for up to USD 100,000,identifying, monitoring and addressing risks tothe deposit insurance funds51, and limiting theeffect on the economy and the financial systemwhen an institution fails. Insurance ismandatory for all Fed member banks, but opento non-member banks upon approval by theFDIC. The FDIC as a fully-fledged bankingregulator is empowered to examine all insuredbanks. To exclude supervisory duplication withthe Federal Reserve and the OCC, supervisionby the FDIC has been largely confined to thoseinsured state banks that are not members of oneof the Federal Reserve Banks, the so called“state non-member banks” (today numberingapproximately 5,300).52 The role of the FDIC isimportant in the process of bank chartering atstate level. In fact, many states require state-chartered banks to obtain FDIC insurancebefore they begin to operate.53

In an effort to reduce moral hazard in theaftermath of the Savings and Loan crisis in the1980s, federal deposit insurance was radicallychanged in 1991 with the enactment of theFederal Deposit Insurance IncorporationImprovement Act (FDICIA). Prior to the 1991legislation, the fees on the insured banks(“assessments”) that funded the FDIC weresubject to an upper limit, with the federalgovernment having to step in to preventdepletion of the resources of the FDIC.54

Following the enactment of the FDICIA, therisk of losses was placed on insured banksrather than on the federal government. This wasachieved by authorising the FDIC to imposespecial assessments on insured institutions and

to use the money to repay temporary bridgingloans made by the Treasury to the FDIC. Thegranting of such Treasury loans is conditionalon the FDIC being in a position to demonstratethat its income from assessments will besufficient to service and repay the loan.

The creation of the FDIC as part of the federalsafety net (together with the lender-of-last-resort facilities by the Fed and its guarantee ofdaylight overdraft for large-dollar inter-banktransfers on Fedwire) meant that the federallevel assumed increasing responsibility for theregulation and supervision of the bankingsector. Federal deposit insurance as such wastherefore instrumental for an intensification offederal regulation and supervision overbanking. As Macey puts it,

“… the history of the dual banking systemsince 1933 has been a steady relentlessmarch towards federal regulation of allaspects of banking related to safety andsoundness. This, of course, means that therehas been a steady march towards federal pre-emption in all important aspects of bankingregulation. These areas include theregulation of minimum capital requirementsfor banks, the regulation of reserverequirements for deposits, and the allocation

50 The FDIC is an independent agency managed by f ivedirectors, one of whom is the Comptroller of the Currencyand one is the Director of the Off ice of Thrift Supervision.The three others are appointed by the President subject toapproval by the Senate, one of them being appointed as theChairman for a period of 5 years (the other two directors areappointed for a period of 6 years). The main off ice of theFDIC is in Washington D.C. Moreover, it has six regionalsupervisory off ices and a number of f ield off ices around thecountry. It employs about 5,200 people. Like the Fed and theOCC, the FDIC is a permanent member of the BaselCommittee.

51 A reform of the deposit insurance system is currentlypending in Congress. Among other things, it is proposed tomerge the insurance funds (for banks and thrifts) and toincrease insurance coverage.

52 Since 1983 the FDIC has participated in the examination ofcertain problem banks not directly under its supervision. Inorder to eliminate redundant examinations, the FDIC’scurrent policy is to participate in the examination of bankssupervised by other agencies only when the examinationsrepresent a concurrent effort or are conf ined to specialcircumstances; see Spong (2000), p. 56.

53 See Spong (2000), p. 150.54 See Kaufman/Wallison (2001), p. 33.

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of regulatory authority over the bank closuredecisions. All of these areas once weresubject to the regulatory jurisdiction of statebanking regulators, but federal law nowcontrols all of these issues.”55

THE SECURITIES AND EXCHANGECOMMISSION (SEC) 56: PRIMARY REGULATOROF US SECURITIES MARKETS

As part of the New Deal legislation, the SECwas established under the Securities ExchangeAct of 1934. The main objectives of the SECare to ensure the integrity of the securitiesmarket and to protect investors in line with theprovisions of the federal securities acts inforce. Its tasks include the disclosure offinancial information of publicly tradedcompanies and oversight over broker-dealerfirms, investment advisors, mutual funds andself-regulatory organisations (SROs), whichinclude, inter alia, the stock exchanges and theNational Association of Securities Dealers(NASD). In this context, the SEC reviews andapproves proposals for new rules and forchanges to existing rules filed by the SROs. Ithas enforcement authority against individualsand companies who infringe the securities laws(insider trading, accounting fraud or providingfalse or misleading information).

The SEC is the primary regulator of the USsecurities markets57 with the individual statesplaying only a secondary role. While so-calledBlue Sky laws58 are still in force in individualstates, states have refrained from developingtheir securities law as the federal level hasincreasingly regulated this area and effectively“occupied the field” of securities regulation.59

That said, it is worth mentioning the recentaction under New York State laws by NYAttorney General Elliot Spitzer to fightconflicts of interest arising out of investmentresearch undertaken by analysts at Wall Streetinvestment banks (see footnote 104).

The dominant role of the federal level and theSEC in securities regulation, which features,among other things, an extensive system for

SEC registration, disclosure and liability(backed up by the mechanism of class actionlawsuits) has attracted both admiration andcriticism. Proponents of a strong role for theSEC refer to the importance of liquidity,product diversification and innovative capacityof the US market to which the SEC hascontributed. Others point to themonopolisation of securities regulation andoversight and the resulting undesirableconsequences, such as undue bureaucracy(leading to unnecessary disclosurerequirements) and excessive transaction costsdue to a favouring of investment banks andtraders over issuers.60/61 Critical remarks aremostly made by academics, but less so bypoliticians or the financial industry.

With the passage of the Sarbanes-Oxley-Act(SOA) the SEC was further strengthened. Partsof corporate law that, until that time, had beenconsidered to be the exclusive regulatory

55 See Macey (2001), p. 102. While the formal decision on theclosure of a state bank continues to be taken by stateauthorities, the FDIC has the authority to revoke the bank’sdeposit insurance, essentially forcing it to be closed down.

56 The SEC consists of f ive Commissioners, with one servingas the Chairman, and all of whom being appointed by thePresident with the advice and consent of the Senate forstaggered five year terms. The SEC has approximately 3,100staff and has its headquarters in Washington D.C. It has 11regional and district off ices throughout the country.

57 The supervision of f inancial derivatives and commoditiesmarkets falls under the competence of the CommodityFutures Trading Commission (CFTC).

58 The term “Blue Sky laws” has its origins in the unrealisticpromises that sellers of securities made to investors.

59 See Jackson (2001), p. 7. State securities regulators are infact more like service organisations helping to protect theinterests of investors resident in their state. They are oftenf irst to identify new investment scams and to bringenforcement actions to remedy a wide variety of investment-related problems. They co-operate within the NorthAmerican Securities Administrators Association (NASAA),founded in 1919, whose membership extends beyond theUSA and consists of 66 state, provincial and territorialsecurities administrators in the 50 states, the District ofColumbia, Puerto Rico, Canada, and Mexico.

60 As Macey (2001), p. 108 puts it: “In fact, there is someevidence that the SEC has been captured by the tradingcommunity, and is therefore unlikely to produce theexchange rules that are best for investors.”

61 The critique notably is inspired by the example of successfulregulatory competition for corporate charters in the US. Seeespecially Romano (2002), but dissenting opinion comesfrom Bebchuk/Ferrel (2001), p. 90 f., who claim that the lackof a federal take-over law has led to state takeoverlegislation favouring management over shareholders.


domain of the states, were then federalised.Reacting to corporate scandals (e.g. Enron,WorldCom), for the first time Congressregulated such issues as the composition, roleand function of the board of directors of publiccorporations. Among other things, the SOApartially pre-empts state law governing theappointment, removal, and compensation ofdirectors and officers. The SEC is nowempowered to remove officers and directorsfrom their positions on mere grounds of“unfitness”. Moreover, the New York StockExchange (NYSE), under the aegis of the SEC,promulgates corporate governance listingstandards (e.g. on director independence)which effectively supersede state corporatelaw.62

One reason why the centralisation in USsecurities and increasingly also in corporategovernance regulation has been accepted, isthat the SEC is regarded as an effectiveregulator which spoke out in favour ofstrengthened corporate governance rules longbefore the passage of the SOA. Moreover,given the risk of confusion and regulatoryoverlap in regulatory competition, uniformrequirements coming from a single regulatorappear more attractive.

4 RULE-MAKING BY REGULATORYAGENCIES: A CASE STUDY OF THE OCC

Federal regulatory agencies enjoy considerablepowers. The OCC’s power can be exemplifiedby its 2004 rule-making on “anti-predatorylending laws”, i.e. laws protecting weakcustomers from abusive bank practices in thesub-prime mortgage lending market. The OCCdeclared relevant state laws not applicable tonational banks and prescribed anti-predatorylending standards for national banks’ lendingactivities. This move was met with considerableopposition from state representatives(governors, supervisors and attorneys general).

The speed and authority with which the OCChas proceeded is remarkable. It started the

procedure on 5 August 2003 with thepublication of a notice of proposed rule-making (NPRM), received 2,600 commentsfrom interested parties by the end of theconsultation period (6 October 2003) and tooka decision on 6 January 2004. The decisionwas published in the Federal Register63 on13 January 2004 and took effect on 12 February2004, just over 6 months after the issuing of theNPRM.

In its final rule, the OCC, in essence, declaresthe applicability of state consumer protectionlaw relating to real estate lending as pre-empted and justifies its action by referring tothe US Constitution, the National Bank Actand the Supreme Court. In tandem with thesepre-emption provisions the OCC adoptedsupplemental and by nature – uniform – anti-predatory lending standards governing nationalbanks’ lending activities.

During the two-month consultation, thecomments supporting the OCC’s proposed rulecame from national banks and banking industrytrade groups. They pointed out that, in effect, anational bank must often craft differentproducts or services for each state in which itdoes business, or accept not to provide all of its products or services in one or more states.The OCC rule would offer much-neededclarification of when state law does or does notapply. Without such clarity, the burden andcosts associated with the numerous state andlocal laws might be a significant deterrent tonational banks’ willingness and ability to offercertain products and services in certainmarkets.

Among those who were against the OCC’sproposed rule, real estate companies feared thattheir own affiliated lending operations wouldbecome disadvantaged because they wouldcontinue to be subject to state law whilenational banks and their operating subsidiarieswould no longer be bound by those same laws

62 See Bainbridge (2003), p. 29 f.63 Federal Register/Vol. 69, No. 8/Tuesday, January 13 2004/

Rules and Regulations.

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4 RULE -MAK INGBY REGULATORY

AGENCIES :A CASE STUDY

OF THE OCC

and rules. State officials64 and members ofCongress questioned the legal basis of theproposal and argued that the OCC lacked theauthority to adopt it. These commentators,exemplified by the attorneys general65,specifically pointed out that “the OCC’s effortsto deal with the very substantial problem ofpredatory lending … fall short of the actionstaken by many states.” The attorneys generalalso objected to the OCC proposal to extendpre-emption rules to operating subsidiaries ofnational banks. This would amount to“federalizing state-chartered subsidiaries ...effectively destroying the dual banking systemthat is valued by both Congress and the States.”“The States would be deprived of all authorityto regulate these state-chartered corporations,which include mortgage companies that havelong been licensed by States.”

More generally, attorneys general criticised theOCC’s analysis of pre-emption as “one-sidedand self-serving”. They criticised its“aggressive advocacy role in favour of pre-emption in the federal courts”. It is interestingto note that the attorneys general acknowledgethat the OCC succeeds in persuading most ofthe federal courts “to ratify its aggressivelyexpansive pre-emption policy”.

The concerns voiced by commentators were,for the most part, not taken up in the final rule.In the “Regulatory Analysis” part of itspublished rule, the OCC pointed out that it hadfulfilled legal requirements (e.g. consultationmeetings with representatives from CSBS66)and described the extent to which the concernsexpressed (extent of pre-emption, underminingof the dual banking system, adequacy ofconsumer protection) had been addressed. TheOCC basically reiterated that its positionconformed with federal law and judicialprecedent, that the final rule preserved the dualbanking system and, finally, that the OCC hadample legal authority and resources to ensurethat consumers were adequately protected.

This case study illustrates that federal agencies– sometimes with the support of federal courts

– push for harmonisation and uniformityquickly and decisively.67 If Congress considersthat the OCC – or any other regulatory agency –has exceeded its powers, it has, by virtue of theCongressional Review Act of 1996, the powerto review and possibly reject major agencyrules within a period of 60 days.68 Only if amotion of disapproval passes both the Houseand the Senate, and is then signed by thePresident, does the respective rule not comeinto force and the agency is banned frompublishing a similar version of the rule at a laterdate. So far, however, the CongressionalReview Act has never been successfullyinvoked. Furthermore, if there were to be afundamental disagreement between Congressand the OCC about the latter’s regulatory

64 State banking regulators, the Conference of State BankSupervisors (CSBS), the National Conference of StateLegislators, individual state legislators, the NationalAssociation of Attorneys General and individual stateattorney generals (AGs).

65 Letter of the National Association of Attorneys General,signed by all 50 AGs, to the OCC from October 6 2003. Thevery active and visible role played by the state AttorneysGeneral can be explained by the non-involvement of states infederal rule-making. Attorneys General, as elected off icials,forcefully defend the prerogatives of their respective state.

66 The so-called Federalism-order (Executive Order 13132)requires federal agencies, including the OCC, to certify theircompliance with that Order whenever a proposed rule has“substantial direct effects on the States, on the relationshipbetween the national government and the States, or on thedistribution of power and responsibilities among the variouslevels of government.” In the case of a regulation that hasFederalism implications and that pre-empts state law, theOrder imposes certain consultation requirements with stateand local off icials, requires publication in the preamble of aFederalism summary impact statement, and requires theOCC to make available to the Director of the Off ice ofManagement and Budget (OMB) any writtencommunications submitted by state and local off icials.These requirements must be satisf ied before the OCCpromulgates a f inal regulation.

67 Interestingly, Congress had earlier expressed its view thatstate law would continue to apply to the interstate operationsof national banks, particularly in the area of consumerprotection. (See report of the House-Senate conferencecommittee on the Riegle-Neal Act, quoted in the Letter byAGs of October 6 2004, p. 5.) Nevertheless, as already statedabove, the OCC had been given authorisation by federal law,the National Bank Act, to pre-empt state laws, an authoritywhich was subsequently conf irmed by decisions of theSupreme Court. See report of the House-Senate conferencecommittee on the Riegle-Neal Act, quoted in the Letter byAGs of October 6 2004, p. 5.

68 “Major” is def ined as a rule that is estimated to have anannual effect on costs for the economy of more than USD100 million.


powers, Congress could simply change theNational Bank Act if deemed appropriate, orleave the matter to the Supreme Court.

5 SPEED AND FLEXIBILITY IN RULE ANDLAW-MAKING

In order to make financial regulation moreresponsive to changes in financial markets, theEU has created the so-called Lamfalussyframework. It differentiates betweenframework legislation, established under theco-decision procedure (i.e. involving both theCouncil and the EP), and more detailedtechnical rules, passed via the speedier“comitology” procedure. While this approachhas the potential to increase the adaptability offinancial market regulation, it does not providefor the flexibility and scope of action of US-style regulatory agencies.

In the US, important pieces of financialregulation such as the Basel II rules will beadopted by the regulatory agencies alone. Bycontrast, in the EU, the main body of the newCapital Directive as well as most of thetechnical details contained in the annexes willbe passed under the co-decision procedure.Only subsequent changes to the annexes will bedealt with under the potentially fastercomitology procedure. Moreover, while the EUCapital Directive will require transpositioninto national law by Member States, US ruleswill apply directly. Finally, translation into thedifferent languages of the European Union cancause a bottleneck in the rule-making process.This inevitably puts the EU at a disadvantage interms of speed. In particular, a prolongedlegislative process may arise when the EP actsas co-legislator. In this case, Members of theEuropean Parliament may be lobbied to filenumerous amendments. By contrast, USregulatory agencies, while being subject tooversight by Congress, do not need a formalstamp of approval by Congress for the rulesthey issue. Lobbying by interest groups is thus“filtered”, taking place in a more indirect wayby convincing members of Congress to support

their cause in the context of the congressionaloversight function (e.g. in congressionalhearings with agency officials).

While the US-style agency structureundeniably has its advantages, theeffectiveness of regulatory action in the USmay, at the same time, be hampered by the factthat there are several federal regulators. Whenuniformity is required and Congress has notgiven a specific agency the lead authority todeal with a certain issue,69 it may arise that theregulators cannot reach an agreement with eachother. This risks slowing down the rule-makingprocess or even leading to regulatorygridlock.70 During the congressional hearing onthe proposed – but finally rejected – RegulatoryConsolidation Act 199471, the then Comptrollerof the Currency, E. Ludwig, referred “… to thelong histories of independent action that havehardened [the agencies’] resistance toaccommodate opposing points of view (…) Inthose circumstances, debate among theagencies can take on the aura of deliberationsamong sovereign powers that have greatdifficulty reaching consensus on almost anyissue within meaningful time frames.”72 Therisk of regulatory stalemate is particularlypresent if Congress is not plain about itsobjectives. If Congress, however, has a clearview on what it wants to achieve, it can threatento legislate directly and thus speed up action byregulatory authorities.

In the EU, the speed with which financiallegislation can be adapted to developments inthe financial markets depends on the extent ofdelegation of technical adaptations to the levelII Lamfalussy committees by the EU legislatorsand on the efficiency of the committees. Thepreparedness of the political level (Council,

69 The Federal Reserve, for example, has exclusive authority towrite the “Truth-in-Lending” regulations.

70 Furthermore, the risk was pointed out that the US position ininternational f inancial negotiations might be weakened bythe fragmented nature of the US system. See GAO (2004),p. 18. According to some observers, co-operation amongagencies with regard to Basel II was not without friction.

71 See Chapter 8 below.72 See Ludwig (1994), p. 149.

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EP) to delegate crucially depends, in turn, onthe satisfaction with the way in which theCommission exercises its regulatory role. Ifmarket participants get the feeling that theirviews are not adequately taken into account,they may lobby governments and members ofparliament to keep as tight a grip on legislationas possible with the consequence that technicaldetails are regulated on level I, which ideallyshould be restricted to the broad framework.

Changes to the broad framework of financialmarket legislation – as opposed to detailedrule-making – may require a lot of time on bothsides of the Atlantic. This is particularly truefor institutional reform, which is much moredifficult in a multi-layered governancestructure, with many interest groups playingtheir role (as in the US or the EU), than in asystem of centralised decision making like thatof the UK.73 In the US, attempts to reform theUS banking supervisory structure by creating asingle federal banking agency have been goingon at intervals over the last forty years. Mostrecently, law makers again failed in 1994, notleast because banking profitability was highand the public at large lacked interest in thesubject (see Chapter 8 below). Institutionalreform is particularly cumbersome in the EU ifa change to the Treaty becomes necessary. Anychange to the Treaty requires unanimity of allEU governments in an intergovernmentalconference and subsequent ratification, whichis difficult to achieve in a union of 25 or evenmore Member States. The risk of anossification of institutional structures at EUlevel thus seems to be even higher than in theUS, where federal regulatory agencies havebeen established and can be changed by acts ofCongress with simple majority, hence notrequiring a change in the US Constitution.

Generally, the seriousness of the problemsconcerned plays a decisive role in the speed ofaction: for Sarbanes-Oxley and the creation ofthe Public Companies Auditing OversightBoard (PCAOB), it took less than eight monthsafter the corporate scandals had surfaced74 forCongress to pass the law. By contrast, the

passing of the Gramm-Leach-Bliley Act tooktwo decades, because pressure was subduedand institutional conflict prevalent75. In theEU, a clear program and the deadlines set by theFinancial Services Action Plan led to a rapidadoption of important pieces of legislation,including the legal framework underpinningthe Lamfalussy process, and accelerated theadoption of legislative measures, such as theEuropean Company Statute, which has beendiscussed for more than 30 years.

6 DRIVING FORCES AND ACTORS INFINANCIAL REGULATION

It has already been pointed out that, in theUS, crisis has been an important drivingforce for the creation of new institutions (e.g.OCC/Civil War, Federal Reserve/widespreadbanking crisis, FDIC and SEC/GreatDepression, PCAOB/corporate scandals) or thereform of existing ones (e.g. FDIC/banking andS&L-crises)76 (“positive” integration). Crisis,

73 “The blockade of institutional reform in the US ... can bestbe explained ... by the tendency of Congress for stalemate indealing with contested measures in the maze of committeesand sub-committees.” This can be contrasted to the creationof the FSA in the British Westminster system withits “unchecked centralisation of power”, see Busch (2002),p. 13.

74 Enron collapsed in November 2001, Sarbanes-Oxley enteredinto force on July 30 2002. Criticism was, however, raisedwith regard to the quality of the substance of the Act.

75 “Congress has been working for 20 years to remove theDepression-era barriers that separate banking, insurance andsecurities,” Sen. Phil Gramm said during the Senateproceedings in July 1999, “… and for the f irst time in 20years, both houses of Congress have passed bills to do that.”The fact that many interest groups were influencing theoutcome meant that a short and simple bill calling for therepeal of the Glass-Steagall and the Bank Holding CompanyActs in 1999 did not come about. Kaufmann (2000), pp. 42 f.describes the legislative process as follows: “ ... the drivingforces have been primarily vested interests, f ighting eachother for gains in a mostly zero-sum game. The process hasbeen a lobbyist’s delight … Foremost of these is Citigroup,which needs congressional approval to maintain and fullyintegrate all the activities acquired in Citicorp’s earliermerger of equals with Travellers Insurance. If notlegislatively permitted within f ive years, some of theseactivities, particularly insurance underwriting, could not beconducted by Citigroup or any of its aff iliates.”

76 The reform of the FDIC was accompanied by the conversionof the Federal Savings and Loan Insurance Corporation(FSLIC) into the Savings Association Insurance Fund(SAIF), which was placed under the control of the FDIC.


however, has not been the only force shapingthe financial framework. Competition is theother force at work, including competitionamong regulators that is induced bytechnology, globalisation and structuralchange. This has led to greater liberalisation ofmarkets (“negative” integration).

In the US, there is a clear link between the twodriving forces of competition and crisis andthe activities of policy-makers, i.e. stateauthorities, federal regulatory agencies orCongress. When adapting to or creating a morecompetitive environment was the issue, thestates (e.g. when lifting branching restrictions)or the federal regulatory agencies (e.g. theFederal Reserve Board when graduallydismantling Glass-Steagall) took the lead.When reacting to deep crises – very often in arestrictive way – it was Congress which tookthe initiative, mostly because the publicexpected its representatives in Congress to doso.

In cases of “negative” integration, i.e.liberalisation, Congress has to a considerableextent only ratified ex post what had alreadybeen granted by the states or regulatoryagencies. One explanation why states andregulatory agencies were more proactive inderegulating than Congress might lie in theirdesire to increase their regulatoryconstituency. The Fed is one, but not the only,example of an agency fuelling regulatorycompetition. In the context of the GLBA, theFed was identified as a big driver in connection“with its ongoing turf battle with thecomptroller of the currency for regulatorysupremacy in banking.”77 For its part, the OCCused inter alia its pre-emptive power to expandwhat national banks are empowered to do.Although regulatory competition as a drivingforce played much less of a role for Congress inthe past78, global integration of markets andcompetition with the EU could, however, makeCongress more responsive to new challenges(as was already the case with the Sarbanes-Oxley-Act).

In the EU, both the driving forces as well as theactors in financial legislation/regulation aredifferent from those in the US. More thanregulatory competition among agencies oramong states or the need to react to crises, thecompelling force for financial marketregulation in the EU has been the desire tofoster integration so as to create a morecompetitive European financial market place.79

With regard to the actors, the strong role of theMember States in the European constructionstands out again. Although the EuropeanCommission formally has the exclusive right ofinitiative for financial regulation, it must takeinto account the positions of Member States asmuch as possible. In its initiatives in thefinancial services field, the Commission isinformed by the views expressed in theFinancial Services Committee (FSC), which,as a Council body, comprises high-levelrepresentatives of the finance ministries ofMember States shaping opinions on strategicquestions of financial markets legislation.80 Ata more technical level, the Commissionreceives advice from the competentLamfalussy committees comprising againofficials and experts from Member States.Given the importance of Member States in thedecision-making process, lobbying effortsregarding EU rules are not only directed at theEP but also at Member States governments. Bycontrast, in the US, lobbying by the well

77 See Kaufman (2000), p. 42f. More recently, in connectionwith “Basel II” it was again primarily the Federal ReserveBoard who reacted to big banks’ concerns of increasedcompetitiveness on the international level.

78 “Critics had argued that the two congressional bankingcommittees preferred not to pass legislation, since theperenniel prospect of a bill works wonders in fund raising.”See Calomiris (2000), p. xxv. To be fair, diff iculties ofCongress in passing f inancial regulation may result alsofrom the fact that other committees besides the bankingcommittees have a say in bills that encompass the securitiesmarkets or insurance.

79 To achieve this, the concepts of minimum harmonisation andmutual recognition were developed. However, due to theabsence of a “true mutual recognition culture” (see Lannoo/Casey (2005), p. 25) the single f inancial market is still not areality in all f inancial market segments.

80 The Commission also nominates a member to the FSC. TheECB and the Chairs of the relevant Community committeesof regulators have observer status.

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organised financial services interest groups81

is concentrated on the federal level, i.e. onCongress 82/83, both to influence law-making byCongress and the way in which congressionalcommittees exercise oversight over theregulatory agencies.

7 THE INTERPLAY BETWEEN REGULATORYAGENCIES: CO-OPERATION ANDREGULATORY COMPETITION

Although US financial activity was liberalisedto a large extent both in geographical as well asin functional terms during the 1990s, theinstitutional set-up for regulation andsupervision remained largely unchanged.However, as the multitude of regulators/supervisors on the state and the federal levelplaces a premium on effective co-operationamong agencies84, various forms of co-operation have developed over time.85

In banking supervision, co-operation has beeninstitutionalised at the federal level in theFederal Financial Institutions ExaminationsCouncil (FFIEC) and, long before at the statelevel, in the Conference of State BankSupervisors (CSBS). The FFIEC wasestablished in 1979 as a formal interagencybody empowered to prescribe uniformprinciples, standards, and report forms for thefederal examination of financial institutionsby the Federal Reserve Board, the FDIC,the National Credit Union Administration(NCUA)86, the OCC and the Office of ThriftSupervision (OTS) and to makerecommendations to promote uniformity inthe supervision of financial institutions. Itprovides, inter alia, schools for examiners andtraining seminars on risk management. Whilethe agencies represented in the FFIEC shareinformation and coordinate among themselves,they maintain their independence. As aresult, while the FFIEC has achieved moreconsistency in dealing with supervisory issuesand reporting forms, its recommendationshave not always been adopted uniformly.87

Furthermore, there is ad-hoc co-operation

among federal agencies dealing with specificquestions such as money laundering andterrorist financing.

At the state level, the Conference of State BankSupervisors (CSBS), which was founded in1902, serves as a coordinating body for

81 Among bank trade associations, the American BankersAssociation (ABA) is the oldest and largest. It views itself asthe voice of the entire commercial banking industry. TheIndependent Community Bankers of America viewthemselves as the true voice of small banks, and competeswith the ABA for those banks’ support. State bankingassociations also play an important role in conveying theviews of bankers in each state (both state and nationalbanks) to the state and federal regulators/legislators. TheFinancial Services Round Table encompasses top executivesof large, expansion-minded banks and non-bank f inancialinstitutions. See Macey/Miller/Carnell (2001), p. 77f.

82 Kroszner/Stratman (1998), p. 1164 cite a study according towhich f inancial services’ political action committeesconstitute the single largest group of contributors tolegislators, providing nearly 20 percent of totalcontributions (see Makinson, L., “Open secrets: Theencyclopedia of congressional money and politics”,Washington D.C., Congressional Quarterly, Inc. 1992.) Theinfluence of academic experts and think tanks catering to aparticular political perspective is also a feature, whichseems to be more developed in the policymakingenvironment of Washington than of Brussels. Clearly, theacademic community made an important intellectualcontribution to the introduction of prompt corrective actionin the FDICIA and to the dismantling of Glass-Steagall inthe GLBA. See Axarlis (2004), p. 15 and 18.

83 Lobbying in Brussels is targeted at the Commission thatdrafts the initial proposals and, at a later stage, at the EPacting as co-legislator with the Council.

84 Spong (2000), p. 50 succinctly describes the layers ofbanking regulation/supervision in the US: “The presence ofboth federal and state authorities has brought almost allbanks under the regulatory authority of more than oneagency. All banks fall under the supervision and regulationof their chartering authority, at either the state or federallevel. If deposit insurance is obtained – as it virtually alwaysis – a bank is subject to certain statutes of the FederalDeposit Insurance Act and, in the case of state non-memberbanks, to direct FDIC supervision. If a state bank becomes amember of the Federal Reserve System, the Federal Reserveis its primary federal supervisor. Also formation of a bankholding company or a f inancial holding company subjectsbanks and banking organisations to an additional layer ofregulation and supervision at the parent company level.Moreover, banking organisations may further be subject tothe oversight of insurance, securities or other regulators asthey take on non-banking activities.”

85 The need for effective co-operation and communication wasstressed recently by the US Government AccountabilityOff ice especially with regard to systematic informationsharing across sectors. See GAO (2004), p. 104 and p. 109.

86 The NCUA is the independent federal agency that since 1970charters and supervises federal credit unions. It is thesuccessor of the Bureau of Federal Credit Unions that wasestablished in 1934.

87 See Spong (2000), p. 58.


achieving supervisory convergence, but also asa lobbying institute for state banking inWashington. It regularly delivers commentletters to the OCC in the context of notices ofproposed rule-making. Moreover, it provides aforum for discussing issues of common interestto all state regulators and assists states inmaintaining efficient agencies. Its membershipincludes state supervisors as well as many statebanks.88

The CSBS played a decisive role in providing abasis for co-operative efforts among the statesupervisors and as the natural interlocutor fordiscussion on supervisory agreements withfederal agencies in the context of theliberalisation of interstate branching in themid-nineties. In 1996, two key agreementswere concluded with the active involvement ofthe CSBS: the Nationwide Co-operativeAgreement among state supervisory authoritieson 13 November 1996, and the State/FederalSupervisory Agreement between statesupervisory authorities, the Federal ReserveBoard and the FDIC on 14 November 1996.89/90

Both agreements – as well as later agreementsconcerning large complex bankingorganisations and foreign bankingorganisations (FBOs) – are inspired by the goalof providing seamless, flexible and risk-focused supervision, minimising regulatoryburden and fostering consistency andcoordination among the appropriate regulators.

The agreements are the outcome of efforts bythe state banking system to remain attractive toits “regulatory constituency”. If, due to a lackof coordination between state banks and their

88 The CSBS, addressing potential members via its homepage,describes itself as “a member-driven organization thatbrings regulators and bankers together for a commonpurpose. Your bank’s support helps us deliver on our corestrategic functions: to educate, coordinate, advocate andcommunicate for the advancement of the state bankingsystem.”

89 The State Federal Working Group (SFWG) worked outconcrete proposals for the State/Federal Agreement of 1996.Given the need to co-operate more closely between thefederal and state level under conditions of liberalised bankbranching, the Group was established in October 1995 as anad hoc committee composed of state bank regulators and topregulatory off icials of the FDIC and the Federal Reserve.

90 The Nationwide Coooperative Agreement sets out theresponsibilities of the home state supervisor and the hoststate supervisors for multi-state banks. In concrete terms,the home state supervisor is def ined as the primary regulatorresponsible for the supervision of its state-chartered banksand its out-of-state branches. His tasks include theexamination of safety and soundness and compliance withapplicable laws and responsibility for coordination with thehost state supervisors and the appropriate federal bankregulatory agency. The home state supervisor may requestthe host state supervisor’s participation to examine safetyand soundness, trust and electronic data processing. Heshould use host state examiners to examine the compliancewith host state laws regarding community reinvestment,consumer protection and fair lending and rely on theirguidance in this respect. (The parties to the nation-wideagreement “recognize, that host state supervisors have alegitimate interest in monitoring the safety and soundness ofout-of-state banks that operate branches in their states and inmaking sure those branches are operated in compliance withhost state law.”) The home state supervisor shall designatethe examiner-in-charge, who may also be an examineremployed and selected by a federal bank regulatory agency.The examiner in charge shall designate the examinationresponsibilities of each examiner involved in theexamination. Unless otherwise expressly provided underhost state law, the home state supervisor shall have approvalauthority over all applications from a multi-state bank.The State/Federal Supervisory Agreement outlines theresponsibilities of the responsible federal agency and thehome state supervisor. Both designate a primary contactperson for each multi-state bank. The contact persons willcoordinate the supervisory and examination responsibilitiesof their respective agencies. In principle, safety andsoundness examinations will be conducted on a joint basis,with a joint examination team issuing a single examinationreport. (The agreement explains in footnotes that the jointexaminations are not intended to supersede existingAlternate Examination Programs (“AEP”), which areconducted by either the responsible federal agency or thehome supervisor, which will also issue the examinationreport. It furthermore clarif ies that joint examinations willnormally be used for the larger, more complex organisations,while alternate examinations are generally reserved forsmall organisations.) In exceptional circumstances, e.g.when there is signif icant safety and soundness risk, theresponsible federal agency or the home state supervisor mayconduct independent or special examinations (giving priornotice to the other regulator). In developing acomprehensive supervisory plan, the primary contactpersons will consider the view of the local Federal Reservebanks, the local FDIC regional off ices and the host statesupervisors, as appropriate. The responsible federal agencyand the home state supervisor may agree to have oneexaminer-in-charge (EIC) or may each assign a co-EIC(which may coincide with the primary contact persons) tomanage the on-site, joint examination. Consistent with thegoal of “seamless supervision”, the agreement requires thatall aspects of the examination process are fully coordinatedand that duplication is avoided. The parties to the agreementalso resolve to coordinate fully the applications processby promoting consistency in approach (e.g. developingcommon forms and introducing concurrent processingperiods). What is clearly expressed is that the provisions ofthe agreement do not supersede statutory or regulatoryobligations of a bank to provide specif ic information or tof ile required reports with a federal or state supervisor.

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federal supervisors (Fed, FDIC), supervisionbecomes too burdensome for multi-state statebanks, they can opt to become a national bank.This would neither be neither in the interest ofthe state supervisor, nor of the Fed or theFDIC.91

In an effort to facilitate cross-border bankingactivities, state banking authorities use CSBSas a means to achieve supervisoryconvergence. In its public compendium,“Profile of State Banking”, CSBS staff havebeen creating transparency by surveying statelaws in relation to topics, such as branching,non-bank-activities and so on. The “Profile” isintended to encourage greater substantiveuniformity and to be a source for identifyingparticular state laws that may raise issues formulti-state providers.92 Furthermore, CSBSprovides added value to its supervisorymembers, by accrediting individual statesupervisors for meeting CSBS standards forbank examinations, which is used as a“marketing argument” by state agencies.93

While banking regulation in the 1930s led tostronger federalisation with the creation of theFDIC and a strengthening of the Fed94, statebanking authorities nowadays regard the FDICand especially the Fed as valuable allies in theirendeavour to create attractive conditions forstate banks and thus to keep national banking incheck. The Federal Reserve Banks, for theirpart, contribute to this effort by offering state-chartered banks membership in the FederalReserve System and thus high quality andefficient supervision. The Federal ReserveBank of Boston, for example, points out that“the Federal Reserve’s local supervision modelis closely aligned with the state banking model,and is supportive of the dual banking system.”Furthermore, the efficiency argument is putforward as follows: “In the case of a statemember bank owned by a bank holdingcompany, the Federal Reserve directlysupervises both institutions, promoting aconsistent supervisory approach for the entireorganization.”95

While the dual banking system has beencriticised for creating a “redundant andconflicting”96 regulatory structure and “beingduplicative and never easy to explain”97, it maybe credited for exerting a favourable influenceon regulatory/supervisory competition in theUS.98 On the side of – both state and federal –supervisors and policy-makers there iscontinuing support for the dual bankingsystem. The state bank supervisors claim that aseparate system of state banks “allows thestates to serve as laboratories for innovationand change, not only in banking powers andstructures, but also in the area of consumerprotection”.99 According to the Comptroller ofthe Currency “the national banking system isthe venue for testing and evaluating theefficiencies and benefits that flow fromuniform national standards […]. In other words,the national banking system is a laboratory too,but what it demonstrates is the value of

91 In the case of national banks, the Fed and the FDIC onlyreceive the examination reports from the OCC.

92 See Eager R. C. and Muckenfuss C. F. (2003), p. 30.93 Accreditation is done on a voluntary basis. The accreditation

program started in 1984 with the state banking departmentof Illinois. Currently, 45 departments out of 54 CSBSmembers (i.e. the f ifty states plus Washington D.C. and the“unincorporated organized territories” of Guam, PuertoRico and the Virgin Islands) are accredited. The conf identialaccreditation procedure is based on an independentassessment of the fulf ilment of CSBS examination standardsby a panel of retired state and federal regulators. A review ofthe accreditation is undertaken every f ive years.

94 With the creation of the FDIC, state banking agencies losttheir position as sole regulators of state non-member banks.Moreover, in the Banking Act of 1935, there was even arequirement for insured state non-member banks to join theFederal Reserve System, a requirement that was removedunder the pressure from state agencies and non-memberbanks in 1939. See Spong (2000), p. 24.

95 The Reserve Bank further stresses that it demands noexamination fees. See Federal Reserve Bank of Boston,“Federal Reserve Membership for a State-chartered Bank”,on the Internet.

96 Hammond, B. (1970), “Sovereignty and an Empty Purse:Banks and Politics in the Civil War”, p. 349-50 cited inBroome (2002), p. 220.

97 White (1999), p. 2.98 Empirical research points, in particular, to regulatory

specialisation, “ … allowing banks to move to a better risk-return trade-off by switching regulators when they areswitching business strategy”, see Rosen (2001), p. 19.

99 Testimony of J. A. Smith, Jr., North Carolina Commissionerof Banks, on behalf of the Conference of State BankSupervisors, before the House Committee on FinancialServices, June 4 2003.


applying uniform national standards toactivities and products that, today, havenational markets.”100

The Chairman of the Board of Governors of theFederal Reserve System, A. Greenspan, arguedthat “when there is no choice of regulatoryagency, rigid policies and interfering regulatorymicro-management can develop.”101 “A singleregulator, charged with responsibility for safetyand soundness, is likely to have a tendency tosuppress risk taking. A system of multiplesupervisors and regulators creates checks on thispropensity.”102 It has also been pointed out thatregulatory competition and even “messiness” isnot always bad, and could lead to unexpecteddynamism.103/104

As regulatory agencies are keen to avoid anydiscrimination against the intermediaries undertheir jurisdiction, they try to bring Congress ontheir side when federal legislation puts theirinterests at risk. A good example is theamendment which – under the influence of thestate regulators – was passed in 1997 to theRiegle-Neal Interstate Banking and BranchingEfficiency Act of 1994. The amended statutestates that interstate branches of a state bank aresubject to the laws of the host state only to theextent that an interstate branch of a national bankin that host state is subject to host state law.Otherwise, home state law applies. In thisspecific context, it was the Conference of StateBank Supervisors (CSBS) which providedleadership in an effort to provide state banks withlegal parity in a federal law (thereby creating“competitive equality”). Before the amendment,Riegle-Neal provided that all host state lawwould apply to state bank branches, while onlypart would apply to national banks. Interestingly,up to 1994, state banking officials called for thepossibility to apply different rules to nationaland state banks in order to allow them to applyhost rules to banks incorporated under anotherstate’s charter. 105 Only when they became awarethat this would mean a competitive disadvantagefor their “clients” – possibly driving them awayfrom their state charter to the national charter –did they change their position.

While there is considerable competitionbetween agencies in attracting banks to registerunder their jurisdiction106, this competition iskept in check by the federal power to regulate.This means that states are unlikely to exaggeratein granting state banks an overly favourableregulatory framework or to impose restrictivestate legislation on national banks since thefederal legislator/regulator could simplylegislate/regulate against such action. In otherwords, regulatory competition in the US isconstrained by the supremacy of federal law,which ultimately determines the leeway offinancial institutions in exercising theiractivities. Given the existence of federal depositinsurance and interstate banking and branching,the federal level has a natural interest inassuming responsibility for the safety andsoundness of depository institutions.107 If it werenot to assume this responsibility, a sub-optimalsituation could arise, whereby state regulators

100 See Comptroller of the Currency (2003), p. 10.101 See BNA Banking Report, March 7 1994.102 See Greenspan, “No Single Regulator for Banks”, Wall

Street Journal, December 15 1993.103 See Walter I. (2003), p. 42.104 Regulatory competition in the US is fostered also in terms

of enforcement, as can be seen by the role of New York’sattorney general, Eliot Spitzer, in the context of the 2001/2002 proceedings against major investment banks in NewYork over the integrity of their investment advice. In hisview, the SEC had initially failed to act, justifying hisstepping into the breach. While Spitzer’s action wascriticised by the Shadow Financial Regulatory Committee(SFRC), which wants the securities markets in its essentialaspects to be regulated exclusively by federal authority, ithas been contributing to more vigilance on the side of theSEC. See SFRC, “State and Federal Securities MarketRegulation”, Statement Nr. 186, www.aei.org/publications.

105 See Eager/Muckenfuss (2003), pp. 4 and 16.106 “ … As US bank regulatory agencies vie for control, they

have tried to bolster their relative position by offering newpowers to banks that choose them as the banks’ primaryregulator (through the bank’s choice of charter and holdingcompany structure)”, see Calomiris (2000), p. xvi.

107 With the FDICIA of 1991 and its system of capital-basedprompt corrective action, a core component of safety andsoundness regulations has been established, whereby thefederal banking agencies must establish minimum capitallevels. They are the yardstick for judging if an institution iswell-capitalised, adequately capitalised, undercapitalised,signif icantly undercapitalised or critically undercapitalised.Based on this, the federal regulator can take correctiveaction (e.g. requiring recapitalisation). See Macey/Miller/Carnell (2001), pp. 309ff. Furthermore, under the FDICIA,the FDIC has the authority to prevent state banks from takingon any broader powers that would put the deposit insurancefund at risk. See Spong (2000), p. 40.

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succumb to the incentive to offer regulatoryrelief to state-chartered institutions in anincreasingly competitive environment.

What nowadays stands out in the US is not only“controlled” regulatory competition betweenstate and federal levels but also competitionbetween supervisory agencies offering high-quality supervision at a reasonable cost. In thisrespect, state agencies together with the FDICor the Fed on the one hand and the OCC on theother hand have an incentive to be efficient,given the freedom for banks to switch charter atlow cost. In this context, the state agencies, theFDIC and the Fed need to compensate for theadvantage the OCC has in being able to use itspre-emptive powers to simplify operations ofnation-wide active banks. With regard to thesupervision of state banks, the Fed and theFDIC compete for being their primary federalregulator. While, in this context, banks haveaccess to central bank liquidity irrespective oftheir federal regulator, being a member of oneof the Federal Reserve Banks is still consideredas a “reputational” asset.

8 STREAMLINING OF SUPERVISION IN THEUS: A DIFFICULT EXERCISE

Given its complex structure, the US regulatory/supervisory system has been criticised forcreating regulatory overlaps and gaps and forweakening accountability. Moreover, in the caseof the Fed, it has been argued that a conflict ofinterest could emerge because of its dualresponsibility for monetary policy and financialsupervision. More recently, in a report toCongress, the US Government AccountabilityOffice (GAO) noted that although the regulatorysystem had been generally successful, it lackedoverall direction and – despite the GLBA – didnot facilitate the oversight of large, complexfirms.108

To date, efforts to streamline the systemhave concentrated on the federal level andthe four federal banking agencies (OCC, OTS,Fed, FDIC).109 However, numerous efforts to

consolidate the banking supervisory structure110,even those with significant political backing,have so far failed.

In 1984 the Task Group on the Regulation ofFinancial Services, chaired by the then VicePresident Bush, recommended to Congress that aFederal Banking Agency be created into whichthe OCC would be absorbed, while theregulatory role of the Fed and the FDIC would besubstantially reduced. The Fed would havecontinued to play a role only with respect tothe largest bank holding companies and theFDIC would have concentrated on its role asinsurer. The Task Group’s recommendationswere not received well by Congress whichcriticised, inter alia, the “ … politically motivatedattempts to decrease the [Fed’s] regulatoryindependence … ”111

In 1994 the Clinton administration made asimilar proposal to that of the Task Group,which also failed to win congressional approval.While it was universally acknowledged that thesystem needed reform, views differed onwhether a single Federal Banking Commission,as suggested by the Administration (andsupported by OCC and OTS),112 would need to be

108 The GAO inter alia put forward the idea of having a singleregulatory entity for all systemically relevant f inancialservices f irms. This entity could be an existing regulator ora new one. The GAO acknowledged, however, that it couldbe diff icult to maintain an appropriate balance between theinterests of the large f irms and of the smaller, morespecialised f irms. See GAO (2004), p. 23.

109 The possible integration of the federal securitiessupervisors (SEC/CFTC) and federal banking agencies intoone single entity was never seriously considered byCongress.

110 A recent study by the FDIC describes 24 major proposalsthat have been put forward as from the 1930s. SeeKushmeider (2004), pp. 65–74.

111 See Malloy (2002), p. 182f.112 Interestingly, in 1991 the Department of the Treasury

argued that a multiplicity of regulators brings a broaderperspective to f inancial services regulation: “The existenceof fewer agencies would concentrate regulatory power inthe remaining ones, raising the danger of arbitrary orinflexible behaviour … Agency pluralism, on the other hand,may be useful, since it can bring to bear on general banksupervision the different perspectives and experiences ofeach regulator, and it subjects each one, where consultationand coordination are required to the checks and balancesof the others opinion”. See US Department of theTreasury, Modernizing the Financial System, February1991, page XIX-6.


created. Alternatively, only the OCC and theOTS would be merged into the new institution(which would also take over the regulatoryfunction of the FDIC, leaving the Fed as thesecond federal banking regulator). The latterapproach was suggested by ChairmanGreenspan, who explained to Congress that thegovernment’s proposal would, among otherthings, lead to an end of the dual banking system,because the FBC, having responsibility both fornational and state banks, would be biased infavour of national banks. Furthermore,Greenspan put forward arguments in favour ofthe continued direct involvement of the Fed insupervision, such as bringing in the macro-economic perspective and a more positiveattitude towards risk-taking or having more“clout” in crisis management. The Fed wouldthereby make a better contribution to the long-term health of the American economy thanwould a “monolithic” risk-averse supervisoroutside the central bank. Reducing the number offederal supervisors from four to two would bringmore than proportionate gains in efficiency,although further reducing it to one wouldcompromise other public policy goals.

The need for a direct regulatory role of the Fedwas questioned by quite a number of expertsduring the congressional hearing, some of themaccused the Fed of only defending regulatoryturf. Others, however, explicitly spoke out infavour of the continued direct supervisory roleof the Fed. The latter stressed in particular theneed to preserve the “creativity” of the dualbanking system. In the end, the government’scalls for quick action to modernise thesupervisory structure were less convincing toCongress than the risk of changing establishedstructural features of the US financial system(dual banking system, regulatory role of theFed). The Fed was seen as an ally in the defenceof the interests of the state banks against theirnational bank competitors, although thegovernment tried hard to convince Congressthat the dual banking system was not at risk bypointing, inter alia, to the fact that the OTSsupervised both federal and state thrifts.

After the renewed failure to reform bankingsupervision, Congress turned its attention tothe repeal of the McFadden-Act, whichprohibited interstate branching, and thediscussion surrounding the reform/repeal ofGlass-Steagall. Even after the passage of theGLBA, the issue of reforming the regulatoryagencies did not forcefully re-emerge. Thiswas, however, hardly surprising. Following theincreasing of the powers of the Fed byCongress and in view of the appreciation bypoliticians and business of the dual bankingsystem, it would have been difficult to imaginea system that was not formed by at least twofederal banking regulators (one for nationalbanks, the OCC, and one for state banks, theFed or the FDIC). More generally, thewidespread mistrust among US citizens ofexcessive concentration of power also played arole. Finally, the complaints from the bankingindustry concerning the multiplicity ofregulators in the US remained subdued, sincemarket participants seemed to appreciate thechoice entailed in the system.

9 CONCLUSIONS

While some describe the US financial systemas evolutionary in nature, others consider it tobe a “patchwork” or as having been “crisis-built”. If one had to build the regulatorystructure again from scratch, it would probablylook quite different from how it looks today.More critical observers argue that having fourfederal banking regulators that have arisen inresponse to specific historical circumstances,makes regulation potentially more complicatedand less expeditious than it needs to be. Also,the multiplicity of regulators is seen asconstituting a risk of leniency vis-à-vis thesupervised entities as well as of causingconfusion and opaqueness for the consumer.Furthermore, doubts have been expressed as towhether the increasing inter-linkages betweenbanking, insurance and the securities marketsare adequately taken into account by theinstitutional set-up. An institutionally moreintegrated regulatory/supervisory approach is

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9 CONCLUS IONS

considered by many as a better solution to thecurrent structure.

The specific institutional framework ofregulation/supervision in the US as it hasemerged over time also contains, however, anumber of attractive features. It allows forregulatory competition under a system ofchecks and balances, facilitates theachievement of uniform conditions for cross-border financial activity and potentiallyprovides for flexibility to adapt to changingmarket conditions.

Elements of regulatory competition areintroduced into the system, inter alia, by thefact that banks can choose between a state and anational charter. Moreover, state banks – withregard to their federal supervisor – can opteither for direct supervision by the FDIC or bythe Fed. The regulatory competition introducedby these elements of choice is, however, notunrestricted. Indeed, while Congress hasdelegated regulatory powers to specialisedagencies, it can at any point intervene in theprocess and regulate itself. Likewise, Congresscan overrule any state legislation. In particular,these checks and balances (delegation ofpowers to agencies, state competences andfederal level prerogatives) make the USregulatory/supervisory system attractive invarious respects both from a market andregulatory point of view.

– First, the potential threat of losing regulatedentities to “competing” regulators is apowerful incentive for regulators to avoidoverregulation and to be responsive to thespecific needs of regulated institutions andevolving markets. In this way, risk-takingand innovation are encouraged in thefinancial system.

– Second, the greater closeness to the marketneed not come at the expense of the qualityof regulation and supervision. In fact, therisk of a race to the bottom is constrained bythe above-mentioned power of Congress tolegislate at any time against state laws and/

or to withdraw rule-making authority fromregulatory agencies.

The possibility for the federal level tointervene is not only crucial in areas whereCongress traditionally fulfils a legislativerole, such as banking, but also in areas wherethere is no federal legislation, but instead afree choice of state law and mutualrecognition, such as in US corporate law. Inthis case, the “intervention capacity” of thefederal level provides a powerful incentivefor states to provide appropriate regulation.Similarly, state regulation of the insurancebusiness, for example, has to constantlyprove its appropriateness given increasingeconomic integration. Consequently, stateinsurance commissioners strive to co-operate effectively under the threat of theintroduction of federal regulation or of anoptional federal insurance charter.

– Third, the prerogatives of the federal level inthe US and the availability of a “nationalcharter” support the creation of uniformlegal conditions for banks with cross-borderactivities. In the US, federal authorities mayremove barriers for cross-border activitieswithout the need to involve the individualstates in decision-making. Thus, the OCC’spre-emptive power benefits national banksencountering obstacles arising, for example,from state consumer laws.

– Fourth, the system allows for the flexibleadaptation of financial regulation to marketconditions. This is mainly due to the fact thatthe degree of direct involvement of politicalauthorities in rule-making is comparativelylow. Rule-making by regulatory agencies inthe US encompasses rules which in the EUwould be considered – at least in part – asframework legislation to be passed by theCouncil and the EP (e.g. the new capitalrequirements in response to Basel II).

The risk that the number of agenciesinvolved in rule-making could affect thespeed with which harmonised financial rules


are adopted and changed is again kept incheck by the congressional power toregulate directly. It constitutes an incentivefor agencies to agree to harmonised ruleswithout undue delay.

The flexibility to change the financialframework in the US also affects theinstitutional structure. From a legal point ofview, Congress could merge or abolishregulatory agencies, or create completelynew ones at its discretion. However, inpractical terms, a fundamental redesign ofinstitutional structures is difficult to achievewhile credible institutions (e.g. the Fed)oppose such changes. So far, the numerousattempts to streamline the regulatorystructure in the US have failed. However,Congress authorised the Fed to act as anumbrella supervisor over financial holdingcompanies as a necessary corollary to theformation of financial conglomeratesallowed under the Gramm-Leach-BlileyAct.

Overall, the US regulatory framework can bedescribed as a system of controlled regulatorycompetition, with Congress exercising anoversight role while retaining ultimateauthority. With regard to the EU, it should benoted that minimum harmonisation and mutualrecognition, if properly applied, provide roomfor regulatory competition among MemberStates. In the EU context, regulatorycompetition may be regarded as a potentialforce for achieving a level playing field on thefinancial market. However, since mutualrecognition does not work in a satisfactoryway, it may take some time to achieve such alegal level playing field.113

Moreover, the role of the EU decision-makingbodies in financial markets regulation – theCouncil and the EP – is different from that ofCongress. As there are no US-style regulatoryagencies in the EU,114 the Council and the EPcontinue to be more involved in detailedlegislation than Congress.

With the Lamfalussy process, the EU hasembarked on a strategy to speed up financialmarket regulation, make it more adaptable tochanging market trends and to provide for alevel-playing field through convergentimplementation. This strategy undoubtedlygoes in the right direction and seems to fit thespecific “constitutional order” of the EU.Despite this progress, some of the above-mentioned features of the US model, such asthe prominent role of regulatory agencies,controlled regulatory competition and thefederal power to create uniform conditions mayprovide inspiration for further improvement ofthe institutional structures in the EU. It should,however, be noted that implementation of theseelements may require the EU to become moresimilar to the US as a political entity, which is afully-fledged federal state, where the federallevel operates largely independently from thestate level. In the EU, Member States can beexpected to continue to play a dominant role inshaping EU policies, even if ratification of theConstitutional Treaty would bring about afurther strengthening of the EuropeanParliament.

113 Recently, elements of regulatory competition have beenreinforced. In the f ield of securities, for example, issuers ofdebt securities may – under certain conditions – have theirprospectus approved by an EU securities regulator otherthan the one of the home country. Regulatory competitionmay also increase as companies may opt for the EuropeanCompany Statute and as their mobility will be facilitated bythe forthcoming EU directives on cross-border mergers andcross-border transfer of registered off ices.

114 According to the prevailing school of thought (i.e. the so-called Meroni doctrine), the establishment of US-styleregulatory agencies would require an explicit authorisationby the Treaty. Thus, the Council and/or the EP would onlybe able to create such agencies if the current Treaty (andalso the future Constitutional Treaty) were amendedempowering them to do so. Another option, alreadyavailable in Art. 105/6 of the Treaty, would be to entrust theECB with “specif ic tasks concerning policies relating to theprudential supervision of credit institutions and otherf inancial institutions with the exception of insuranceundertakings.” However, any such transfer would, bynature, be of limited scope. Moreover, it would need to beagreed upon in the Council by unanimity.

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ANNEX 1

ANNEX 1

STRUCTURE OF BANKING REGULATION IN THE US1)

Chart

Federal banking regulator

State Level

Regulated depository institutions

Banks(nationally chartered,Fed members by law);about 2,100 entities

OCC FEDERAL RESERVE OTS

Banks(state chartered,not Fed members); about 5,300 entities

FDIC

Banks(state chartered,Fed members); about 1,100 entities

Thriftsabout 900 entities(excluding holdingcompanies)

STATE BANKINGSUPERVISORS

primary regulatorsecondary regulator

1) Excludes foreign banking organisations and bank/f inancial holding companies.


115 Based on Inter-Institutional Monitoring Group (2004),p. 49.

116 Committee of European Banking Supervisors (CEBS),Committee of European Securities Regulators (CESR),Committee of European Insurance and OccupationalPensions Supervisors (CEIOPS).

117 European Banking Committee (EBC), European SecuritiesCommittee (ESC), European Insurance & OccupationalPensions Committee (EIOPC), European FinancialConglomerates Committee (EFCC).

ANNEX II

THE FOUR LEVELS OF THE LAMFALUSSYPROCESS115

LEVEL ICommunity legislation adopted by the Counciland the European Parliament, upon a proposalby the European Commission under the co-decision procedure: legislation should be basedonly on framework principles and definition ofimplementing powers for the Commission.

LEVEL IICommunity legislation adopted by theCommission to lay down the technical detailsfor the principles agreed at “Level I” under theso-called comitology procedure. Particularfeatures:

– Technical advice prepared by the Level III-committees (CEBS, CESR, CEIOPS)116,following mandates issued by theCommission and based on consultation withmarket users;

– Favourable vote of Member States(qualified majority) as represented in theLevel II-committees (EBC, ESC, EIOPC,EFCC);117

– European Parliament may adopt resolutionsa) within three months of the draftimplementing measure; b) within one monthof the vote of the Level II-committees ifLevel II-measures go beyond implementingpowers.

LEVEL IIILevel III-committees (CEBS, CESR, CEIOPS)in which the national supervisory authoritiesare represented, to facilitate consistent day-to-day implementation of Community law. Theymay issue guidelines and common, but non-binding, standards.

LEVEL IVCommission checks compliance of MemberState laws with EU legislation. If necessary, ittakes legal action against Member Statesbefore the Court of Justice.

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ANNEX I I I

ANNEX III

REGULATORY AND SUPERVISORY STRUCTURE IN FINANCIAL MARKETS – STYLISED OVERVIEW

Chart

USA

State securities administrators

SEC, CFTC OCC, Fed,FDIC, OTS

securities

State banking departments

banking

State insurance commissioners

insurance

FEDERAL

STATE

EUEUROPEAN UNION

MEMBER STATE

securities banking insurance

SUPERVISORY INSTITUTIONS

EU COMMISSION

COMMITTEES

Lamfalussy framework


ANNEX IV

TOP 50 US BANKS (TOTAL ASSETS IN BN USD AND PRIMARY FEDERAL SUPERVISORS1)

Table

1) As of 30 September 2004; the top 50 banks represent about 70% of all commercial banks’ assets.The table has been updated with regard to JP Morgan Chase which is in the process of changing to the national charter.

OCC Federal Reserve System FDIC

1 Bank of America, Charlotte 7402 JP Morgan Chase 6613 Citibank 6514 Wachovia Bank 3805 Wells Fargo Bank 3626 Bank One, Chicago 2597 Fleet National Bank 2098 U.S. Bank 1929 Suntrust Bank 12610 HSBC Bank 11811 State Street and Trust Company 9612 Bank of New York 9013 Keybank 7714 Branch Banking and Trust Company 7315 PNC Bank 7116 Merrill Lynch 6917 Bank One, Columbus 6918 Lasalle Bank 6119 Fifth Third Bank, Cincinnati 6020 MBNA America Bank 5821 Citibank (South Dakota) 5422 Chase Manhattan Bank USA 5423 Southtrust Bank 5324 Comerica Bank 5225 Manufacturers and Traders Trust Company 5226 National City Bank 5127 Charter One Bank 5028 Amsouth Bank 4929 Regions Bank 4630 Union Bank of California 4631 Standard Federal Bank 4132 Bank of Amercia, Phoenix 4133 National City Bank of Indiana 3934 Fifth Third Bank, Grand Rapids 3835 Wells Fargo Bank 3836 Union Planters Bank 3437 Treasury Bank 3338 M&I Marshall & Ilsley Bank 3339 Northern Trust Company 3340 Deutsche Bank Trust 3241 Bank One, Delaware 3142 Bank of the West 3143 Huntington National Bank 3144 Citizens Bank of Massachusetts 3045 Banknorth 2846 Citizens Bank of Pennsylvania 2847 Washington Mutual Bank 2848 First Tennessee Bank 2849 Compass Bank 2750 Capital One Bank 27

Total 4,497 852 231

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EUROPEAN CENTRAL BANKOCCASIONAL PAPER SERIES

1 “The impact of the euro on money and bond markets” by J. Santillán, M. Bayle andC. Thygesen, July 2000.

2 “The effective exchange rates of the euro” by L. Buldorini, S. Makrydakis and C. Thimann,February 2002.

3 “Estimating the trend of M3 income velocity underlying the reference value for monetarygrowth” by C. Brand, D. Gerdesmeier and B. Roffia, May 2002.

4 “Labour force developments in the euro area since the 1980s” by V. Genre andR. Gómez-Salvador, July 2002.

5 “The evolution of clearing and central counterparty services for exchange-tradedderivatives in the United States and Europe: a comparison” by D. Russo,T. L. Hart and A. Schönenberger, September 2002.

6 “Banking integration in the euro area” by I. Cabral, F. Dierick and J. Vesala,December 2002.

7 “Economic relations with regions neighbouring the euro area in the ‘Euro Time Zone’” byF. Mazzaferro, A. Mehl, M. Sturm, C. Thimann and A. Winkler, December 2002.

8 “An introduction to the ECB’s survey of professional forecasters” by J. A. Garcia,September 2003.

9 “Fiscal adjustment in 1991-2002: stylised facts and policy implications” by M. G. Briotti,February 2004.

10 “The acceding countries’ strategies towards ERM II and the adoption of the euro:an analytical review” by a staff team led by P. Backé and C. Thimann and includingO. Arratibel, O. Calvo-Gonzalez, A. Mehl and C. Nerlich, February 2004.

11 “Official dollarisation/euroisation: motives, features and policy implications of currentcases” by A. Winkler, F. Mazzaferro, C. Nerlich and C. Thimann, February 2004.

12 “Understanding the impact of the external dimension on the euro area: trade, capital flows andother international macroeconomic linkages“ by R. Anderton, F. di Mauro and F. Moneta,March 2004.

13 “Fair value accounting and financial stability” by a staff team led by A. Enria and includingL. Cappiello, F. Dierick, S. Grittini, A. Maddaloni, P. Molitor, F. Pires and P. Poloni,April 2004.

14 “Measuring Financial Integration in the Euro Area” by L. Baele, A. Ferrando, P. Hördahl,E. Krylova, C. Monnet, April 2004.

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REFERENCES

15 “Quality adjustment of European price statistics and the role for hedonics” by H. Ahnert andG. Kenny, May 2004.

16 “Market dynamics associated with credit ratings: a literature review” by F. Gonzalez, F. Haas,R. Johannes, M. Persson, L. Toledo, R. Violi, M. Wieland and C. Zins, June 2004.

17 “Corporate ‘Excesses’ and financial market dynamics” by A. Maddaloni and D. Pain, July 2004.

18 “The international role of the euro: evidence from bonds issued by non-euro area residents” byA. Geis, A. Mehl and S. Wredenborg, July 2004.

19 “Sectoral specialisation in the EU a macroeconomic perspective” by MPC task force of theESCB, July 2004.

20 “The supervision of mixed financial services groups in Europe” by F. Dierick, August 2004.

21 “Governance of securities clearing and settlement systems” by D. Russo, T. Hart,M. C. Malaguti and C. Papathanassiou, October 2004.

22 “Assessing potential output growth in the euro area: a growth accounting perspective”by A. Musso and T. Westermann, January 2005.

23 “The bank lending survey for the euro area” by J. Berg, A. van Rixtel, A. Ferrando,G. de Bondt and S. Scopel, February 2005.

24 “Wage diversity in the euro area: an overview of labour cost differentials acrossindustries” by V. Genre, D. Momferatou and G. Mourre, February 2005.

25 “Government debt management in the euro area: recent theoretical developments and changesin practices” by G. Wolswijk and J. de Haan, March 2005.

26 “The analysis of banking sector health using macro-prudential indicators” by L. Mörttinen,P. Poloni, P. Sandars and J. Vesala, March 2005.

27 “The EU budget – how much scope for institutional reform?” by H. Enderlein, J. Lindner,O. Calvo-Gonzalez, R. Ritter, April 2005.

28 “Reforms in selected EU network industries” by R. Martin, M. Roma, I. Vansteenkiste,April 2005.

29 “Wealth and asset price effects on economic activity”, by F. Altissimo, E. Georgiou,T. Sastre, M. T. Valderrama, G. Sterne, M. Stocker, M. Weth, K. Whelan, A. Willman,June 2005.

30 “Competitiveness and the export performance of the euro area”, by a Task Force of theMonetary Policy Committee of the European System of Central Banks, June 2005.

31 “Regional monetary integration in the member states of the Gulf Cooperation Council(GCC)” by M. Sturm and N. Siegfried, June 2005.


32 “Managing Financial Crises in Emerging Market Economies: Experience with theInvolvement of Private Sector Creditors”, by an International Relations Committee taskforce, July 2005.

33 “Integration of securities market infrastructures in the euro area”, by H. Schmiedel,A. Schönenberger, July 2005.

34 “Hedge funds and their implications for financial stability”, by T. Garbaravicius andF. Dierick, August 2005.

35 “The institutional framework for financial market policy in the USA seen from an EUperspective”, by R. Petschnigg, September 2005.

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