Congress looks for way to mend patchwork of bank regulation

Congress is looking even more closely at the federal government's fragmented system for regulating financial institutions in the wake of last week's emergency closing of 70 savings and loan institutions in Ohio. ``Some basic reappraisals are urgently in order,'' Rep. Doug Bernard Jr. (D) of Georgia said Wednesday. He chairs a subcommitee of the House Government Operations panel, which this week has been holding hearings on the Reagan administration's plan to streamline regulation on financial institutions.

The current system is a patchwork quilt in which seven federal agencies oversee financial institutions. Banks are regulated by three agencies, thrifts by two groups, credit unions and securities firms by one.

The result is ``a significant degree of overlap and fragmentation, with occasional disputes concerning enforcement responsibilities,'' said Richard C. Breeden Tuesday. Mr. Breeden is staff director of a task force headed by Vice-President George Bush.

The Bush report, issued last year and soon to be submitted to Congress, would, in its proposed legislative language, make more than four dozen changes in financial regulation.

Still, the Bush plan is ``not a paragon of simplicity,'' because it tries to balance a variety of considerations, Federal Reserve Board chairman Paul A. Volcker said Wednesday. Mr. Volcker, along with the heads of all the agencies involved in financial regulation, supports the proposals in the ``Report of the Task Group on the Regulation of Financial Services.''

Despite that support, Mr. Volcker cautioned Congress that the ``sense of confusion and even disarray in bank regulation'' is not primarily tied to regulatory structure.

Rather, he said, the main problem is that the substance of federal banking legislation has not kept up with rapid changes in the market. Among other things, those changes have blurred the distinctions between banks, brokerage houses, and insurance companies.

``Long-established policies set by Congress are breaking down. . . . Confusion abounds. Equity is lost,'' he said. Efforts to update the laws governing financial institutions are hampered by a major disagreement between House Banking chairman Fernand J. St Germain (D) of Rhode Island and Senate Banking Commitee chairman Jake Garn (R) of Utah. Representative St Germain generally opposes further deregulation of the banking industry while Senator Garn favors it.

And even the agreement by federal financial regulators on the Bush task force comes in the face of major areas of disagreement over what jobs each regulator should perform. That disagreement just below the surface, coupled with the proposal's complexity, could make it difficult to sell in Congress, Mr. Bernard warned.

Among other things, the administration plan would reduce from three to two the number of bank regulators. A new Federal Banking Agency (FBA) would be created in the Treasury Department which would build on the current Comptroller of the Currency's office and regulate all national banks. The Federal Reserve would handle federal regulation of state chartered banks. The Federal Deposit Insurance Corporation (FDIC) would drop its regulatory chores and concentrate on insuring deposits.

Other regulators say the Fed's should be confined to setting monetary policy and being lender of last resort.

``I would have preferred . . . a single federal banking agency,'' C. T. Conover, comptroller of the currency, told the committee Wednesday. ``I just don't think the Fed needs to be involved in the examination of banks and bank holding companies,'' FDIC chairman William M. Isaac said Tuesday.

Fed chairman Volcker, however, said a role in bank regulation was needed so the Fed would have the body of knowledge and highly trained staff needed to step expertly into problem situations like the one in Ohio.