Abstract: Comptroller of the Currency Robert L. Clarke wields a powerful eyebrow. When it was raised last year over some banks' emphasis on consumer lending, pundits began scrutinizing home equity loans and other types of personal credit as potential risks to the banking system. When the Comptroller's office issued an advisory on real estate lending earlier this year, the notice, coupled with statements Clarke made, really caught lenders' attention. Indeed, some bankers changed course so abruptly that Clarke had to stress that he was urging caution, not abstinence. Recently ABA Banking Journal executive editor Steve Cocheo met with Clarke to discuss issues ranging from deposit insurance reform to his views on the Financial Institutions Reform, Recovery and Enforcement Act. The following transcript of their talk has been edited for space and clarity. Q. It's a bit early for specifics, but what are your views on deposit insurance reform? A number of proposals have been floated, including ABA'S. A. Let me start with a couple of broad responses. First, it is very important to not let the savings and loan crisis color our thinking about deposit insurance much. Too many people are blaming that crisis on deposit insurance. There is no doubt deposit insurance was a contributing factor to the ability of the crisis to happen. But I suggest that it's not deposit insurance that was at fault, but the way thrift institutions were allowed to behave with their deposits insured. They did not have real capital requirements. They were not held to the same accounting practices banks follow. At times they did not have supervision as strong as they should have. And they were not closed when they became insolvent. Had all of those factors been different the country would not have had a savings and loan crisis. At least we would not have had one of the magnitude that we did. The other broad issue that is important to keep in mind is that deposit insurance in some form is an important, stabilizing factor in the financial system. Before we make significant changes to our system of deposit insurance, which has served us well, we ought to be pretty sure that the expected benefits outweigh the potential instability. I understand the theory behind what ABA has proposed. [In essence, that no bank would be too big to fail and that uninsured depositors would receive a final settlement payment based on the average of past FDIC recoveries no matter how the failure was resolved.] And I understand that, were sufficient notice given before such a system were put into place, there might be opportunities for the evolution of a private insurance system. That could make up the difference and might well result in a workable solution. But I'm really not making a judgment at this point about ABA's proposal or anybody else's. Q. ABA and others have called for the end of the too big to fail doctrine. Do you think the regulatory system can handle the failure of a large bank? A. It's not so much a question of whether the regulatory system can handle it. It's a question of whether the system can accommodate the notion that uninsured depositors are going to be at risk. I still debate the issue of too big to fail with people. I think banks resolved by FDIC do fail. If you talk to the shareholders of some of the banks that were allegedly big to fail, they will tell you that in their view, the bank failed. The debt holders of those holding companies will, too, as will the managements who are no longer there. The issue is how you deal with the bank after it's failed. Do you liquidate it? Do you sell it? On what basis do you sell it? FDIC [on whose board Clarke sits] has been making every effort to sell all institutions, big and small. When that is done, it minimizes the cost to FDIC. The problem comes up because many times FDIC is not able to find a buyer for smaller institutions. …
Publication Year: 1990
Publication Date: 1990-05-01
Language: en
Type: article
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