I welcome the opportunity to describe the OCC's recent regulatory actions, which are designed to maintain a safe and sound National Banking System that serves America's communities, businesses and consumers within the context of a continually evolving economy.
Through the years, the banking industry has faced numerous, increasingly rapid, changes, each resulting in new challenges to the long-term health of the industry. Recently, competition within the industry increasingly has been augmented by competition from new participants that are able to target selectively segments of markets traditionally served by banks. Competition is not merely regional or national, but global. Underlying all this, rapid advances in technology are fundamentally changing the nature of how information is created, processed and delivered -- the heart of what banks do. Banks can meet these challenges, remain safe and sound, and profitably serve the needs of consumers and businesses only if lawmakers and regulators take a flexible and adaptable view of both the business and the supervision and regulation of banking.
The basic authority under which the OCC and the National Banking System operate is the National Currency Act of 1863, revised and renamed the National Banking Act in 1864. It was based on the belief that a safe, stable system of national banks was indispensable to our country's economic future. But Congress intended that the particulars of what national banks could do would evolve with a changing environment. The law also endowed the Comptroller with a large measure of independence and discretion in regulating the system under his care. Four unanimous Supreme Court decisions have recently reaffirmed the OCC's interpretation of the scope and evolutionary nature of the national bank charter.
As the banking industry evolves to meet the changing needs of the economy, so too must bank supervision evolve, and in my term as Comptroller we have taken many steps to do just that. We all remember that the industry was going through difficult times when I took office four years ago. There were numerous bank failures, complaints from small businesses and consumers about a credit crunch, and concerns in the banking industry and Congress about excessive regulatory burden. Community organizations were concerned about fair lending compliance, and both community organizations and banks agreed that the Community Reinvestment Act (CRA) regulations were not as effective as they should be.
We have worked hard to address these issues and to refocus and retool OCC supervision, adopting a risk-based approach to supervision and incorporating new analytical techniques. The results of the changes and innovations we have made to our approach to supervision are evident in the performance of the National Banking System. Today, we find a banking system that is not only highly profitable and healthy, but also one that is far better capitalized. Bank failures in 1996 were at a 20-year low. The OCC has also increased its enforcement of fair lending laws, completing over 3,000 exams with revised, state-of-the-art procedures. Since 1993, we have referred 23 cases to the Justice Department for further investigation. Credit is flowing smoothly. Small business loans, which are reported every June, increased 31 percent over the three years ending June 1996.
We have increased supervisory and regulatory efficiency in numerous ways, for example, by reviewing all of our rules and creating an Ombudsman program. We have revised the CRA regulations, and one result has been that mortgage lending to low- and moderate-income individuals has increased dramatically. Since CRA became law in 1977, we have witnessed over $140 billion of loan commitments for community development. Remarkably, $100 billion -- a full 70 percent of the total -- was made in the past three years alone. Also, before I became Comptroller in 1993, national banks had invested less than $1 billion in community development projects; but since then, national banks and their community development partners have made targeted investments of over $4 billion.
While we are proud of our accomplishments, we are not complacent. Now, while the industry is strong, we must keep a vigilant watch for emerging risks, and we must make productive use of the time to reflect on what banking is, how the industry is changing, and what we as regulators must do to maintain a safe and sound banking system that serves America's communities, businesses and consumers.
A dwindling core business, increased competition, changing consumer needs, and -- most significantly -- a dynamic environment in terms of technological change and globalization means that banking cannot stand still. If we deny banks the opportunity to evolve and pursue opportunities in new financially-related activities they can undertake safely, banks will be pressed to squeeze more profit out of their dwindling traditional activities, either by moving further out on the risk limb or by shortchanging basic risk management systems and internal control mechanisms as they seek to cut costs without losing revenue. Indeed, it is this dynamic, the lack of opportunity to evolve and resulting increase in risk, that led to bank losses in lending to lesser-developed countries and highly leveraged transactions within the past decade.
By contrast, creating a process through which banks can prudently respond to new marketplace demands for products and services will enable them to achieve balance and offset downturns in their traditional lines of business. The OCC's revised Part 5 regulation details a process by which banks can apply to engage in activities that are part of, or incidental to, the business of banking through operating subsidiaries which, structurally, have been permitted for many years. It is a procedural rule that does not authorize any new activity; rather, it provides a framework within which the OCC will consider applications case-by-case, and provides explicit safeguards to maintain the highest safety and soundness standards and protect the interests of America's consumers and communities. It does not breach any division between banking and commerce. And, it protects the interests of America's taxpayers by providing a framework upon which to build a stronger banking system that is better-positioned to meet the challenges of the next century.
In these respects, the rule provides many benefits. Bank earnings diversification from operating subsidiary activities would help reduce bank failures and any subsequent need to tap the Bank Insurance Fund. Stronger institutions with increased profits and asset growth will be better positioned to meet the credit needs in their communities and in the economy as a whole. As FDIC Chairman Helfer stated in recent testimony before the House Banking Committee's Subcommittee on Capital Markets, allowing a bank to put new activities in a bank subsidiary "lowers the probability of failure and provides greater protection to the insurance funds."
Part 5 contains important, explicit corporate and supervisory safeguards to ensure that any new activities are conducted safely and soundly. The safeguards in the rule will apply regardless of the particular activity undertaken by the special operating subsidiary. Also, in many cases, activities will be regulated on a functional basis by another regulator. Further-more, the OCC will impose additional safeguards application-by-application as warranted by the particular activities the subsidiary proposes to conduct. These provisions have been carefully thought out in order to protect the bank, the safety and soundness of the National Banking System, consumers, and the taxpayer.
Some have expressed concern that banks could potentially benefit from a safety net subsidy that can be transmitted to an operating subsidiary and is best contained by the bank holding company structure. An attachment to my full written statement addresses these concerns in detail. To summarize, there simply is no evidence of a net subsidy. Any benefit banks receive from the safety net is more than offset by regulatory costs. Evidence cited as proof of a subsidy is readily attributed to other factors. Most important, banks do not behave as if they enjoy a subsidy. Even if there were a subsidy, the appropriate response would be to contain it with carefully constructed regulations -- similar to those safeguards we have developed for operating subsidiaries -- rather than to impose organizational constraints on banking companies. The bank holding company structure is not superior to the bank subsidiary structure in containing any alleged subsidy; the bank subsidiary structure is actually the superior structure for containing any alleged subsidy.
In March 1993, when I stood before the full Senate
Banking Committee at my confirmation hearing, I stated that I
wanted to focus particular attention on the structure and
function of the banking system from a long-term perspective. My
actions taken to date as Comptroller, including promulgation of
the revised Part 5, demonstrate my commitment to those
statements I made four years ago. My goal for the remainder of
my term is to continue to make certain that our supervision and
our policies meet any new challenges that the future will bring
so that the National Banking System remains healthy, stable and
able to serve the diverse needs of American consumers and
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