Competition Among Bank Regulators

T he organization of bank regulation in the United States is somewhat peculiar. Banks answer to an array of regulators, both federal and state. To begin with, a bank can choose a national or a state charter. National banks are regulated by the Office of the Comptroller of the Currency (OCC). State banks are regulated by their home states, as well as by a federal regulator. The Federal Reserve System regulates state-chartered banks that are Federal Reserve members, and the Federal Deposit Insurance Corporation (FDIC) regulates state, nonmember banks. A bank, by its choice of charter and Federal Reserve membership, chooses its regulators. There is a sense, then, in which U.S. federal bank regulators are in competition with each other. How does this competition affect bank regulation in the United States? On the one hand, one might conclude that the need to compete with other agencies would motivate a regulator to perform its tasks as effectively and efficiently as possible. On the other hand, one might argue that the desire to attract more clients could drive a regulatory agency to be loose. Banking is not the only industry in which alternative regulatory agencies compete with one another. Most other instances, however, involve different geographic jurisdictions. For instance, to the extent that environmental regulations vary from state to state, a manufacturer’s decision on plant location entails a choice among potential regulators. The stringency of such regulations then has the potential to become one tool by which states compete to attract businesses. One could ask the same question about this competition as is often asked about the interaction among bank regulators. Does competition lead to effective or excessively loose environmental control?