The Secret World of Banking

by Ralph Nader

All the headlines about corporate disclosures and the need for transparency are sending shivers through the banking industry and its regulators who have always lived in a protected and largely secret world.

Hundreds of millions of dollars are expended on examinations of depository institutions, but most of the key findings are treated as inside information between the bankers and the regulators who see a mutual advantage in keeping the depositors and investors-and even Members of Congress-in the dark about the gritty details of their performance. Only when an institution actually fails and taxpayer-backed deposit insurance funds are lost do the hard facts of mismanagement and regulatory miscues become public knowledge.

The lack of timely disclosures about bank conditions arose a few weeks ago when a recess appointee to the Securities and Exchange Commission, Cynthia Glassman, suggested that the so-called "Camel ratings" of banks be made available to the public. Camel ratings compiled by the regulators are evaluations based on examiners’ and supervisors’ assessment of six factors: capital, asset quality, management, earnings, liquidity, and sensitivity to risk. Performance is based on numerical ratings of 1 to 5-with five designated as the worst.

Ms. Glassman’s suggestion produced an immediate uproar among regulators and the bank lobbyists. Comptroller of the Currency John Hawke, who spent most of his career as a big-time bank lawyer and lobbyist, immediately sent his spokesman out to denounce the idea of public disclosure, contending that the Camel ratings were an "internal tool of the regulators."

Other opponents suggested that disclosure of the ratings might cause a "run" on a bank by scared depositors. This brings back memories of the savings and loan collapse in the 1980s when the Chairman of the Federal Home Loan Bank-Danny Wall–continued to paint rosy pictures and withhold bad news from the public while behind the scenes the savings institutions rotted and edged toward failure. At one point, Wall barged into the offices of the General Accounting Office in an attempt to block the release of a critical report citing mounting losses and increasing drains on the deposit insurance runs. And the friends of the savings and loans in key positions on Capitol Hill were all too happy to gloss over the worsening conditions until it was too late.

The costs to the taxpayers and the savings and loan industry increased greatly under this blanket of secrecy. The public release of the Camel ratings would make it impossible for regulators and banks to hide conditions and let problems mushroom into disasters ala the savings and loan collapse. And as the SEC’s Ms. Glassman asks "why shouldn’t investors [as well as depositors] have this information."

Richard Carnell, a professor of law at Fordham University and former Assistant Secretary of the Treasury, wholeheartedly endorses the idea of public disclosure of the Camel ratings, arguing that the disclosure would "facilitate constructive criticism of how bank regulators measure risk." Carnell was one the key staffers on the Senate Banking Committee who urged action on the savings and loan crisis in the 1980s and crafted many of the reforms after the collapse.

Rather than facing the market discipline which full disclosure would help instill, the banks and other depository institutions prefer to utilize a costly deposit insurance system as a tranquilizer for the public. As thespeculation by the savings and loans revealed in the 1980s, the taxpayer-backed insurance creates a moral hazard that encourages excessive risk taking.

Throughout this Congress, much of the banking industry has been on Capitol Hill in an intensive lobbying campaign to have taxpayer-backed deposit insurance increased from its present limit of $100,000 per depositor to as much as $150,000 plus indexing for future inflation. The present $100,000 limit was pulled out of thin air in 1980 by a handful of House-Senate conferees seeking a means of helping the ailing savings and loans attract deposits in competition with big money center banks. Actually, under loopholes, a family of four could keep as much as two million dollars in insured accounts in a single institution.

The secrecy maintained by federal regulators combined with the tranquilizer of the massive deposit insurance program effectively takes the public out of the debate about banking policy. As a result, it is difficult to build public opinion about legislative and regulatory actions which impact on the safety and soundness-not to mention the efficiency–of banking corporations, and ultimately on the health of the deposit insurance funds.

That was certainly the case in 1999 when the combined lobbying forces of banks, securities firms and insurance companies pushed through a near total rewrite of the nation’s financial laws which authorized the formation of huge nationwide financial conglomerates-with little or no protections for consumers or the taxpayers who stand behind the deposit insurance funds.

So, the idea advanced by a lone member of the Securities and Exchange Commission for disclosure of the regulators’ ratings of banks is a welcome development in this desolate desert of secrecy which surrounds the banking industry. But, don’t expect the banks or their regulators to agree voluntarily to come out in the sunshine. It is too convenient to leave bank regulation asan inside-game. The same is true for the Congress-particularly the House and Senate Banking Committees-which prefer to legislate favors for the industry without being bothered with messy facts in the hands of their voters back home.

But the Enrons, the Worldcoms and the Global Crossings-among others-are placing a new premium on open disclosure. Perhaps, the sunshine may ultimately reach the musty dark corners of the secret world of banks and bank regulation.

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