THEG·A·O 1'17027 -1'I70~b AQUARTERLY SPONSORED BY THE U.S. GENERAL ACCOUNTING OffICE • OURNAL SAFE AND SOUND s-rilIg""fr*n 1I/_IPrg RISKY BUSINESS U""" ghg"" SttIffrmJsIIIdttt1 IofItI JhOfl- GOING STALE? 1M.cd , f foodsofrt! sy.- IIUIIlER 15 • SPRNG/su.MR 1992 THEG·A·O _15 AQUARTERlY SPONSORED BY THE U.S. GENERAl ACCOUNTING OffiCE SPRNGISlNMER 1992 OURNAL c o N T E N T s • GIRDING FOR COMPETITION 3 - ~\'ltPI", Croig A. Si",,,,o,,s a"tI C. Sera;", 1't70z.8 • COMMERCIAL BANKING IN THE UNITEDSTATES: A LOOK BACK AND A LOOK AHEAD 10 Ii. Gn-oklC.rrigo. 1~7oZ 'i • MODERNIZE BANKING ... BUT WITH CARE IS PAilip A. Uxovortl • HOW DID GLASS-STEAGALL HAPPEN? 21 RtnlllnllI't:<kr /'17031 •A NONBANKER'S PERSPECIWE ON BANKING REFORM 1.9 • Willi". PM I'-/703 z • WHAT THE CANADIANS KNOW 33 CIr"rl" f'. Rllinl 1'17033 • UNTANGLING THE STAFFORD STUDENT LOAN PROGRAM 38 - JoupA J. f:gli. li70 '3 'I • FOOD SAFET\': A PATCHWORK SYSTEM 411 Willi•• III. l.oyd,. I'1 70 3<.. Jona'han Kw.ol. SA IIAGE INEQUAIJ71F,S: (.'HlllJRf:N IN 60 .WERlCA:~ SCHOOI's, rrvi,.,nIby RoI>m Gmt • Srep/lcn Hcs.... -- l./I'f: FROM CAPITOL Hill.!STUDIKI'OF CONGRf:SS ANIJ 1'Hf: IIIE/)/A. rrvin.vdby f'.lkrGrifJitir. Cover ilusuaioo by fohn Porter • THEG·A·O AQUARrERlYSflONSO«[O BY THL U.s. G[N(RAl. ACCOUNTING on ICE • JOURNAL • C_fll..",,/,r G"",ml • SIIIJ! • Et/i/fl,;"I....dtisory BINI'" of"" (IIIi'"'S',,"s JOli1\' F. AI....:ARN..: 8 ..:VI5LOS(iSTRETII CIIARI.I-:S 1\. ROWSUER S",;or Edi/or GEORGE J. ALEXANIJER CIIARLES F. I.''ct: RORI~ SE'I'HERTOS EDW.\RIl MUS 8Rllel-: k. M...:I..o\I'RY • E"illJritll."'dr.-iso". ~ORTO~ M. B..:IJ"-ORI> ANN ~h:LAI'GIILlN HARRY S. HAn:SS. ..'»«ill". E"i/tln ROtIF.RT F. BORI'CIl JOliN I.. Md.I·C.AS C.M;~. LISD:\ F. R.o\KER SORMAS U RRAIJRI'RS 1l0lUS MEISSSER THf:OIlORf: c. BARRE""X '-IASSAH .... "'Ell' JOIIS RRADBIAS A.~rRII) t:. ~IERGET JAMES .... IiIM~I"MAS I>t:BORAIIA. SIGM:R MAR\'IS RRESSI.":R W. I~U: SO..:1. OOSAL.D J. HORAS JOHN c. Rl'RTO~ .\LFREIl t:. OSBORSE. JR. 1'",;/ Editor JAMES I.. CIIAN KATHERINE D.OR·rE(iA • Ojfin ofPltNirAf/llirs IlIASE REINKE MICHAEl. K CliETKOnCIi Rt ·s..~EI.I. E. IlALMER CLF.'·F. F.. CORLF."!"r. SI-IELllOS COIiES ~1t:RTOS J. Pt:CK /Jimtor Coorrli_IDr WILLlA~1T. COI_.EMAS. JR. RAnlOSIl E. P..:ET ALI.ISOS POWELL MICHAEL COLI.ISS AI'IA,\",-\ L. I)..:TERS • Editor MORRiS W. II. COLl.lSS. JR. IXlSAU>.-\. PETRIE STI-:NIES Al.TMA!' • /k,ip ROBERTCCRVIN GF.ORGt: W.I'IIILLIPS KROHN. INC. RRF.WSTF.R C. DENN\" JOliN 8. RIIIN,,:L.-\NI>..:R JOHN T. IJUNLOII t:L1.IOT RICIIARIJSON • O/fitr ofI"jofJlHlh.. IlAUL I.. "'OSTER J. RoRt:RT SCIIAt:TZt:L .fllI""".,.,,',,"" J. ROSALD FOX ..:I>WIN H. SiMMONS C".lIl1iattiHS MAR'I1M W. GILLIL.ANIl J. F.DWARD SIMPKINS KEVI:'Ii ROLAXU. PATRICIA A. GRAHA~I AL\"IN R. TARLo\' • f);trm1r RORUT IIA"BIAS SLS.\N J. TOI.cIlIN CIMRI.ES T. BORNGRE!' ROB":RT WARN":R Pr'OIIIH'';Oll MU.VIN R.I.AIRI> RORERT WK"VER fWrRICIA PETERS01\ HERMAN R. LEONARD SIIlN..:Y J. "'..:IN8..:R(;. JR. AL.o\N B. I.EVt:NSOS KARt:N 11. WILLIAMS llAnO t'. LI~OWES CHARLF.S J. ZWICK THE G:W)OliRXM. i.s published quaRc"y by the f:IJI7TJRM.I. txJRRESPO.\'l)f:.\'C/-:: By mail co the: abo\"C~ OffICe of Public Affairs. Mm. 6901.l:.5. Gencral Accountin~ :lddr~ss. Lell~n to the cdilOf arc c::ncoura~. l'nsolici[~d Office. \\'ashin~on. D.C. Z054H. Fin! d:l5s posca~ paid m:lnu~:rip1S will be: f~lUrn~d only if :K\.·tlmplni~dhy 11 Kif· at Washington. D.C. :lddr~!Iscd. Jilampcd ~n\'~lope. II'RITf:RS dog ..·orlllppnm i",;, GclOlqllOllJ! //1'01 for 1'f).H:II:UTI-:R: Send chan~~Ji of :addr~SJi to [h~ G.-tO)o",./lI, """'vlt'ffOil/]. (!"Ins OIInr;u i""H-lltM. dNirt'Nt.-s oro/l;";OIlI OffICe ofl'ulJlK.- AtTain. Rm. 6901.l'.S. G~n~ral ..\ccoun[in~ sAtHI'" 1101'"ro"s1nlt't/ IIJ til,fHJIiry or1'OJihOIl of (;,-to or",,! 01,," Offil.'C, W:lshin~tun, D.C. lO.~M. o'%fl"iurioll rid rlNA t4ty.1I] I1r u./filintrtl. • CraigA. Simmons & StepIten C. SfJ1J(Jim tHE BAI«JIIG SYSltM GIRDING FOR COMPETITION InsIHJtioftryingto define tilefuture, tile nerJP honkingadI1eIps •preparefor it. • SPllNG/SUoMR 1992 I FOCUS s 'I'HE SlJRI~(i of 1991. rcpn:scnr~(i\'4.'"S ~)f the Laming to play It safe • o;',(ion's lar~r hanks went to Capttol Hill m I ..cck a "aricrv ofchan~ in the hankin~ intersta[~ brark-hin~ s\··otcm: frcc:dom 10 JtCt intu The kC'\' ~ in the nc."\\' Icjtislation is a d~A."'C­ ~hcr lines ofbusiness such as !i«'Urirics underwrit­ ti\"c to ~nkin~ R:~lIlat:ors to prumpt:I~' ckr.iC all hanks ing and insunncc. and an cnd to rc:suK.'tions :lJtOlinst that bt.<t.·OfTle insoh"cnt. 'Iltc intcnt behind this the ownership ofbanks by l.'OOlmen:iall'Uf1lpanics. Rl<Indatc is to pm the risk ofpn..a:tin~ depositors The bankcrs--alonR \\;th the adminimarion ofTll;als not: on the (M'ners ofhcalth~' hanks (t:hmudl hi~r In: LAW who backed the proposed chanJ/.C'i liS ....rs 10 help deposit insuraRl.'C premiums). nUf on the taxpa~'CB, modemi7.c the financial ~'stcm--flo?cd that IlCW but on the O""ncn ofbanks that fail. In a Knsc. this S!\'i'S. IN HH:CT. 11tA,. legislation would help the indus~' R:'(.'O\'er frum the str1l1er slIpcn;sion is the prK'C the bankin~ indu~' problem, thor had bankrupted the Bank Insura..." must pay for another JIf'O\'ision in the Ic~slatiun: the Fund (Ill Fl.' After months of hcarinll".nd debate. $70 billion Tn:a.'Ull· loan authori'l' fur shnrin~ up ho...e\1:1. ConI'1C'S n:jccted the picas for ne... PFT S70 III1LUON AT RISK BIF.' What the IcKisiation sal". in efTe:<.•• is that the banking powers. adoptinR only a set ofnew safety "'\'emment will put 570 billion of taxpa~'cr funds at and soundness measures. risk (0 keep 81 ... from ~"n~ under. but in rerum. the This was the third rime in a decade: that Con· hankinJr; indus~' will hnc to clc-..n up it.'i al1 so that I'1C'S had tricd-and. t:itimatel)'. dcclincd-lo dc-.I a similar action will AC\'Cr ncc:d to be taken aJOlin. in a comprchensh'c way with many ofthe stnK.1u,...1 \\'hcthcr bankin~ofTK.:ials and R:Jr;\llamfS ..:an li\'c up (;()ISG tJNI>I-:R. 8li1' IN moderni1.in~ issues associated with the final'K.-ial to this challcn~ remains to be Ken. Ic~slation ",'Stem. The that ConI\R:''S did adopt­ Traditionally. fCKlJlatioo has !oudtt to keep the federal Deposit Insurance Corporation Im­ deposit insurant.'C k~5CS kM' ~, shiddin~ banks from pro\'emcnt Act of1991-1cft many ,-ntK."5 in irs wake. INIXlSTR\' \\11.1. UAV": TO m.rk", fun...,.. Spc:<.ir.:allr: But did me 311 reall\' set hack the moderni1.arion CI.I·:"'-': UP ITS ACT ~ effort? And docs it rcaliy portend a ,."ontinllation of • hanks an:. for the ,,"»5t part. restrk.1cd by laa the tr..nking industry's problems? One ,-an , ..enainly acrh'itics thar arc thouKht to he devoid ofex""'!l!l!' 'ilIA" A SIMilAR ACI10N understand the frustration ofthe many who want to sive risk: modemi1.e more quickly. but overall. the bankin~ • rhe federal ~vcmment insures the value of WiLl. NI-:n:R Nt:t:D TO Rio: act should help that pnx:ess. The most pn.~,in~ deposits--the major SOUfl'C offinanc.-inK for this modernization task at the moment is not to define TAKt:N "GAlN. $3.S·trillion industry; bankin~ ~'cars. what the industry will look like in 10 • the dcl'1sion as to when bank., fail is made noc: by Rl'thcr. it is to dctennine Ylhetbcr the industry can cn:ditors hut hl' federal or state rc~laton: b..~:ome strong cnou~ to serve as the foundation of • banks that experience financial probIcmll have the U.S. financial system in the future. Under the unrestricted acees., to loans from the Federal new bankin~ legislation. the counny will find this Raer\'c System: out-and will do so without unduly incrcasin~ Rlf's exposure to loss or riskin~ the stability ofthe • most bank failul'C5 arc: R:5OIved in such a way as financial system. to protect not: only insured dcposiron.. bur allK) uninsured dcpositOB. and sometimes c\'c:n ~ncr.iI (.TCdir0f5. CR..HG .~. SIJIf,lfONS is f)im1or ood STEPHEN C. These rules and practices. ...hi<:h have prorc:eted SII'AIJII is AssiS100' f)im1or io GAO's f'ioooriol the stabilit\, ofthe bankin~ induMf)' by cnablinJt it to l"stif"tiOiIS o"d:IIorhts Iss", A"o. TA'''';rrs tit'! retain the ,:anfidcncc ofirs customers. also helped npms ~'" do 001 offfSSllrily rrfTm '~Og ofGAO. thc nation's financial ~)'Stem remain remarkably • • tHE C'A<:lIOll\NAl CIt[)t«; fOR COMPEIIIION ....bIe durin~ .he .umulen. 1970:. and 1980s. Ru••he The honom-linc effect ofthese reforms is to recent failure ofso many bank'i.