Fed’s Martin Proposes Self-Policing by Banks

Federal Reserve Board Vice Chairman Preston Martin proposed Tuesday an industry accreditation system for banks and bankers and said “surveillance boards” should be formed to detect potential bank failures.

He said prestigious retired bankers and certified public accountants should be recruited to serve on these panels.

Martin, while conceding that his proposals had met with some skepticism from bankers and other federal officials, also called for the drafting of a “code of ethics” for banks.

He said the move would help reverse “the erosion of confidence in our whole banking system” brought on by the spate of recent failures and near-failures--including problems faced by savings and loan institutions in Maryland and Ohio and last year’s $4.5-billion federal bail-out of Continental National Bank of Illinois.

Martin said the banking industry needs to do much better at policing itself. He said there are limits to what the Federal Reserve, which oversees the nation’s major banks, and other federal regulatory agencies can accomplish.

“Today’s higher-risk financial system requires new approaches by examiners, by management and by the industry,” Martin told a seminar on banking practices. “We need better supervision. Deregulation did not mean de-supervision--if there is such a word. And better supervision does not mean entirely governmental supervision,” Martin said.

He also called for increasing the number of bank examiners and for various new industry panels to oversee generally what financial institutions are doing with investors’ money--including one that would establish “good business practices.”

“It requires a multiple approach to a massive problem,” he told a forum on financial services regulation sponsored by the American Enterprise Institute, a conservative research organization.

A “bank accreditation program” should be established for banks similar to accreditation programs in other industries, Martin said.

He also proposed an industry-run accreditation program for bankers themselves.

Martin also proposed the establishment of a “clearinghouse” where officials of financial institutions could go to “discuss problem situations on a confidential basis.”

He said the surveillance boards would attempt to detect potential bank failures long before they occurred. He said separate boards could be created for banks and for savings and loan institutions.