To help U.S. banks compete, balance growth and safety.

From the Big Three automakers to microchip manufacturers, U.S. industries have benefited from Washington's growing willingness to negotiate "level" international playing fields. But not U.S. banks.

By adding new regulatory burdens, Congress has "un-leveled" the playing field for an industry already questioning its global competitiveness.

The United States can't claim a single bank among the 25 largest in the world. That's an amazing and sad reality for a country of our size and strength. And we're losing ground. Our system needs some fundamental rethinking, starting with the dilemma of banks' capital requirements.

Striking a Balance

On one hand, everyone recognizes that a healthy economy requires a strong banking system. We want our banks to relieve the credit crunch and make loans to the entrepreneurial businesses that will drive job creation.

Yet, in the long term, our bank capital requirements may discourage lending to those sectors. The reason? Washington has vigorously pursued a second objective -- building up bank capital to avoid any perceived or real danger of a taxpayer bailout.

In truth, the system needs to maintain a proper balance between growth and safety. But following the S&L crisis, the pendulum has swung too far and produced excessive regulations that go far beyond those in other countries.

At a Disadvantage

Requiring a U.S. bank to support each loan with more capital can either restrict the amount it can lend or increase the cost of each loan. That puts U.S. banks at a competitive disadvantage.

Unfortunately, this occurs at a time when even the biggest U.S. banks are pulling back internationally. Many U.S. bankers are focusing simply on serving their U.S. clients overseas rather than competing on a truly global basis for foreign customers.

In the late 1980s, U.S. banks' global competitiveness took a big step forward with the Basel accord. After long and difficult negotiations, the bank regulators of 12 leading industrialized nations agreed on a framework for risk-based capital requirements for banks.

The accord gave the U.S. banking industry the "level playing field" it sought -- particularly at a time when Japanese banks were benefiting from different standards.

Two Steps Back

But then the industry took two steps back. Reacting to the thrift crisis, in 1991 Congress passed the Federal Deposit Insurance Corporation Improvement Act, although few outside Congress saw it as an improvement.

Not only did the act's capital requirements exceed those in the Basel accord, Congress set up definitive criteria that took away much of the regulators' discretion.

We're already seeing the impact. Primarily as a result of record levels of net income and raising new capital, more than 96% of U.S. banks need the definition of "well-capitalized," a level much higher than the Basel standards.

However, this has come at a cost to the U.S. economy. To meet FDIC Improvement Act requirements, many banks have increased capital ratios by making fewer commercial and industrial loans and shrinking.

Fleeting Gains

This is troublesome in light of a recent study by Ernst & Young that found many of America's most successful small and mid-sized businesses expect a shortage of available capital funds.

Also, these companies are increasingly counting on short-term and long-term bank debt to raise capital.

In theory, U.S. banks have accumulated enough capital to support today's demand for loans. For that reason, many argue that bank capital is not a problem. It is, however, a long-term concern -- especially if the industry does not continue its pace of record earnings.

In truth, much of the recent boom in earnings is due to a temporary spread in interest rates. Likewise, recession in Europe and Japan has caused foreign banks to focus on domestic concerns and restrict their own overseas forays. That, too, may be temporary.

Tough Questions

To bolster U.S. banks' global competitive position, capital requirements must be part of the total package of reform that also addresses banks' ability to operate: (1) in other financial services such as securities and insurance, and (2) on an interstate basis.

Perhaps Congress should listen to the comments and questions of foreign bankers who wonder: Why can't U.S. banks operate across state lines? Why does the United States have more banks than the rest of the world combined?

Why is a single banking organization often subject to three or four regulators? Why can't U.S. banks offer customers the same financial services as European bankers?

Joint Effort Needed

However, not all the onus falls on Congress. The U.S. banking industry needs to agree on a single agenda and -- taking a lesson from the Big Three automakers -- learn to speak with one voice.

Unless the industry overcomes its internal squabbles, such as the perceived conflict between big money center banks and small community banks, there is little conflict between big money center banks and small community banks, there is little chance Congress will listen to, understand, and act on the industry's common concerns.

Also, regulators must be willing to support -- not resist -- their own consolidation. For instance, do we really need to keep both the Office of Thrift Supervision and the Office of the Comptroller of the Currency as separate regulatory entities?

Role for the GAO

Finally, the General Accounting Office should do more than simply fuel concerns over the stability of the banking system and demand more layers of regulation.

Rather, it should take the lead in generating awareness of U.S. banks' international challenges and studying the impact of positive reforms.

In this way, the GAO can support constructive changes that will contribute to the industry's stability and its global competitiveness over the long term.

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