To the Editor:

In the Jan. 26 issue of the American Banker, Bill Isaac argues for the repeal of the Bank Holding Company Act. He believes that the original rationale for the Bank Holding Company Act was to prevent the spread of interstate banking.

Isaac goes on to argue that since interstate banking is now the law of the land and there are laws in place to guard against "other perceived potential problems", there is no need to have the activities restrictions contained in the Bank Holding Company Act still on the books.

In reality, prohibiting interstate banking was only one of the reasons for enacting the Bank Holding Company Act. The act also protects the banking industry, and ultimately the U.S. taxpayer who backs the deposit insurance funds, from significant safety and soundness concerns and restricts undesirable financial concentration.

Congress correctly recognized that transactions between banks and affiliated commercial firms can be dangerous. What bank would not bend over backwards to arrange a credit for an affiliated entity, even if it meant discriminating against nonaffiliated businesses? What bank would not do everything it could to support a troubled affiliated business entity, knowing that the failure of the business entity would severely damage reputation and public perception of the bank?

The current restrictions on transactions with affiliates are not structured to take into account the risks inherent when banking and commerce are mixed.

Eliminating the barrier between banking and commerce would lead to massively increased financial concentration. It would open the door to Merrill Lynch buying Chase, and then this conglomerate could be bought by Honda.

And if this structure failed, the Congress and the American taxpayer would have to belly up to the cash bar. The failure of such a financial conglomerate would make the systemic risk in the banking system today seem like small change.

All of this concentration would occur among the large banks and commercial entities, to the detriment of community banks and Main Street America. Yet these large conglomerates would not offer many of the services and products offered by community banks, thus causing Main Street to suffer.

We should also learn from the experience of others. The Germans are critically rethinking their financial and economic structure which has allowed the Deutsche Bank to hold enormous influence over the German economy.

Congress had many valid reasons for enacting the Bank Holding Company Act in 1956, and those reasons are still valid today. Bill Isaac closes his article by saying that the Bank Holding Company Act has limited competition in the financial marketplace at "enormous cost to the American public."

The opposite is true. Repeal of the Bank Holding Company Act would have costs to the American public that we cannot begin to imagine. Kenneth Guenther Executive vice president, Independent Bankers Association of America

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