The raging debate on the future of bank regulation has made it to Congress.

House Banking Committee member Jack Metcalf, R-Wash., sponsored an all- day conference Monday on regulating banks dealing in derivatives and other complex instruments.

"Let's get all this on the table," Rep. Metcalf said. "From this process, we can winnow down what our options are."

The conference, featuring officials from the banking agencies and trade groups, examined whether policymakers should continue a piecemeal approach to regulation or if they should adopt a radically new structure.

Kenneth Spong, an economist at the Federal Reserve Bank of Kansas City, advocated the most extreme option. He suggested splitting the banking system in two. Consumers would deposit money in "narrow banks," which would invest the cash in short-term government and corporate bonds. All other investment needs would be handled by nonbank affiliates.

"This would allow financial institutions to engage in a wider range of activities because they have already set aside reserves for their deposits," he said.

Narrow banks would have trouble making money, he conceded. But lower operating costs should allow institutions to at least break even, he said.

A slightly less radical idea was proposed by an economist with the Federal Deposit Insurance Corp., Frederick Carns. His so-called two-window system, first proposed by former FDIC Chairman L. William Seidman, would require banks to establish separate teller windows and back-office operations for insured and uninsured products. Banks could loan insured money, but they couldn't invest in riskier financial instruments.

"It can be viewed as the middle ground between the status quo and the narrow bank," Mr. Carns said. "It reflects a view that some risk exposure might be appropriate."

None of these ideas went over well with Robert Davis, a consultant with America's Community Bankers. All of the ideas "impose another layer of regulatory burden" by restraining what banks can do, he said.

Also, he said, the proposals have little support. "Who wants this change?" he asked. "Are consumers asking for it? I don't think so. Are bankers asking for it? I don't think so."

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, staked out the middle ground. Some megabanks, he said, have become so complex that regulators cannot adequately monitor their investment portfolios without substantially more regulation.

His solution, first unveiled last month, would let banks engaging in complex instruments relinquish access to the federal safety net. In exchange, they'd be freed from most safety-and-soundness rules.

The presidents of various Federal Reserve banks have been debating the future of bank regulation for the past two months.

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