WASHINGTON - A Federal Reserve economist argues in a new report that the banking industry is not losing ground to its less-regulated competitors.

"Banks are not dinosaurs," Mark E. Levonian, a research officer, writes in the Federal Reserve Bank of San Francisco's "Weekly Letter."

"Banks may be evolving away from their traditional role as lenders, but they remain central to other, equally vital forms of financial activity."

The letter, titled "Why Banking Isn't Declining," refutes the traditional argument that the industry's declining share of the overall financial sector market is evidence that banking is dying.

Mr. Levonian, who based his article in part on research done by John H. Boyd, an economist at the Minneapolis Fed, and Mark Gertler, a professor at New York University, noted that the financial sector is growing steadily. Even if banks are shrinking relative to their financial competitors, he said, banks' slice of the expanding pie may be bigger.

The Fed economist also argued that the typical means for measuring bank assets don't work anymore.

The case that bank assets are shrinking ignores their burgeoning off- balance-sheet businesses, such as standby letters of credit and derivatives.

"Thus, at least part of the downward trend in asset share reflects a change in how banks do business, not how much business they do," he said.

In addition, traditional bank-asset measures do not include off-shore assets booked by domestic banks or loans made in this country by foreign banks.

When off-balance-sheet assets are factored in, much of the decline in bank market share evaporates. The gap is eliminated completely if off-shore assets and assets held by foreign banks in the United States are included, Mr. Levonian concluded.

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