Few people except bankers and their regulators know or perhaps care about the avalanche of regulation and red tape that is about to descend on the industry in the wake of the socalled reforms of 1991.

If the consequences weren't so serious for banks, their customers, and the economy, this worst-ever example of bank overregulation would be worthy of a comedy-club act.

But small banks, which operate with minimum resources and require maximum efficiency to survive, are not laughing.

Small Banks Overburdened

The Federal Deposit Insurance Corp. Improvement Act of 1991 will hurt these otherwise highly efficient businesses, simply because they're unable to spread nonproductive work over a large customer base and work force. The same can be said of the Community Reinvestment Act mandates.

This will please some Beltway regulators and policymakers who want fewer banks. But when these once prosperous businesses disappear, former employees and customers will be hurt, and the economy will suffer.

There is a way around this problem that would also address other divisive issues such as interstate branching: restructuring the banking system.

New Charters Proposed

The time is ripe for discussion of this basic issue, and a key element is separate and distinct bank charters along functional lines.

If fact, such discussion has already begun, represented by commentaries in baking industry publications and preliminary staff work in the Senate and elsewhere.

Restructuring of the U.S. banking system will be a monumental political and economic task.

The effort, nevertheless, is worth the investment of significant time and resources. The strength and stability of our economy are affected by the overregulation of the banking system as it now operates and by divisiveness within the system.

Efficient allocation and delivery of capital to all levels of the economy in all geographic areas of the country are needed for the United States to be competitive in the global economy.

Regulatory Overkill

Redundant and excessive regulatory supervision and wasteful internecine competition cause confusion and deny consumers adequate service. Reorganization of the system is in order.

To pass political muster, any reorganization would require retention of at least two aspects of the present system: The dual banking system and multiple-account federal deposit insurance for the smaller community-oriented institutions.

A third political requirement might well be continuation of credit unions' tax and regulatory privilege. And another might be continued involvement of all the present regulators: the Federal Reserve, the Office of the Comptroller of the Currency, the FDIC, the Office of Thrift Supervision, and the state supervisors.

A more effective system can be achieved while accommodating these political realities.

Some initial discussions have focused on three separate federal bank charters that together would establish a nationwide, uniform commercial banking base.

These charters are designated respectively, as "community," "commercial," and "wholesale."

The community charter would represent what is now commonly understood to be the typical community bank, thrift, or perhaps credit union, and would reflect their present powers and limitations. On the basis of asset size or market area, certain regulatory requirements such as those in the Community Reinvestment Act would be eliminated for the community charter. Multiple-account FDIC insurance would be exclusive to this particular charter.

A second charter, representing a higher level of activity, different (perhaps broader) powers, and some form of nationwide branching authority would be designated as commercial. Assumed to be the key to this charter is nationwide branching plus self-insurance for deposits, including cross-guarantees.

Global Competitors

The wholesale charter would be for financial organizations that have global, investment, or merchant banking interests. It would include those that now offer comprehensive nonbank-bank services. The aim of this charter would be to rationalize supervision and free the institutions to compete globally.

Assuming that these charters can be fairly defined to meet the reasonable interests of those affected, how can the political realities be accomodated?

* Dual Banking System. Envisioned is a primary federal charter that would broadly define the commercial banking or related activities for each of the three federal charters and that would apply throughout the nation.

But to operate, the community and commercial charters would require a state charter in each state where the institution does business. The states could reasonably deviate from the basic powers and limitation granted by the federal charter.

This would reflect reasonable state and regional differences and perpetuate the "laboratory" or "innovation" advantages that are now conceded to state-authorized and state-supervised activities in many areas of commercial activity.

But the nationwide system would remain dependent on the uniform authority granted by the federal charter.

To establish a rational and productive duality of regulation, regulatory supervision of the community charter could be shared between the FDIC and the state regulatory agency, with perhaps an associate FDIC administrator and appropriate staff for each state. These would consult with the state bank supervisor.

Shared supervision would introduce some flexibility into otherwise rigid nationally standardized regulations.

As to the commercial charter required from each state, the state would defer to but consult with the Comptroller's office on supervision and regulation. The Comptroller's office would be the lead regulator for commercial charters.

This system would acknowledge the primacy of the nationwide scope of this particular charter while also acknowledging the states' interests in how these charters operate in their jurisdiction.

* Deposit Insurance. FDIC coverage and supervision related to community charters have already been discussed. By limiting FDIC insurance to community charters, the "too big to fail" issue should be vitiated. The larger nationwide commercial charters would have to self-insure and cross-guarantee deposits under supervision of the Comptroller's office.

* Credit Unions/Commercial Lending. Credit unions are the wild card in the restructuring game. They should be encouraged as effective organizations providing basic financial services, but should be limited to reasonable "common bond" affiliations.

And, if they remain credit unions, absolute restrictions should be placed on their authority to engage in commercial lending or services. They would retain their tax-exempt status and other regulatory advantages they now enjoy as long as they comply.

If they engage in or wish to engage in commercial banking activities, then the community bank charter would be required and they would be taxed and regulated accordingly.

* Regulatory Jurisdiction. I have already addressed continuation of FDIC, Comptroller's office, and state regulation. Wholesale charters would fall under Federal Reserve regulation exclusively,.

The OTS would be eliminated and its staff transferred to the remaining federal regulators, as appropriate.

Since all elements of the banking system seen to agree that reform is necessary, why not redesign and retool to address the highly competitive global market?

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