House Banking Committee Chairman Jim Leach believes banks wishing to expand into activities such as securities underwriting should be required to do so through holding company affiliates. Comptroller of the Currency Gene Ludwig believes expansion should be permitted in banks or their direct subsidiaries.

The comptroller wants to allow national banks to offer a full array of services. Most activities would be permitted directly in banks. Some would be required to be placed in bank subsidiaries.

Mr. Leach, in a recent speech, lashed out at the comptroller and his proposed rule. The complaints articulated by Mr. Leach and my response to each follow:

Leach's complaint: The comptroller is offering national banks the opportunity to become involved in the "full range of non-financial commercial activities."

Response: The comptroller has proposed no such thing and would have no legal basis for so doing.

Leach's complaint: Banks' operating subsidiaries engaged in risky activities "could be funded using insured deposits of the national bank."

Response: The rationale for placing some activities in subsidiaries is to help protect banks. It's unreasonable to assume the Comptroller would allow these higher risk activities to be funded by the bank.

Leach's complaint: "The comptroller's proposal would appear analogous to the direct investment authority granted S&Ls by certain states in the 1980s, which had the effect of placing significant uncontemplated liabilities on the deposit insurance system."

Response: S&Ls got into serious trouble initially due to the failure of Congress to allow the industry to evolve.

After much of the industry became insolvent in the high interest climate of the late 1970s, Congress enacted a huge increase in the deposit insurance limit. Thrifts with little or no capital or management were allowed to grow rapidly with negligible supervision. There's not the slightest resemblance between this situation and the comptroller's proposal.

Leach's complaint: "The ability of national banks to branch interstate with fewer restrictions than state banks means there will be no reason to hold a state charter."

Response: The balance between state and national banks has shifted back and forth for nearly 150 years. In recent years, a number of major banks have switched to state charters. The real threat to both state and national banks comes from technology and other nonbanking companies. Liberalization of the national bank charter is in the best interests of the banking industry and the public. The states no doubt will change their laws to keep pace.

Leach's complaint: "Allowing national banks to engage in impermissible activities through a subsidiary will remove the need for a bank holding company which has been one of the most important methods of managing risk in the banking system."

Response: The holding company hasn't been an important method of managing risk. Holding companies were conceived to circumvent government restraints on branching. Now that branch banking is the law of the land, the bank holding company is an anachronism.

Bankers have a vital stake in the outcome of the debate between Mr. Leach and Mr. Ludwig. The holding company format is cumbersome and expensive. More importantly, if Mr. Leach has his way, the fate of expansion-minded banks will depend on the whims of a single regulator. That's a very high-risk proposition indeed.

Mr. Isaac, former chairman of the Federal Deposit Insurance Corp., is chairman and CEO of Secura Group, Washington

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