The banking industry is under the gun from politicians to accept "compromise" financial reform legislation. Recent history should provide bankers with lessons on the importance of not compromising their principles.
Banks fought for decades to gain a right other industries take for granted-the right to open branch offices. Politicians, bowing to pressure from smaller banks seeking to limit competition, refused to enact reforms.
It didn't matter that geographic restraints were inflicting considerable damage on the banking industry. Nor did it count for much that the American public was paying a steep price for a less efficient and less competitive banking system.
Eventually, the barriers to geographic expansion began to lose their relevance. Technological advances made it feasible to deliver many financial services without using the traditional branch system. States enacted regional interstate banking compacts. Regulators began selling failing banks and savings and loans across state lines.
The political opposition to interstate banking within the banking industry diminished significantly. But just when it appeared the way was cleared for legislation to be enacted, the independent insurance agents jumped into the fray.
The agents insisted that no interstate banking bill should be enacted unless it rolled back what limited authority the banks had to offer insurance products and services. Most observers felt the banks had no chance of winning a showdown with the agents.
The politicians pressured the banks to come to the table and cut a deal with the agents. It didn't count for much that the protection from competition sought by the agents was contrary to the public interest and wasn't relevant to the interstate banking bill.
Some banks were so eager to get an interstate banking bill that they were willing to trade away their right to sell insurance. Most banks, and the American Bankers Association, decided to take a more principled stand.
They were seeking pro-competitive, pro-consumer legislation. They wouldn't accept the agents attaching anti-competitive, anti-consumer amendments.
The banks put all the chips on the table. When the smoke cleared and the votes were counted, they won decisively. That victory set the stage for the current round of financial modernization.
We are now in the process of deregulating products and services. The insurance agents are once again fighting to protect themselves from competition. Legislators who should know better are bowing and scraping to the agents.
The legislation should not be particularly difficult. Banks, insurance companies, and securities firms should be allowed to own each other and compete head-to-head.
They should be given the maximum freedom to organize themselves as they believe appropriate. They should be allowed-but not required-to organize themselves under a holding company.
Each bank, no matter what its ownership or affiliation, should be regulated like every other bank. The same is true for insurance companies and securities firms. To the extent we find it essential to supervise bank holding companies that job should be performed by the supervisor of the company's lead bank.
We need to get on with the task of deregulating the financial system as swiftly and completely as possible. Any proposal from any source-including from regulators seeking to maintain their fiefdoms-that would impede that process should be rejected.
Bankers are in a much stronger position this time around than they were when they fought the interstate banking battle. They've proven they have considerable political muscle. They've already gained from the regulators- supported by several unanimous Supreme Court decisions-a great deal of the freedom needed to compete.
Banks should fight any measure that would diminish their competitive freedoms, including the freedom to organize and operate their businesses in the most efficient manner and the freedom to select the most enlightened regulator to oversee those businesses. If there were ever an appropriate time to stand on principle, this is it.