Obsolescence killed the savings and loans. Not fraud, not theft, not negligence, not regulators, but structural obsolescence in the form of inadequate financial tools to respond to changes in the marketplace and intellectual obsolescence in the form of an inadequate vision of the future of the S&L industry.

As Congress debates measures to broaden bank powers, it should consider the possibility that similar obsolescence is already stalking the country's commercial banks.

Regulation imposes artificial market conditions on businesses, no matter how enlightened regulators and legislators may be. Thrifts and banks are among the most intensely regulated industries in the country. Thus they must be prepared to seek mechanisms to react quickly to marketplace changes.

The S&Ls that failed were forced to borrow short at rates that were artificially constrained, and at the same time they were limited to lending long to finance housing. Congress refused throughout the 1970s to authorize them to make variable-rate mortgages and shift the interest rate risk in the direction of the consumers.

Faced with a 12% average cost of funds and mortgage portfolios yielding only about 8%, many managements came to the conclusion in 1982 that they could become profitable and prevent the failure of their institutions only if they doubled in size through the addition of substantial higher-yielding assets (for example, junk bonds and commercial real estate, often financed by brokered deposits).

This strategy might have worked but for the changes in the tax laws in 1986 that discouraged real estate investment; the Congressional declaration in 1989 that junk bonds were a form of financial nuclear waste; and the constant reformation of S&L capital rules.

More than 1,000 S&Ls in the 1989-class picture were considered financially (and morally) destitute, and were eventually seized by the government. Misguided public policies that exalted short-term populist politics over long-term economic soundness had effectively destined them to structural obsolescence.

Do the mid-1990s suggest a repeat of the early 1980s?

The headlong rush of large commercial banking institutions to merge with one another are largely viewed as financially sound moves. But toward what end are these mergers directed?

Retail commercial banking is frequently viewed simply as the manipulation and transmittal of financial information. Customers receive and make payments, and banks move and invest funds for them.

But are banks better prepared than others to make these transactions better, faster, and more efficiently? What if the execution side of the business can be better handled by those who control technology and the flow of information?

Though the country and the consumer needs banking, the critical question is whether it will continue to need banks.

Much of the financial services industry is driven to become larger because of the inherent belief that there are economies of scale to be achieved. However, academic studies and research from the Federal Reserve indicate that after a relatively low dollar level, there are only modest economies of scale available in banking.

If the new giants of technology can execute financial transactions better and more quickly than banks, they may elect to mount an assault on the bank's retail customer base.

Certainly, banks need to be vigilant to evade the threats of creeping obsolescence. And unlike the S&Ls that failed, banks are not generally mismatched, thinly capitalized, or reliant upon the performance of high- yielding assets. The threats they face are of a different nature.

Many banks can enter the technology war and hold their own in it. But they will need to focus on and develop the fundamental advantages they have.

Most noteworthy, financial institutions enjoy the trust and confidence of savers and borrowers, which makes them a party to the decision of how consumers move and save money.

Failure to employ strategies and tactics that focus on exploiting this comparative advantage may sentence banks to second-class citizenship as surely as the S&Ls of the 1980s were destined to fail.

Mr. Vartanian heads the financial institutions transactions practice at Fried, Frank, Harris, Shriver & Jacobson. He was general counsel of the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corp. and special assistant to the chief counsel of the Office of the Comptroller of the Currency.

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