Thinking back over 25 years in banking, the most highly regulated industry in the United States, I recall sitting in the boardroom of the old United California Bank. A senior executive was proclaiming the end of the world because a Regulation Q proposal was being debated that would allow for the unthinkable: interest on demand deposits.

In those days, banks and bankers relished regulation. Competition was kept in a narrow band, and the customer was a hostage of the inefficiencies created by governmental oversight.

Now as we approach the millennium, we hear revolutionary thoughts of deregulation, embodied in the reform legislation that the two houses of Congress recently passed in different forms. Bankers should step back from that political process and consider the philosophical underpinnings for banking powers because in doing so they may identify strategic advantages for the future.

The revolution in banking has actually been more subtle than it seems. Market forces have made the role of politicians increasingly irrelevant.

Viewed over the past two decades, the expansion of banking powers has been dramatic: Banks offer securities services and sell insurance on their premises; they have sweep accounts for corporate customers that circumvent the remaining limitations of Regulation Q; and they market over the Internet without geographical limitation.

Changes such as these took place with no significant statutory revisions. Yet the pall of regulation continues to inhibit banking opportunities that would benefit customers, shareholders, and communities.

The market forces that have expanded banking powers could not be demonstrated any more dramatically than by the merger of Citicorp and Travelers Group last year. At the same time, some of the largest insurance carriers and industrial companies have entered the world of banking through the side door of thrift charters. These charters have evolved to include most if not all of the characteristics of commercial banks, though the companies entering the business through that route are theoretically prohibited from commercial banking.

Others are availing themselves of even greater freedom by chartering state-regulated, FDIC-insured, deposit-taking institutions called industrial loan companies in states such as Utah, Nevada, and Arizona. Yet no comprehensive (or comprehensible) scheme exists to reconcile the incongruities between these actions and the underlying rationale for existing law.

Regulations continue to be enforced that have little relevance to the protection of society, while our regulated financial institutions struggle to be competitive in the face of 60-year-old restrictions.

We should be examining the current regulatory scheme, asking whether and to what extent banks should enjoy greater freedom from regulation. I am and will always be skeptical of government intrusion into the free market. I have yet to see a regulation, no matter how well-intended, that provides the ultimate benefits that were promised. Yet the pragmatist in me recognizes that because of deposit insurance the government will play a role in controlling banks.

The real question must be how to balance regulation with competition. In establishing that balance, we must consider whether limits on powers are needed to let banks compete effectively but not adversely affect the public good.

If broad competitive powers should be denied, then what are the legitimate interests being protected by such limitations, and what data support such a determination?

Today there is very little justification for restricting the financial services products that banks should be permitted to sell. The banking industry has a powerful distribution network, and if banks can conveniently meet customer needs, those products should be available. Depression-era restrictions have no relevance.

Yet I have strong reservations about whether banks, once handed a new sack of toys in the form of enhanced powers, would execute profitable business plans, adding measurably to shareholder value or meaningfully changing the current product mix. In fact, the evidence suggests that bankers' grandiose business plans inevitably fail, not because the ideas are unsound but because the talent needed to execute such plans, and the necessary institutional focus, has been lacking.

Looking at Citigroup, there is little indication thus far that the sum of the parts is greater than either of the stand-alone entities. One only has to examine the efforts of Sears, Roebuck and Co. in the 1980s to see that grouping apparently related financial services products under one flag is not a panacea. In the end, consumers failed to respond, and the parts- including Allstate Insurance, Dean Witter, the Discover card, and Sears Savings Bank-became more valuable standing alone.

Citigroup has a greater platform from which to approach customers than its constituent companies had before. But can it manage to cross-sell at a time when most banks find it difficult even to cross-sell their own, related products? Until this happens, regardless of the law, evolution, not revolution, will define the offerings of banking products and services in the 21st century.

Bankers should therefore focus on improving the delivery of existing products. They should carefully monitor technology and electronic commerce to find ways to enhance market share. They should work on greater penetration of their existing customer bases through a better understanding of financial needs in a rapidly changing environment.

Basically, this means cross-selling existing products better, not seeking new, unrelated, and elusive elixirs. Only then will bankers proceed into the next century confident that they can deal with the opportunities that true deregulation will present. Mr. Rockett is a partner in the San Francisco law firm of McCutchen, Doyle, Brown & Enersen.

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