The Clinton administration has put forward a plan to consolidate the banking agencies that makes a lot of sense in terms of both politics and substance.

For more than 50 years, various commissions and government policymakers have been trying to revamp the system by which we regulate depository institutions. The proposals have gone nowhere.

I thought we were headed toward yet another round of fruitless debate until the administration submitted an outline of its views just before Thanksgiving.

The problem, as I saw it, was that there were two 800-pound gorillas involved in bank regulation, neither one of which would ever be willing to give up its authority.

Turf Protection

So I had expected the Treasury to argue, as it always has, that bank regulation should be housed in the Treasury to make it more responsive to the political process. And then the Federal Reserve would argue that it needs to be involved in bank regulation to facilitate its conduct of monetary policy.

Congress doesn't much trust either the Fed or the Treasury to be the sole repository of bank regulation and instead argues for an independent commission. At this point the matter always dies.

Until now, that is. The Clinton Administration has taken the unprecedented step of offering to strip the Treasury of bank regulatory authority. It's not clear that the Federal Reserve will be able to successfully wage the battle against agency consolidation, now that the Treasury has abandoned the fight.

Sensible Proposal

The Treasury has put forward a sensible plan. It calls for the establishment of a federal banking commission with three members appointed by the President and one each representing the Treasury and the Federal Reserve (the FDIC should also be represented on the commission, in my judgement).

Bankers have had the luxury in the past of sitting on the sidelines, watching in amusement as the agencies waged their periodic battles over consolidation. No harm would come to anyone in the end, so it was all good sport.

Agency consolidation, in the wake of the Treasury's bombshell, is no longer an abstraction. There is a distinct possibility, if not a probability, that consolidation will occur in 1994. Bankers will need to figure out pretty soon how they feel about it.

What About Credit Unions?

One obvious complaint bankers will have about the administration's plan is that the new banking commission is not slated to regulate credit unions. This is one of those instances when policy and political considerations do not converge.

There is no question that credit unions look, walk, and talk like banks and should be regulated in the same manner as banks. But credit unions do not embrace that notion and are probably strong enough politically to make their views stick.

The administration's plan would produce a system that is less expensive and more efficient than what we have currently, and that's all to the good. But the current system offers some escape valves when a regulator becomes unreasonable, as each of them does from time to time.

If the Comptroller of the Currency takes an unreasonable position on a potential acquisition, for example, it can be structured as a holding company application to the Fed, and vice versa. Then there is the national versus state chartering authority and the S&L charter versus the bank charter.

It seems clear that most of these escape valves will be closed or restricted if the banking commission becomes a reality. Considering how unresponsive, even hostile, Congress has been to the needs of a banking industry clearly in a state of decline, should the industry give up what little flexibility it has?

Which leads to another major concern for bankers. The banking industry's share of the financial services marketplace has been in precipitous decline for more than a decade.

Why, many ask, should we devote any energy to reorganizing the banking agencies? Shouldn't our attention be focused on removing the government-imposed burdens and restrictions that are preventing the industry from remaining viable in the marketplace?

Many believe that reorganizing the banking agencies at this time is akin to rearranging the deck chairs on the Titanic.

Mr. Isaac, a former chairman of the Federal Deposit Insurance Corp., is managing director and chief executive of Secura Group, a financial services consulting firm based in Washington.

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