WASHINGTON - Comptroller of the Currency John D. Hawke Jr. sees the nation's dual banking system as a controlled battle between the state and federal charters - one that fosters a "creative tension" that forces continuous improvement and innovation.

In an ideal world, the OCC is on one side fighting to improve the national charter while state regulators, the Federal Reserve, and the Federal Deposit Insurance Corp. focus on refining the state charter.

But right now, Mr. Hawke says, the state charter side is fighting with the equivalent of brass knuckles: a fee disparity that forces national banks to pay examination fees as much as double those of state chartered banks.

"We had one fairly large bank earlier this year, SouthTrust, convert to a state charter solely to achieve the fee savings," Mr. Hawke said in an interview Thursday. "Earlier in the year, National Bank of Commerce in Memphis filed for conversion but changed its mind. Any time we lose a large bank it is a significant loss to the system."

The OCC has been able to hold on to the majority of its large institutions, but the fee disparity, he says, is slowly concentrating most of the assets it regulates in those big banks, creating an imbalance that threatens the stability of the system.

"Ten years ago the 10 largest national banks accounted for 26% of our assessments," Mr. Hawke said. "Today they account for almost 50%. That is … not a particularly healthy thing for the system."

Despite its problems, Mr. Hawke is an eloquent defender of the dual banking system, and is quick to cite ways in which it has produced healthy competition. The appearance and rapid spread of NOW accounts in the 1970s, he says, was in part a result of the OCC's response to a competitive advantage state banks gained when their supervisors approved an innovative and popular product. The OCC quickly matched the states' move, approving NOW accounts for national banks.

Of course, the competition sometimes gets ugly. Last week, House Banking Committee Chairman Jim Leach, R-Iowa, publicly chastised Mr. Hawke and called for an independent investigation of the agency, claiming that the OCC has illegally given some national banks the authority to hold securities as a hedge against equity swaps. Rep. Leach claimed, among other things, that the OCC's ruling breached the division between banking and commercial activities.

"I don't think anybody really thinks that ruling did anything … but reduce risk," Mr. Hawke said. "It had no implications for banking and commerce. It was a sensible ruling that I think all banks recognized the value of."

Rep. Leach's interest in the matter was spurred, at least in part, by protests from Fed officials. "The Fed had several choices. One was to go to complain to Congressman Leach; the other was to go look at their statutes and to see if they could achieve the same advantages as national banks," Mr. Hawke said in the interview. "The Fed decided - for its own reasons - that it didn't want to follow" our lead.

Mr. Hawke viewed the OCC's decision as just another chapter in the evolution of banking regulation. He was clearly disappointed that, rather than try to create a comparable ability for its own institutions, the Fed apparently moved to restrict it on the part of national banks.

This makes the issue of fee disparity all the more galling to Mr. Hawke. The difference in exam fees would be one thing if it were the result of more efficient regulation by state bank supervisors. The whole point of the dual system would be to punish the OCC for inefficient regulation and encourage it to improve.

But the reason for the disparity, Mr. Hawke claims, is actually an unfair subsidy delivered to state banks by the Fed and the FDIC.

The OCC is required by law to charge national banks fees equal to the cost of regulating them. That figure was $379 million in 1999.

State banks, by comparison, pay only for examinations performed by state regulators - $160 million in 1999. However, Mr. Hawke claims, a total of $870 million from the budgets of the Fed and FDIC was dedicated to state bank supervision and never recovered from the institutions.

"They are delivering a subsidy that is totally unjustified," Mr. Hawke said.

Numerous proposals for eliminating the disparity have been floated over the years. "One of the suggestions that I mentioned is having the FDIC remit to us a portion of what national banks have paid into the insurance fund, or national banks' share of the earnings of the insurance fund," Mr. Hawke said.

"Of course, the straightforward way of eliminating a subsidy is to make the beneficiaries pay for it," he said, noting that the Office of Management and Budget has proposed legislation creating just such a remedy every year since 1993, only to see it defeated in Congress.

But it is not only lawmakers who have failed to address the competitive imbalance. "Both the Fed and the FDIC have the authority to charge for supervision," he said. "They have elected not to."

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