WASHINGTON — Could President Bush’s promise to continue paying down the nation’s debt bring an unexpected benefit to banks?

According to Alex J. Pollock, president and chief executive officer of the Federal Home Loan Bank of Chicago, it may. As Treasury debt — currently the closest thing to a risk-free asset — becomes more and more scarce, conservative money managers are going to look for safe places to store funds, and banks may be one place they turn.

“One of the alternatives that I think will look good could be bank deposits,” Mr. Pollock said in a recent interview, echoing remarks he made a week ago at an American Enterprise Institute seminar on the consequences of paying off the debt. “Think about deposits in high-quality banks: You have a conservative instrument, and you also have a link to the government, through being a highly regulated industry. That gives an investor a certain feeling of confidence in this asset class.

“That would go for either domestic or international or investors looking to hold dollar reserves, or potentially to investors who, in cases of upset in the market, are moving out of riskier assets into lower-risk assets — the so-called ‘flight to quality.’ ”

To be sure, many investors will gravitate toward debt issued by government sponsored enterprises, such as Fannie Mae, Freddie Mac, and the Federal Home Loan banks, Mr. Pollock said.

However, “wholesale secondary market bank deposits are very competitive with other money market instruments,” he argued.

For some time, industry observers have speculated that mortgage-backed securities issued by Fannie and Freddie would, by default, occupy the role played by Treasury debt. But those observers don’t recognize that for decades Treasury debt has played a dual role as a benchmark asset against which loans are priced and as a high-liquidity, low-risk investment, Mr. Pollock said.

There is no reason that a single asset has to serve both functions, he argued. In fact, there is no reason why the benchmark has to be an asset at all, he said.

“Imagine a situation where you don’t have the Treasuries and therefore you don’t have that standard,” he said. “It’s something like moving from the Newtonian theory of physics, where there is an absolute framework of space and time against which all motion is measured, to an Einsteinian theory, in which there is no absolute framework but only things which move with respect to each other.”

The question may be academic, because the benchmark role has already been cast, Mr. Pollock said. Swaps based on the London interbank offered rate — the rate at which large London-based banks are willing to lend each other Eurodollars — is a popular alternative, he said.

“It is already the case that Treasury issuance is decreasing, and that the Treasury market yields have changed in relationship to everything else, making Treasuries already less available as an investment and, more to the point, less useful as a hedging instrument, because the relationships to other yields are wider and less statistically well-behaved,” he said.

“It seems pretty clear to most of us who try to think about this that the Libor swap rates are becoming the world’s standard benchmark.”

But Libor swaps cannot replace Treasury debt as a low-risk investment, and that’s where bank deposit products would come in.

“What most people have not thought about is a greater role for bank deposits as a very high-quality asset that conservative investors, either domestically or internationally, could look to as an alternative when you don’t have Treasuries,” Mr. Pollock said. “Let’s say Treasuries are disappearing or have disappeared. Now I have a certain amount of dollar-denominated assets I wish to hold. I might be thinking about” their value relative to “the Libor swap curve, but what am I going to invest them in?”

The answer for the foreign investors, who currently hold $1.2 trillion of Treasury securities, is government-sponsored enterprise debt and bank deposits, he said.

“Think about a European or anyone else in the world wishing to hold a conservative dollar-denominated asset. If you tell him he can’t buy Treasuries anymore, what does he invest those dollars in? Maybe agencies, maybe bank deposits. It seems to me that those are the first two things that sort of investor thinks about.

“If you look at what bank deposits and agency securities have in common,” it is that investors “look beyond the credit quality of the instrument itself to some sort of implicit link to regulation or the government’s interest in the well-being of this sector.”

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