For bank and thrift regulators - and by extension, those they regulate -- 1992 is shaping up as the beginning of a new era of limits.

Battered by the thrift crisis and the more recent credit crunch, Congress wrote into the 1991 banking legislation firm prescriptions for how regulators are to deal with troubled financial institutions.

Many experts decry the result as a cookie-cutter approach that replaces the regulators' precision tools -- judgment and discretion dull and imprecise implements that could further scar the banking system.

While the regulatory damage-control mode was tailored for troubled banks, even healthy institutions will feel the effects. They are likely to include higher regulatory costs and more conservative lending policies.

There may even be a decline in innovation as banks find that they need permission to enter businesses or provide products that did not require approval in the past, said Gilbert T. Schwartz, an attorney with Skadden, Arps, Slate, Meagher & Flom.

"The good banks will be impacted negatively and needlessly by additional regulatory burdens that weren't necessary for the 90% of the banks that are profitable," said Charles E. Waterman, chairman and chief executive officer of South Holland (Ill.) Trust and Savings Bank.

Less Leeway for All Concerned

The 1991 legislative changes, built on the notion of "early intervention" in troubled banks and thrifts, are "an attempt to cut out examiner discretion and set really rigid standards," said John O. Alderman, regulatory counsel for the Independent Bankers Association of America. "Neither banks nor examiners are going to have much leeway."

The new guidelines fall into two broad categories that will bring major changes for the industry in 1992 and beyond:

* In a strict, five-class system for rating capital adequacy, regulators will have less say in deciding how to respond to banks and thrifts whose capital ratios tumble.

* National standards for evaluating bank management practices will supersede case-by-case judgments by examiners.

Zoning Laws

Under the new approach to capital, banks and thrifts will be classified in one of five "zones." Each zone requires a certain response by regulators - for example, asset-growth restrictions and dividend limits for institutions that fail at least one capital test.

Except in rare cases, once core capital falls below the "critical capital level" of 2% of assets, regulators must initiate a takeover.

Under the new national standards, loan documentation and underwriting practices, asset growth rates, even market-to-book-value ratios of publicly traded shares will be judged according to uniform criteria.

Rules on Pay and Perks

Industry officials are already bristling about a provision requiring regulators to set national standards for compensation of bank presidents and directors.

"If a bank is in a distressed position, clearly the regulators should be looking at salaries and perks and bonuses," said Mr. Waterman of South Holland Trust, which has $389 million in assets.

"But if the bank is not [in trouble], it's none of their darned business. For Congress to set the guidelines in statute is ludicrous."

"The good banks will be affected negatively and needlessly," Mr. Waterman added. In an atmosphere of caution, he said, "the economy will be the net loser."

Obscure Amendment Cited

In the same vein, Mr. Schwartz of Skadden Arps noted that the Federal Reserve Board in October began reining in banks with a little-noticed amendment to Regulation H.

The amendment requires them to seek approval before engaging in commodity swaps and other commodity-linked transactions.

"It's been years since they used the authority in Regulation H to force banks to get approval to engage in banking activities," Mr. Schwartz said.

But the Fed is pulling out the stops because "Congress is not going to accept wishy-washy regulation."

Ironically, the tilt to by-the-book supervision comes after a solid year of complaints from lawmakers and Bush administration officials that overly rigid supervision exacerbated a credit crunch and jeopardized economic recovery.

'Loosen Up'

The administration will probably continue to aim its "loosen up" rhetoric at examiners, who are seen as unlikely to heed it.

"How can they? They'd have to be contortionists," said Karen Shaw, president of the Institute for Strategy Development, a Washington consulting firm.

"The administration is going to find that its arguments slip from the purely rhetorical to the completely irrelevant," she added.

To be sure, there are some disagreements as to how much of a constraint the regulators face.

"They're forced to begin looking and acting earlier, but they still have a lot of latitude once they begin acting," said Bert Ely, an industry consultant based in Alexandria, Va.

Seen as a Futile Effort

Nevertheless, he sees the changes as a futile effort by Congress to micromanage the banking industry.

"The parallels to the breakup of the Soviet Union are mind-boggling," Mr. Ely said. "We're witnessing the last gasp of the central planning process of banking regulation."

A former New York State banking regulator said the legislation, though "rather draconian," will ultimately yield some good results.

"Three to four years down the road, you will have achieved the very kind of consolidation you need in what is essentially a non-growth industry," said Patricia Skigen, now a partner with the law firm Willkie, Farr & Gallagher, New York.

But she maintained that permitting banks to diversify geographically and offer new products would have yielded the same result.

"There is going to be a lot more pain this way than if Congress had allowed the natural forces of consolidation to work," Ms. Skigen said. "I'd hate to be a regulator today."

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