Federal Reserve Board Governor Laurence H. Meyer urged the government Monday to move more aggressively to remove impediments to bank and cross-industry mergers.

"Unless there are further actions, the remaining regulations likely will continue to restrain consolidation and integration activity significantly," Mr. Meyer said.

While praising the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 for lifting some barriers, Mr. Meyer noted that the law imposes deposit caps that may force some banks to walk away from mergers. The law generally prevents any bank from controlling more than 10% of domestic deposits or 30% of deposits in any state.

"This cap is close to binding on some organizations and may make it difficult to have deposit-taking branching operations in all 50 states," he told the North American Economic and Finance Association.

Existing laws also make it tougher for banks to diversify into new lines of business, he said. For instance, banking companies are generally barred from underwriting insurance, he said.

The House last year passed a financial reform bill that would have allowed banks, securities, and insurance firms to buy each other, but the Senate failed to act. Passage of a bill this year is questionable.

Mr. Meyer said the market-not the government-should decide whether mergers make sense. "We should allow banks to take advantage of perceived opportunities to increase profitability by improving efficiency, and leave it to the market to discipline errors in this regard," he said.

The government should intervene only if an in-market deal significantly reduces competition, he said. "Our basic policy should be-and is-to deny or alter mergers and acquisitions that appear likely to result in substantial increases in local market power," he said.

Regulators also need to revamp how they judge local market competition, he said. Consumers are increasingly using the Internet to bank with out-of- market institutions, or turning to nonbank financial companies for loans and investments, he said.

Overall, Mr. Ferguson said, mergers strengthen the industry. "Available evidence suggests that bank consolidation increases profit efficiency and helps diversify the portfolio risks of participants," he said.

Despite a 30% drop from 1988 to 1997 in the number of banks, the average concentration rating for local banking markets has remained steady, he said. The Fed governor credited fierce competition from small- and medium- sized banks and the chartering of 3,200 new banks since 1980.

The greatest threat from consolidation is the expansion of the "too big to fail" doctrine, which is the belief that the government will bail out big banks rather than risk a financial crisis by letting them fail, he said.

This threat may be neutralized if regulators force shareholders and management to incur losses, even if the government provides financial assistance to the bank, he said. "The realization of significant losses should be the expectation of owners, managers, and uninsured creditors of any failed institution," Mr. Meyer said.

In his wide-ranging remarks, Mr. Meyer said risk-based bank capital rules are crude and must be revised, though he did not recommend how they should be changed.

Broader use of credit-risk models, securitizations, credit derivatives, and similar risk-management tools will require regulators to use new supervisory techniques, he said. For instance, oversight must become continuous and focused on the biggest risks incurred by the bank, he said.

The government also should encourage market discipline by requiring banks to disclose more data about their financial condition, he said. And he said regulators should consider requiring banks to issue subordinated debt, the price of which would reflect the market's perception of the institution's health.

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