At a recent conference sponsored by the Jerome Levy Economics Institute of Bard College, Annandale-on-Hudson, N. Y., Federal Reserve Governor Susan M. Phillips presented her thoughts on the future functions of banks. Excerpts follow.

Although there is a role for smaller banks in the local municipal markets and in the securitization of small business debt, I expect that most of these banks will concentrate their efforts on the distribution of investment products.

The rapid expansion of mutual fund sales through banks is a great example of the potential of a branch banking system.

While more sophisticated investors buy no-load funds via mail and toll-free telephone numbers, most funds are sold on a retail basis by stockbrokers.

But, since a majority of the population does not regularly deal with a broker, the banking system has a natural advantage in the distribution of mutual funds. Banks should become a prime vehicle for mutual fund distribution.

The sale of at least some lines of insurance is probably more important to banks than the distribution of mutual funds. An insurance brokerage line offers the bank the opportunity to gain a larger share of its customers' total financial business.

Like the sale of mutual funds, this is a distribution activity that involves little risk of loss to the banks and can provide convenience to customers.

As most of you know, banks have long wanted to distribute insurance products. Those bank holding companies that have grandfathered insurance powers have found this to be a very profitable business. Indeed, it is the most profitable of nonbank activities permissible to bank holding companies.

The [Federal Reserve] Board has long advocated allowing banks to act as insurance agents. But legislative reviews of the issue have not been supportive.

Consistent with the one-stop financial service provider theory, a third logical service line for banks, but one which has received little attention in recent years, is real estate brokerage.

These new services could be tied together in a comprehensive package by the banks. When combined with financial planning and tax preparation, they would have consumer appeal, would provide all the financial services needed by the average consumer, and could be offered by nearly all banks.

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