I spoke recently at the Federal Reserve Bank of Chicago's conference on bank structure and competition. The speaker immediately before me was Federal Reserve Chairman Alan Greenspan. His remarks were the most thoughtful and forward-looking by any bank regulator in years.

Banks, he noted, are in the business of managing risk. Risks can be priced properly and diversified, but they can't be eliminated.

The willingness of banks to take risks. said Mr. Greenspan, is essential to economic growth, particularly in view of the fact that most economic growth comes from new firms with high risk.

Factoring in Risk

Congress, in Mr. Greenspan's judgment, has never adequately wrestled with the question of just how much risk is optimal. The Federal Deposit Insurance Corporation Improvement Act's objective was to minimize future costs to the deposit insurance fund, not to insure that banks were positioned to meet the nation's economic needs.

"The optimal degree of bank failure," according to Mr. Greenspan, "is not zero, and, in all likelihood, not even close to zero. ... [W]hile risk taking should be restrained, we should not seek to minimize it."

Mr, Greenspan criticized FDICIA for placing excessive restrictions on the ability of banks to take normal risks and for attempting to micromanage banks through legislated, formulistic rules. These rules stifle innovation by both banks and their regulators.

Mr. Greenspan went on to make the case for the portions of the original Bush administration legislative package that Congress chose to disregard.

Shackles on Banking

He decried the banking industry's eroding share of the U.S. financial markets and suggested that Congress must address the "legal impediments to needed structural reform in banking," such as a Glass-Steagall Act and the restrictions on interstate banking.

It appears that banking's long political winter may finally be drawing to a close. Mr. Greenspan's words are as important to a politically besieged banking industry as robins are to spring.

A single speech by a regulator, even one as powerful as the chairman of the Fed, is not going to change the world. But the fact that Mr. Greenspan has finally decided to speak out so directly and forcefully signals a marked improvement in the political climate in Washington.

No sitting bank regulator has felt free during the past several years to criticize Congress. Everyone in Washington headed for the bunkers in the wake of the S&L industry debacle.

As pleasing to the ear as Mr. Greenspan's words may be, what the industry needs most from him and his colleagues at this time are strong actions.

Favoring Securities Industry

For example, banks have been pleading with the Fed to loosen the restraints the Fed has placed on so-called Section 20 subsidiaries of the bank holding companies.

The Section 20 subsidiaries are constrained in their competition with the securities industry by an arbitrary limit imposed by the Fed on how much of their income can be derived from "ineligible securities."

The Fed has the ability to ease substantially this limitation, which would enable banks to become more competitive with the giant Wall Street firms.

But the Fed has chosen not to do what needs to be done so as not to stir up the securities industry's friends on Capitol Hill, particularly Congressman Dingell. The result is that nothing gets done on the Hill because banking's foes have no incentive to deal.

It's time for the regulators to alter the political balance in Washington. It will be a lot easier for banking to defeat bad legislation sponsored by the securities industry or others than it will be to enact good legislation.

I believe Mr. Greenspan was sincere in the views he expressed in Chicago. But unless he backs those most encouraging words with some meaningful actions, not much is likely to change in Washington for banking anytime soon.

Mr. Isaac, a former chairman of the Federal Deposit Insurance Corp., is managing director and chief executive of the Secura Group, a Washington-based financial services consulting firm.

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