The banking industry is redefining itself, because it must do so or be forced into extinction.

I can get a checking account and money fund from Fidelity Investments, an auto loan from Ford, a MasterCard from AT&T, brokerage services from Charles Schwab, an IRA from Northwestern Life, and access to cash from American Express. Not one of these companies is a bank.

If I were a corporate treasurer, I could select General Electric Credit for corporate finance, ADP for payroll services, Merrill Lynch for a commercial paper program, and Westinghouse Credit for leasing equipment.

The Decline of Deposit-Gathering

How has banking lost its franchise?

In February, investors poured $16.3 billion into stock and bond funds to obtain better yields.

The deposit-gathering function had been lost, first, when corporations went directly into the credit markets through issuance of commercial paper. What was left is now being lost as consumers flock to mutual funds and other investment vehicles.

To put it simply, the franchise was lost because of regulation, with its inherent costs and anticompetitive nature, that doesn't apply to nonbanks.

Congress has been bogged down for five years debating whether to permit interstate banking or appeal the Glass-Steagall Act. In the meantime, both have occurred.

Isn't J.P. Morgan a leading corporate underwriter? Can't I gain access to my Citibank account by using the Cirrus ATM network inn Indianapolis? Wachovia has an office in New York City and Chase Manhattan owns a bank in Arizona.

Perhaps interstate banking will bring the needed contraction or consolidation of 12,000 banks with various regulatory franchises. Market forces, not Congress, will determine who will survive. Market forces work when all players are free to compete.

Most experts agree that, at a minimum, banks should separate their insured-deposit-gathering and lending businesses from risk-taking activities in foreign exchange, underwriting, and mergers and acquisitions.

Tilt to the Playing Field

Without swift action on deregulation by Congress, banks will continue to be less competitive against other financial intermediaries and large banks will also continue to face competition from foreign-based "universal banks" with broad securities and insurance powers.

Congress seems to be the last to recognize that the banks must be set from the regulations that prevent them from competing in a market economy. Mr. Armenia is senior financial industry consultant in New York for Digital Equipment Corp.

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