In Focus: Banking Industry's Not-So-Secret WeaponIn War with Nonbanks

By the end of the millennium, one fundamental thing will let banks dominate securities firms and insurance companies.

Capital.

"Capital determines who survives in the long term," NationsBank Corp. vice chairman James H. Hance Jr. said last week.

Speaking to the Bank Administration Institute's annual compliance and auditing conference, Mr. Hance said the banking industry's reserves confer an advantage in investing in technology and acquiring competitors.

According to the Federal Deposit Insurance Corp., commercial banks had $375.3 billion in equity capital at the end of 1996. Separately, a banking organization studying the issue, which requested its name not be disclosed, compiled data on the capital strength of the eight largest competitors in several financial services fields.

The analysis showed the eight largest banks had $116 billion in capital, dwarfing the $30 billion of the top eight securities firms. The eight largest life insurers hold $27 billion, the top property-and-casualty insurers $86 billion. An official at the organization doing the study said the banking industry's advantage widens when the list is expanded beyond eight firms.

"This is a defining advantage for banks," Mr. Hance said.

Most of the walls separating the three industries will be gone in a few years, he predicted. Already, regulators have torn down most of the Glass- Steagall Act barriers to bank securities operations while the courts have freed banks to enter the insurance business.

Congress has permitted banks, like securities and insurance companies, to operate nationwide. Lawmakers are currently debating sweeping financial reform, which could permit banks to affiliate with nonfinancial companies.

"We stand to gain more in this last decade than in the past nine decades of this century," Mr. Hance said, adding that it will be capital strength that distinguishes the winners in head-to-head competition.

But banking's advantage, Mr. Hance said, could be jeopardized by a credit crisis. If underwriting standards are loosened too much, capital would be depleted.

"As we stand on the brink of a new century, we must remain in control," he said. "Another round of mistakes may not be recoverable. There are too many competitors waiting."

Protecting capital may not be easy. Banks often run into underwriting trouble when the economy is strong and competition for loans is fierce, Mr. Hance said. "It is in good times that we most often make mistakes."

The industry is especially vulnerable because the last recession occurred seven years ago, before many current employees started work in banking, he noted. "We have a generation of officers in our banks that have never been through a downturn," he said.

Another credit crisis also could permanently damage the public's trust in the banking system, he said.

"The one aspect of our industry that has been built this century that will be critical for the next century is our customers' trust," he said. "Our customers' trust can position us as the at-home financial services provider."

Consumers must be willing to share information about their investment strategies and finances if banks are to help them reach their goals, he said. But customers won't do that if banks mishandle sensitive data, he warned.

"The business of banking is the business of trust,"agreed Jorge A. Brathwaite, senior vice president and director of corporate compliance at Fleet Financial Group. "If you have a major blowup, then that will impact the public's trust. It will allow competitors to move in and erode our assets."

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