WASHINGTON - To hear former Comptroller of the Currency Eugene A. Ludwig tell it, the U.S. financial services regulatory structure is a multiheaded monster gradually sucking the life out of the institutions it is supposed to keep safe.

"This system is a product of history, not logic," he said in a recent interview.

Over the years, instead of adapting the supervisory setup to a changing marketplace, U.S. lawmakers simply added a new regulator for every new financial product. The result is a system so unwieldy, Mr. Ludwig said, that it actually reduces the safety and soundness of the financial markets.

His favorite example: A U.S. financial holding company offering a broad range of products must satisfy at least 14 regulatory agencies - from state consumer protection organizations to the Federal Reserve - eating up financial and managerial resources that could be better used elsewhere.

Mr. Ludwig has been on all sides of this issue. Before his six years as comptroller, he was a banking lawyer who helped clients clear regulatory hurdles. Upon resigning from the OCC in 1998, he became a vice chairman at Bankers Trust Corp., and after it merged with Deutsche Bank he decided to launch a Washington venture capital firm, Promontory Financial Group.

His time in the private sector has not purged him of regulatory impulses, however. In an interview with American Banker and in a speech before the Conference of State Bank Supervisors, Mr. Ludwig revealed that he has been giving a lot of thought to streamlining financial services regulation.

U.S. financial institutions face serious safety-and-soundness issues as they compete with firms from less-regulated countries in an increasingly global environment, he said.

"If you have a set of entities that are overregulated in a marketplace that is not, you have competitive inequality, and capital will tend to flow toward the unregulated entity. This makes the regulated entity less effective, less competitive, and less safe," he said.

When it comes to the financial markets, he said, "The U.S. is not the anointed No. 1 forever if we make poor decisions."

His solution: Get rid of the regulators.

Not all of them, though. He advocates cutting those 14 agencies down to a single supervisor that regulates all financial activities - from banks to insurance to the securities markets.

His proposal would maintain the current dual banking system by creating a federal comprehensive supervisor and an equivalent in each state, and allowing financial institutions to choose between them when applying for a charter.

"The advantage is simplicity for the supervisee," he said. "For the supervisor, it is the ability to see risk comprehensively over the whole entity, and to make sure that things don't slip between the cracks."

A single supervisor would also coordinate its internal efforts better, he said. Because it removes interagency rivalry, there will be "much more of a tendency toward collegiality."

And the talent pool will be less diluted. Currently, the various regulatory agencies all have to hire people with expertise in specific areas, such as risk management and compliance. "That means that they will have less talented staff, on average," he said, than a consolidated supervisor that could pick and choose among the most talented candidates.

In Mr. Ludwig's vision, the Federal Reserve Board would retain responsibility for implementing monetary policy, but would not be involved in direct regulation of individual financial institutions. The role of the FDIC would also be trimmed, leaving it an autonomous insurance underwriter with no direct oversight responsibilities.

In the beginning, he admitted, elements of the old system would remain. Financial institutions facing the 14 regulatory agencies would see a comprehensive regulator, but one with multiple divisions, each specializing in particular financial activities.

"But over time these units will meld into different focuses," he said. "For example, I think you would find pretty quickly a unit that is involved in risk management, risk modeling, and capital allocation. By its nature, that would look over all the product areas."

As it is, the lines are blurry. "Look at an annuity: Is it an insurance product? Is it a banking product? Is it a securities product? What about deposit products with interest rates tied to the stock indices? Is that really a securities product or is it a banking product?" he asked.

"We are in a new era, where products themselves are evolving. Hybrid products and new products don't fit the old baskets." So a regulatory structure modeled after old product designation categories is problematic, he said.

Implementing the changes he advocates will be difficult, if not impossible, absent a financial crisis that forces regulators and legislators to consider restructuring the system. But if U.S. financial institutions are to compete in a 21st century marketplace, he says, sooner or later change must come.

"As we look at a regulatory environment for the future, regulators have to think of themselves as adding value with a minimum amount of excess regulation and a maximum of effectiveness," he said. "Unfortunately, the regulatory architecture we have gets in the way."

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