From Comptroller of the Currency Eugene A. Ludwig's vantage point, new products and services are helping commercial banks make up ground lost to competitors.

"Banks are only really just catching up," Mr. Ludwig said in an interview. "What really gets under my skin is the notion that letting banks become more competitive is a win/lose proposition."

Take mutual funds. Banks' share of this market has held steady at less than 20% for the past five years. "Banks haven't eaten up this market," Mr. Ludwig said. Instead, bank sales of mutual funds have helped the product become more widely available, he said.

"That's a win-win for everyone-more competition, more availability, and nobody has been competed unfairly out of business.

"In these turf battles, people lose sight of the consumer," Mr. Ludwig added. "Competition does not necessarily mean that industries that are traditionally involved in these areas are going to disappear."

Entering the final 12 months of his five-year term, Mr. Ludwig wants to improve national banks' ability to compete while ensuring the industry is prepared for an economic downturn.

"I am passionate about giving banks a fair chance to compete," Mr. Ludwig said. "To keep the industry healthy, you have to allow competitive opportunities. In fact, I believe that competition in the banking industry is the absolute essence of safety and soundness."

While national banks are barred from offering many services that are natural extensions of their business, many securities firms offer checking accounts, he noted.

"The competition already exists from the other end," Mr. Ludwig argued. "The notion that they somehow have not been able to get into the insured depository business is not borne out by the facts."

The policy behind this philosophy is the agency's controversial "operating-subsidiary" rule, which gives national banks an avenue for requesting new powers.

In the works for two years, the rule took effect Dec. 31. NationsBank was the first to try and take advantage of the rule, asking for permission to develop real estate and enter the lease financing business. Zions First National Bank wants to underwrite municipal revenue bonds.

The op-sub rule has been a magnet for criticism from lawmakers. Senate Banking Committee Chairman Alfonse M. D'Amato, R-N.Y., last month accused the comptroller of "overreaching" his authority and threatened to introduce legislation nullifying the rule.

Sen. Lauch Faircloth, R-N.C., plans to hold a hearing May 1 to examine the agency's recent actions. Mr. Ludwig will be the lone witness.

But Mr. Ludwig, his authority validated by four 9-0 Supreme Court decisions, is looking forward to the hearing as an opportunity to "lay the facts on the table." The op-sub rule, he said, is often misconstrued as carte blanche for national banks to enter new businesses.

"The rule itself is just a process of applying for new powers," he said. "On top of that, we have hard-wired firewalls of considerable proportion into the op-sub rule."

While Mr. Ludwig has not settled on a firm position regarding legislation that would let commercial firms affiliate with banks, he warned that Congress should proceed with caution.

"A complete, no-holds-barred mixing of commerce and banking doesn't do it for me," Mr. Ludwig said. However, he said banning technology firms from coupling with banks would harm the industry.

"It would be tremendously damaging to keep banks out of the evolution of the information technology business ... which marries naturally with the banking business," he said. "There are clearly areas, whether you call them commerce or not, where there will have to be considerable flexibility."

Credited with repositioning the banking industry, Mr. Ludwig is a hero to bankers today. That's quite a turnaround from early in his term when many bankers were suspicious of Mr. Ludwig's campaign to rewrite Community Reinvestment Act rules.

"Gene Ludwig recognizes that national banks operate in an antiquated financial system, and that unless something gets done to improve that, the economy as a whole will pay a price," said Kenneth W. McAllister, executive vice president and general counsel of Wachovia Corp., Winston-Salem, N.C. "I would not have thought that about him when he came in."

Beyond broadening bank powers, Mr. Ludwig is watching the economy.

"While things are looking good now, I don't believe we've reinvented the business cycle," he said. "In good times there's a tendency to take steps that can lead to problems when the economy turns down."

Specifically, the comptroller said he worries that banks will scrimp on internal controls to reduce costs.

"There is always a tendency to try to save money by cutting your internal controls, and we can't let that happen," Mr. Ludwig said. "If you look at the number of problems we've had with institutions in the past, they've been failures of internal controls."

During his last year in office, Mr. Ludwig said, the agency will be working on several initiatives to ensure this warning is heeded.

Within the next two months, the Comptroller's Office will outline for examiners how national banks' internal controls should function. For example, the instructions will note that a bank's internal auditors must operate independently and have the authority to challenge any business transaction.

Examiners also will scrutinize whether an institution's cost-cutting initiatives erode its ability to manage risk, Mr. Ludwig said.

"We're going to emphasize in writing that we view internal control mechanisms as one of the paramount safety and soundness areas for a financial institution," he said.

The agency also has established a working group to recommend other ways examiners can prepare for an economic slowdown.

The panel, headed by Leann G. Britton, senior deputy comptroller for bank supervision operations, consists of examiners with experience supervising troubled banks, lawyers specializing in enforcement actions, and economists.

"This team is thinking about how we'll supervise in a down market," Mr. Ludwig said. "We want to be proactive as opposed to reactive, because it doesn't do any good to go into a bank, spend a huge amount of resources, and then say, 'Yep, you're dead.' "

The last few months have been tough ones for the comptroller.

Questions about his objectivity forced Mr. Ludwig to recuse himself from the NationsBank applications. Hugh McColl, the bank's chairman, was one of 17 bankers who attended a White House coffee last May. Mr. Ludwig said he would not have attended had he known the coffee was organized by Democratic party fund-raisers, a fact that did not surface until early this year.

The coffee controversy has dogged Mr. Ludwig, who said he was "shocked" the story got so much attention.

"If you had given me a list of things that would have been newsworthy, and you had asked me the day before the first story ran, I wouldn't have listed this in the top 50."

But he's taking it in stride.

"Unfortunately, that comes with the territory," he said. "You can't be thin-skinned."

While he would not rule out a second term, it seems that five years will be enough for Mr. Ludwig.

"The reason they have terms is it is a period of time in which you can really get to know the organization in-depth and make changes, while at the same time you don't get stale," he said. "I've always thought that made a lot of sense.

"But then again you never say never."

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