Finally, streamlining federal bank regulation is an idea whose time may have come.

The Clinton administration, elected on a platform of change, is proposing a major restructuring of the four federal agencies that regulate the nation's banks. Two similar bills have already been introduced in Congress.

Under the President's proposal the regulatory responsibilities of the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the Federal Reserve System, and the Federal Deposit Insurance Corp. would be combined in a single agency, the Federal Banking Commission.

Only the FDIC and the Federal Reserve would remain, but their responsibilities would be limited to deposit insurance and monetary policy, respectively.

Nonbank Competition

Bankers are well aware that their future success depends significantly on how well they adapt to rapidly developing nonbank competition within the regulatory restrictions imposed on banks.

The fact that Wells Fargo Bank recently contemplated switching from a bank to a thrift charter and that Continental Bank has applied to switch from a national to a state charter are good examples of the extent to which the current regulatory structure frustrates adaptation.

Less Need to |Charter Shop'

The expected benefits of such charter switches, including broader branching restrictions, more merger options, greater powers, and lower regulatory costs, are apparently enough to justify roundabout efforts to adapt.

With a single regulator, "charter shopping" would quickly become less necessary as long as the advantages of different charter types were distributed thrifts to endorse the consolidation proposals.

Smaller banks and thrifts, which significantly outnumber larger institutions, may err in any opposition to consolidation. Approximately 70% of all banks and thrifts, for example, have less than $100 million in assets.

In the absence of a rationalized regulatory system, smaller institutions will be at a disadvantage to larger institutions - like Wells and Continental - which have significantly more resources to devote to ferreting out relative advantages in the current regulatory maze.

Darwinian Struggle

At the moment, the inevitable consolidation of the bank and thrift industries is a slightly euphemistic term for larger institutions swallowing smaller ones. This pattern is influenced by branching restrictions and regulatory limitations on bank and thrift mergers.

A single regulator would add pressure to eliminate these restrictions and provide more opportunities for smaller banks and thrifts to expand, including growth through mergers.

Smaller banks and thrifts will need to expand or be absorbed by larger institutions in order to survive. The more sophisticated financial products that are increasingly being demanded by older individuals for their pensions and by younger persons using technology to gain access to financial products increasingly will be difficult for smaller institutions to provide.

Functional Equivalence

Most smaller banks and thrifts are, in essence, competing community banks offering the same deposit products and smaller community-based loans. The fact that the vast majority of federally insured depositories have become functionally equivalent, also argues for regulatory equivalence.

In the past, the principal economic reasons for the current multi-regulator system have been regulatory arbitrage and turf protection. Institutions with different charters could gain temporary competitive advantages by playing one regulator off another.

The Wells and Continental gambits are examples of this behavior. The regulators also protected traditional bank activities from nonbank competitors.

Now, however, whatever benefits can be extracted through regulatory arbitrage and protection are small and declining in the face of growing nonbank competitors.

As former officials at the Office of Thrift Supervision and the Federal Home Loan Bank Board at the height of the savings and loan crisis, we see additional benefits in consolidation for future crisis management.

Most banks and thrifts have used the phenomenal interest rate spread income of the past few years to build capital. Few analysts predict continued income at recent levels in the face of compressed spreads and intensifying nonbank competition.

Well-capitalized institutions with sound operating income should view bank regulatory consolidation as future protection against the deterioration of less well capitalized institutions.

When the thrifts and banks deteriorated in the 1980s, the underfunded deposit insurance agencies all too often used their regulatory powers to provide forbearance to deeply troubled institutions.

Encouraging Prudence

Current restructuring proposals separate insurance from regulatory functions, thereby curtailing the ability of the deposit insurer to engage in forbearance. The insurer would more likely act more prudently without the power to forbear through regulatory leniency.

Likewise, without specific responsibilities for deposit insurance and resolution of failed institutions, the new banking commission would be freer to focus on assisting well-capitalized institutions adapt to non bank competition. This could substantially help banks and thrifts retain and serve their customers.

An idea whose time has come can gain momentum very quickly. With that in mind, along with the many benefits that can flow from regulatory consolidation, bankers should join with Congress and the Clinton administration in designing a more appropriate new regulatory structure.

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