After three decades as a bank regulator in several locations, including duty in Washington at the height of the crisis years, it is easy to think one has seen it all. Well, that is certainly not the case. My transition to the private sector has revealed other points of view on a number of issues.

There are two topics that connect observations from my regulator days and my limited time in the private sector.

First, a divisive, subtle debate rages about the future of large and small banks in our country. The reality is simple - a sound, well-managed community bank whips the big bank every time. It is management excellence that distinguishes the best banks from the rest - not size.

Megamerger mania has prompted many community bankers to view their options as limited to being a buyer or a seller. This is very short- sighted. What is wrong with a bank simply doing a superior job serving its local market? Shareholder value is enhanced when this is the objective. If the bank is ultimately sold, the market will be served by the remaining competitors or a new entry will appear. That is the nature of competition.

Full implementation of interstate banking in 1997 begs a very serious question. Is this the time to restructure the banking business for the future? The answer is yes.

One approach is to divide banking into two separate businesses. The division consists of one segment for banks and financial services firms doing business in multiple states, and a second for banks operating locally. It is not necessary to limit local banks to a single state. The key is the size of the market served and the complexity of the operation.

These two types of business are, after all, very different. Developing a separate set of rules for each differentiates the more complex operations from the rest.

Many onlookers believe we are on a course to segment the business. What will it take to bring about this change? Regulators largely avoid the structure issue for reasons of self-interest. Congress struggles with it since there is no consensus. The industry is confounded and generally adopts the notion that "the devil you know is better than the devil you don't know." The result is no one is willing to champion change. We just wait for the next crisis and react.

The implications of segmenting the industry are significant. These include:

*Alleviation of the struggle over products and services. Different authorities and rules for different types of institutions would eliminate the classic response - "I don't want the powers but you can't have them either."

*Rationalization of the deposit insurance system. The $100,000 level could be scaled back for larger institutions to eliminate the "moral hazard" issue that has haunted the industry for a decade.

*Realignment of the current federal regulatory scheme. With expense reduction a focus in all banks, few realize the dollar and time burden of the current overlap of responsibility. Regulatory restructuring also resolves the current assessment disparity.

A reduction in administrative burden would be achieved with rule clarification and fewer regulators. For bankers, less regulatory burden means less complexity - a differentiated system can achieve this distinction. State regulators could have sole supervisory jurisdiction of community banks. Deposit insurance oversight could be handled more efficiently.

Due to technology, the delivery systems for tomorrow's services will be vastly different. Able and efficient supervisors are necessary to match these advances. A single federal authority for examination and supervision of this complex group of banks is more apt to get it right than would authorities under the current arrangement.

Risk management is the second area I'd like to address. A new regulator initiative captioned "supervision by risk" has been announced by the Federal Reserve and the Office of the Comptroller. The goal is to encourage a coherent risk management system in each bank that spans all of the risks associated with each of the bank's business activities.

Examiners will assign a formal rating to the adequacy of an institution's risk management process. In the early going, the Office of the Comptroller of the Currency will focus on banks with assets of more than $1 billion and the Fed will apply its examination efforts to state member banks and all holding companies.

Bankers appear to be in a wait-and-see mode on formalizing risk management processes. There are two reasons to move more expeditiously. First, the regulators will be attaching a rating to this function. It is better to deal with a rating from a position of strength. Movement in the right direction is certain to be taken into consideration in any rating effort.

Secondly, banks must be prepared to explain their risk management process to external audiences. Analysts and other interested parties are sure to be watching this evolution closely, and will soon be asking questions.

The supervisory assessment of risk focuses on evaluating the threat of an institution's risk exposure to short-term earnings and long-run stability. To evaluate the potential impact of risk exposures on the institution, supervisors generally consider two basic factors: the quantity or level of risk exposures, and the quality of risk management to control them.

It is the combination of these two factors that determines the true threat of exposure to the institution. Regulators recognize that there can be no single approach to risk management that works for all companies.

Their position is that each company should develop a risk management process that fits its particular needs and circumstances. The challenge for institutions is to make sure they are ready for supervision by risk assessment.

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