Comptroller of the Currency John D. Hawke Jr. criticized the controversial "know-your-customer" proposal Monday, telling a group of community bankers meeting here that it could destroy customers' trust in the industry.

"Do the community bankers of America really need new federal regulations telling you to know who your customers are-something you already know better than anyone else in the business?" Mr. Hawke asked.

Erupting into applause, the roughly 650 bankers shouted "No! No! No!"

In an interview after his speech, Mr. Hawke said requiring bankers to identify and track a customer's source of funds, as proposed, "could cause lasting damage to the relationship banks have with their customers."

"Customers view the bank's role as essentially passive-not as cops," he said.

Asked whether he thought any rule is needed, Mr. Hawke said: "Banks ought to figure out their own ways to know their customers."

Pressed for a more definitive answer, the comptroller noted that public comments are still being taken on the proposal and that a final decision could not be made until after the March 8 deadline.

Financial reform was the other big issue Mr. Hawke tackled in his first major speech since becoming comptroller Dec. 8.

"Depending on how it's structured, financial modernization could usher in a new era of prosperity-or one of prolonged marginalization-for community banks," he told the 19th annual National Conference for Community Bankers sponsored by the American Bankers Association.

Mr. Hawke said the lead bill, HR 10, would hamper banks trying to diversify income sources, particularly in selling fee-based products such as insurance.

Mr. Hawke has argued repeatedly that banks ought to be able to offer new services through direct subsidiaries; however, the legislation would force banks to use holding-company units.

"If the legislation mandates a rigid, one-size-fits-all format in order to take advantage of new opportunities, banks would be denied the flexibility they need-today more than ever-to compete successfully in the financial marketplace," he said.

Mr. Hawke devoted much of his speech to praising community banks.

"If community banks were once a source of vulnerability in our financial structure, that couldn't be less true today," he said. "You've turned your natural advantages into assets."

Taking a subtle swipe at the banking giants created by megamergers, Mr. Hawke said community banks respond to changing business conditions long before "the news has flashed on your competitors' computer screens maybe hundreds of miles away."

Mr. Hawke clearly wanted these bankers to know that the Comptroller's Office is in their corner.

"No cumbersome, impersonal banking bureaucracy can compare with what you can do when it comes to delivering the products and services your customers want, when they want it," he said.

Booming profits, he warned, should not lull community bankers into complacency.

"Some of the challenges you face are the offspring of your own success," he said.

"You can't take too much for granted. Your best customers can very easily become someone else's."

In particular, he noted nonbanks' aggressive pursuit of small-business customers.

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