Comptroller of the Currency Eugene A. Ludwig, in a speech to bankers Monday, defended his agency's moves to modernize the national charter.

Mr. Ludwig also criticized lawmakers for failing to keep pace with the marketplace, where new products and services continue to be developed despite outdated laws.

"What we need from our legislatures is much more than an exercise in allocating turf among competing interests or industries," Mr. Ludwig said. "What's going on in the marketplace is the real financial modernization."

At a New York State Bankers Association conference, Mr. Ludwig asked where the industry would be if the Comptroller's Office had not provided new avenues for meeting customers' needs.

"Given this sea change in where Americans prefer to put their savings, can you imagine how banking would have been affected had we not allowed banks to engage in mutual fund activities?" Mr. Ludwig asked.

"Our actions were not universally popular at the time, but how on earth can we expect banks to continue to be safe and sound and compete in what is clearly the most popular vehicle for consumer savings."

In his speech, Mr. Ludwig said that since 1990, mutual funds sold by banks more than doubled to 14% of the $3 trillion in total mutual fund assets.

"The truth is that banks had little choice but to become involved in the mutual fund industry if they wanted to continue serving the financial needs of their customers," he said. "It seems almost certain that by the end of this year, mutual fund assets will exceed the amount of assets in all deposit products, such as bank deposits, thrift deposits, and brokered deposits."

In the first quarter, Mr. Ludwig said banks sold $227 billion in mutual funds and annuities, an 88% increase over the last two years.

This shift to fee-based products has changed the composition of bank earnings, he noted. Mr. Ludwig said non-interest income has increased 10% since 1985, and today constitutes 35% of bank operating revenues. Off- balance-sheet activities, especially derivatives, also are boosting non- interest income, which nearly tripled to $17.2 billion last year from 1990, the comptroller said.

This increasing reliance on fee-based products has, at least partially, decoupled a bank's bottom line from the yield curve, Mr. Ludwig observed.

That bank earnings continue to be strong even though the yield curve has flattened has led bank regulators to wonder how a weaker economy could affect the industry.

"The fundamental changes in the banking industry mean that future downturns could generate unforeseen results," Mr. Ludwig said.

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