WASHINGTON - Susan F. Krause wouldn't mind changing a few things about the way banks are regulated.

"If I were king, and someone said supervise the banking industry, I would allow far more freedom for financial services providers to operate according to market forces," the senior deputy comptroller for bank supervision policy said in a recent interview.

"Product and service constraints would be the first things to go out my window."

While the 15-year-veteran of the Office of the Comptroller of the Currency may be frustrated by restrictions on bank operations, Ms. Krause, a chief architect of the ongoing evolution of national bank supervision, is trying to build a better bank exam.

"Ultimately, I have a vision that we might organize our examination procedures less along product lines and more along risk lines," she said.

National bank supervision has come a long way since the 1970s, when OCC examiners would count every dollar in an institution's cash drawers. The focus has slowly shifted toward an evaluation of a bank's management policies and processes. By the early 1990s, the agency began formally identifying risks and how well banks control them.

Ms. Krause, the OCC's risk management guru, said reaching her supervisory policy goals will take time - OCC examiners still rely heavily on a hefty handbook that steers the exam process to the different products and activities of national banks.

But the agency recently took an important step toward the future when Comptroller Eugene A. Ludwig unveiled his "supervision by risk" program, which Ms. Krause, 44, spearheaded.

Under the program, OCC examiners will separate risk into nine categories, ranging from credit and interest rate risk to compliance and reputation risk.

It is an attempt to create a common "taxonomy," as Ms. Krause calls it - a language that both examiners and bankers can understand and agree on. And it is a crucial foundation on which the agency will continue to build a better exam process, she said.

"In our supervision, we want to emphasize that good risk management is the bank's responsibility, and if we do that, we have to define the risks that we're are talking about," Ms. Krause explained.

The risk groupings will first surface in the new examiner handbook for banks with more than $1 billion in assets, which the OCC expects to release within the next six weeks. Examiners will rate the bank as a high, medium, or low risk in each category, and will analyze how well each risk is managed.

The supervision-by-risk program will eventually apply to smaller banks, Ms. Krause said, "but in a way that is simpler and appropriate for their less complex profiles - we don't want to lay a whole apparatus on banks for which it is not necessary."

Ms. Krause made her name in bank supervision in the 1980s when risk- based capital was created. That work continues today as the agencies struggle to incorporate interest rate risk into the capital calculation.

Regulators are considering a plan to gather information from banks to determine, starting in March 1997, whether an institution should be required to hold additional capital to compensate for potential exposure to changes in interest rates.

Since, under the proposal, many banks will have to start submitting interest rate information with their March 1996 call reports, Ms. Krause said she expects the new reporting requirements to be announced by November or December.

However, with market risk looming on the horizon as the next capital add-on - primarily for large, internationally active banks - Ms. Krause said she's concerned that the increasing complexity of risk-based capital may become burdensome for banks.

"It's the classic supervisory tradeoff," she said. "The major concern now is that it is quite complicated and poses quite a burden to comply."

She added that risk-based capital levels are "not the most important issue when an examiner assesses the risks at an institution."

"Capital is a consideration that comes after looking at the risks - you have to make sure the two balance," Ms. Krause said.

Nevertheless, while Ms. Krause said she worries about the myriad restrictions banks must work under, she is likely to err on the side of caution.

"She's the consummate regulator," said Richard Whiting, general counsel for the Bankers Roundtable. "She has a very precise way of thinking and approaching things, and she always tends to view things in terms of safety and soundness."

Indeed, Ms. Krause is known as one of the more precise and analytical minds at the bank and thrift agencies.

"This woman remembers the details," said Diane Casey, national director of regulatory issues for Grant Thornton, an accounting and consulting firm. "I consider myself a detail person, and Susan blows me away."

Undoubtedly, much of Ms. Krause's meticulousness stems from her education. She received a bachelor's degree in mathematics from the University of California at Los Angeles, and a doctorate in economics from the University of Southern California.

"It's unusual to have a PhD economist in charge of supervisory policy, but I think that an important perspective she brings is her recognition of the limits of what can be accomplished by regulation," said Jonathan L. Fiechter, acting director of the Office of Thrift Supervision.

"She's far more prone to look to market forces" than other regulators, added Mr. Fiecther, who was Ms. Krause's boss when he worked at the Comptroller's office.

While she admits that an educational background like hers often leads to a career in the world of academia, Ms. Krause said she has long been drawn toward policymaking. This naturally led her to the nation's capital, where she was born.

She said she joined the OCC in 1980 as a financial economist almost on a whim.

"I thought I may stay here a few years and then move on," she said. However, once she was exposed to a controversial banking policy issue, she was hooked.

Back in the early 1980s, Congress pulled together a committee of bank regulators to figure out how best to remove interest rate ceilings. At the time, Regulation Q forced banks to keep interest rates on savings accounts capped at 5.25%, while thrifts could offer 5.5%.

Most of the committee's work was done at the staff level, and although she had been with the OCC for less than two years, Ms. Krause found herself making presentations to bigwigs like the Treasury secretary, the Comptroller, and the chairman of the Federal Deposit Insurance Corp.

"It was exciting for me," Ms. Krause recalled. "It was a very high- profile issue, and it was very fast-paced work.

"While it was an economic issue, there was a definite public policy challenge - to do it in a way that met the various concerns of the banks, the thrifts, and the public," she asserted.

Ms. Krause said she misses those days of working in the bank-policy trenches. Since she was named senior deputy comptroller in 1990, her job has focused a lot more on approving, reviewing, and "pushing paper," she said.

"I miss the challenge of sitting down and getting very involved in a single issue - I don't do that very much anymore," she said a little wistfully.

Ms. Krause added that reaching her latest post has been a tradeoff. Being one of six members on the OCC's executive committee - the agency's policymaking body - Ms. Krause said she can "make a lot more things happen."

Yet, even in her influential position, she said she gets frustrated working within the cumbersome regulatory and legislative framework facing the industry.

"The things I feel good about ... are so minor in the scheme of things," Ms. Krause said.

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