On Monday, in a speech at a Merrill Lynch conference in New York, Comptroller of the Currency Eugene Ludwig gave a clear statement of support for bank insurance powers and the right to branch interstate.

He prefaced that statement with an overview of the state of the industry and its regulation, which is reprinted here.

We stand at a historic crossroads for the banking industry. On the one hand, as all of you know, the industry has been in a secular decline relative to other financial services sectors for most of this century. Banks' share of the nation's financial assets has been declining for decades.

This decline accelerated sharply in the 1980s. In 1980, commercial banks held 37% of all financial assets. Savings and loans, savings banks, and credit unions held an additional 21%, bringing the total for all deposit intermediaries to 58%.

By 1990, the commercial bank share had dropped to 32%, and the total for all deposit intermediaries had dropped to 48%. For bankers, this 10-point decline in the span of a single decade is deeply troubling.

From a public policy perspective, all of us ought to be concerned to the extent that the 10-point decline reflects inappropriate or inefficient regulation.

Genuine Recovery

On the other hand, the industry finds itself today in the midst of a powerful cyclical recovery. Contrary to opinion in some quarters, I do not believe this recovery merely reflects today's benign interest rate environment. True, depository institutions have benefited from the positive yield curve. But even if the curve were to flatten somewhat, the resulting compression in margins would not abort the recovery for most banks.

In addition to the benefits of the yield curve, five important structural forces are at work. These forces, in my view, will probably continue to support strong bank economic performance over the intermediate term even after the yield curve flattens a bit.

First, as you are well aware, for most institutions, credit quality continues to improve, and declining loan-loss provisions are likely to support further gains in economic performance.

Second, reserves and capital are stronger than at any point in recent decades.

Third, we have witnessed and continue to witness a trend toward consolidation and the withdrawal of weaker players from the market.

This consolidation -- in combination with the psychological scars produced by recent credit losses -- is, I think you will agree, likely to produce somewhat more rational pricing in the 1990s than we saw during much of the 1980s.

Balance Sheet Integrity

Fourth, regulatory policy has improved, and continues to improve, balance sheet integrity. I am among those who have criticized certain regulatory excesses. But as analysts and investors, you know that bank stock valuations have been penalized historically by uncertainties surrounding credit quality and reserve valuations.

On balance, I believe that regulatory shifts in recent years have improved the credibility and reliability of bank earnings statements. The valuations attached to bank earnings may well rise as recognition of that change sets in.

Finally, the current macroeconomic environment is favorable for banking. We find ourselves in a moderate growth, low-inflation, and low interest rate environment -- virtually an optimal environment for most financial institutions, as you well know.

Federal Banking Policy

This curious juxtaposition -- an expectation of continued long-term decline versus sharp short-term recovery -- makes the immediate course of federal banking policy particularly important for bankers and bank shareholders. Let us now turn to that subject, and address three particular areas of policy concern:

* Safety and soundness regulation.

* Regulation of products, services and geographic reach.

* And, briefly compliance regulation.

I will begin with safety and soundness.

Maintaining the safety and soundness of the banking system has been the central objective of bank regulation since bank regulation was invented. It will remain central during my tenure as comptroller.

In this regard, I want to comment briefly 6n the reason we have safety and soundness regulation. It has become commonplace to discuss safety and soundness regulation in the banking system as though its sole purpose were to protect the deposit insurance fund.

We have only to look at the role that weakness in the banking system played in bringing about the recent recession to realize that safety and soundness in the banking system remains integral not just to protecting the deposit insurance fund, but also to long-term economic stability and growth.

Deposit Insurance

Nevertheless, it remains true that while many financial providers face some minimal level of state or federal safety and soundness regulation, only banks face the additional layer of regulation created by the special needs of the deposit insurance system.

These substantial burdens may well put banks at a permanent competitive disadvantage vis-a-vis other financial services.

Nonetheless, because the deposit insurance system has become substantially stronger in recent years, I believe the extent of that disadvantage may diminish as the costs of deposit insurance-related safety and soundness regulation prove containable.

This happy development may not suffice to reverse the secular decline in banking, but its effects can only be positive.

Credit FDIC Improvement Act

Much of the credit for strengthening the deposit insurance system, in my opinion, goes to the much-maligned Federal Deposit Insurance Corporation Improvement Act of 1991, FDICIA.

Certainly, this statute is far from perfect. I have been working with my colleagues in the regulatory community and the administration to mitigate some of FDICIA's excesses and inconsistencies.

But at the risk of being stoned to death, I will venture to say that FDICIA's overall effects -- and especially the effects of its prompt corrective action requirements for aggressive regulatory intervention in troubled banks -- have been fundamentally positive for America's banking industry.

Developments other than FDICIA have also, to my mind, strengthened the deposit insurance fund. Foremost among these are the improving condition of the fund itself, and the recent enactment of depositor preference rules.

Taken together, these developments have set the stage for new regulatory directions that can only strengthen the banking industry. By reducing apprehension about the deposit insurance exposure to the tax-payers, they make possible renewed pursuit of new products and services for the banking industry, a subject about which I will have more to say in a moment.

Moreover, and more tangibly, they make possible, indeed likely, a substantial reduction in deposit insurance costs within the next few years, when the Bank Insurance Fund is replenished.

Safety and Soundness

Practically, what does this mean about how safety and soundness regulation will evolve under the Clinton administration? I think there have been several important implications thus far:

* Aggressive efforts to reduce the costs of regulation to the banking industry without compromising safety and soundness.

* Recognition that safety and soundness regulation is not an end in itself but a means to the ends of economic growth and competition that benefits consumers and the economy as a whole.

* Reorientation of safety and soundness regulation toward protection against systemic failures and away from excessive efforts to prevent failures of individual institutions. Recognizing that, to have competitive markets, we will have to accept the failure of some market participants.

* And encouragement of industry self-regulation as an aid to government regulation that can, in appropriate instances, reduce regulatory costs to the industry and produce more carefully-tailored responses to public policy problems that Congress or the regulatory agencies are able to provide.

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