Glass-Steagall repeal, financial modernization, banking-commerce integration-whatever the latest legislative catch-phrase may be-got a good raking over last week at an annual meeting of political and academic minds in upstate New York.
On debating points, it ended in a draw.
By the time the Jerome Levy Economics Institute's two-day symposium on the Bard College campus was over, the unpredictability of Washington, plus a dose of old-fashioned moderation, proved a match for the forces seeking to further broaden banking charters and powers.
"In this session of Congress we are poised to move forward on financial modernization," said Rep. Jack Metcalf, R-Wash., buoying the reformers. But his next breath was deflating: "This does not necessarily guarantee a solid finish at a given time."
Rep. Metcalf contended that reform is necessary to improve U.S. financial institutions' global competitiveness. But leaning more toward the views of his House Banking Committee chairman, Rep. Jim Leach, than the more aggressive stances of Senate Banking Chairman Alfonse D'Amato or Comptroller of the Currency Eugene A. Ludwig, Rep. Metcalf expressed concern "that the financial industry can become dominated by the very large."
Caught between those poles but clear about his goals-Rep. Metcalf wants a "level playing field" as well as attention paid to "the needs of local communities"-he typified the tone of the Levy Institute's seventh annual financial system symposium.
"Caution is not a dirty word," said Federal Reserve Governor Laurence H. Meyer. "On balance ... we need far more research before we can come to any definitive conclusions" about allowing banking to mix with other forms of commerce.
Appropriate for the college setting, Mr. Meyer, a former professor with a Ph.D. in economics from Massachusetts Institute of Technology, looked back 300 years to the way the Bank of England established the tradition of banking-commerce separation. But the United States tinkered with that tradition.
The Fed now allows banks substantial interests in commercial enterprises through small business investment companies. It also has whacked away at the Glass-Steagall Act of 1933's "Chinese Wall" between commercial and investment banking. And thrift holding companies can be a part of any kind of enterprise.
"Why not go all the way?" Mr. Meyer asked. "Such arguments exaggerate the reality. Despite all the gray areas, I think it's fair to say that to a very substantial extent banking and commerce are essentially separate activities in the United States."
Mr. Meyer said he saw no factual basis in supposed banking-commerce synergies, expressed concern about concentration of economic power, and called it "pretty silly" to say that banks must broaden their scope to attract capital.
"Adding commercial firms before we have digested the financial side of the business could well be a bridge too far," Mr. Meyer said. "Prudent public policy requires that, for this reason alone, we get financial activities right before tackling further combinations of banking and commerce."
Philip F. Bartholomew, director of the bank research division at the Office of the Comptroller of the Currency, thought he detected an inconsistency in one of Mr. Meyer's points about whether securities and other nonbank activities should be housed in banks or holding company affiliates. The Fed prefers the latter, which causes sparks to fly between the agencies.
Peppering Mr. Meyer with questions, Mr. Bartholomew said, in mock bemusement, "I'm a little confused."
"Apparently," Mr. Meyer replied curtly.
In its heat, the exchange was exceeded only by one sparked when Mark Brickell, J.P. Morgan & Co. managing director and head of derivatives strategies, suggested that the cleanup of the Barings Bank crisis was an example of self-regulation and market discipline at their best.
Martin Mayer, author of "The Bankers" and its recent "Next Generation" sequel, then spent 10 minutes walking Mr. Brickell through all the gory details to prove otherwise.
Mr. Mayer, who clings to a belief that governments still do some good, screamed his soft-spoken co-panelist into submission, concluding: "If not for governments and regulators (like Mary Schapiro at the Commodity Futures Trading Commission), the failure of Barings would have collapsed the commodity markets!"
Professors Edward J. Kane and Bernard Shull did not let regulators get away without criticism.
Mr. Kane, of Boston College, raised concerns about regulators' accountability and said their view of the financial industry may be too "static" to keep up with rapid strategic and technological changes.
He likened regulators' role to that of referees at a basketball game: "Referees have to be in a position to make calls. Regulators today are not in position."
Mr. Shull, of Hunter College in New York, said competitive reviews of bank merger proposals are almost meaningless.
Of 204 mergers considered by the Fed from 1994 to 1996, he said, all but three were approved. The reviews, following antitrust principles, were supposed to prevent undue concentrations of market share and preserve competition, and rejections for competitive reasons are extremely rare.
"Few mergers are denied under present standards," Mr. Shull said, suggesting that the prior-approval approach "doesn't make any sense."
"You could get rid of it for most banks unless you use it as a tool to enforce the Community Reinvestment Act," he added. But he conceded an argument could be made for continuing to review mergers of very large institutions.
James D. Kamihachi, senior deputy comptroller of the currency, seemed every bit the modernist. He spoke at lunch Thursday on outsourcing, or more precisely, the "make or buy" decision.
"Taken in isolation, any make or buy decision can be viewed as a tactic," he said. "But if we consider all of the firm's make or buy decisions collectively, we can reveal its underlying business strategy."
Banks tend to make less and buy more-becoming less vertically integrated-in the face of technological and financial innovations. Which raises new questions for regulators.
"The risk profiles of commercial banks are bound to change in unpredictable ways," Mr. Kamihachi said. "Our challenge is to allow banks to make these efficiency-enhancing changes while making sure they do not make the banking system less safe and sound.
"This is not an easy task for agencies whose single-minded focus for many decades has been the evaluation of credit risk."
One of the more optimistic pro-reformers was Robert Glauber, a veteran of bank legislative battles when he was under secretary of the Treasury in the Bush administration.
The Harvard University lecturer said the 1994 interstate banking law, the Comptroller's moves on insurance liberalization, and the chinks in Glass-Steagall suggest "something is different this time."
Mixing banking with commerce "may be a disputed idea, but it is not revolutionary," Mr. Glauber said. "This issue goes beyond concentration of power-it is a matter of simple fairness."
Expressing confidence that logic and reason will prevail, putting an end to the regulatory turf battles and legislative "soap opera," he stopped short of endorsing the "universal bank model" of Germany and some other European countries that do not restrict bank-commercial interlocks.
Universal banking has "the attraction of coherence and simplicity," he said, but it "does not square with deposit insurance, the discount window, the safety net."
Auburn University professor James Barth, co-author of a study for the Comptroller's Office on commercial banking structures in other industrialized countries, said international comparisons can be useful to any discussion.
He concluded the U.S. has "one of the most restrictive systems." In most of the 19 countries studied, banks have wider investment latitude, and commercial firms can invest in banks. But those countries were not immune from banking crises.
One trap the U.S. will surely avoid is that of government- or state- owned banks. In most other countries "state-owned banks are the rule, not the exception," said George G. Kaufman of Loyola University, Chicago. The "moral hazard" and shoddy management of state-controlled banks have been at the root of many crises.
Treasury Under Secretary John D. Hawke Jr.'s luncheon speech Friday was eagerly anticipated for clues to the Clinton administration's direction on modernization. But he insisted his remarks be considered "off the record," not quotable by the media.
Approached afterward by reporters, Mr. Hawke declined to give any details of Treasury's much-awaited proposal and made a hasty exit, which only fueled the gossip.
Paul Schosberg, president of America's Community Bankers, said the proposal had reached 250 pages in length. He said it had lost momentum in the face of small-bank resistance and would need an all-out administration effort to succeed.
Erik E. Strom, the congressional staff member accompanying Rep. Metcalf, said he had heard Treasury's proposal was moving more in the direction of Rep. Leach and away from Sen. D'Amato.