Politics-not public policy-are shaping the debate over whether new products should be offered from subsidiaries of holding companies or directly by banks, according to Bevis Longstreth and Ivan E. Matteri.

"The vigorous debate among the federal banking agencies about the BHC bank model is, in reality, a debate over regulatory jurisdiction," the Debevoise & Plimpton law partners write in the Columbia Law Review.

The authors note that the operating-subsidiary structure favored by the Office of the Comptroller of the Currency would cause the Federal Reserve Board to lose its monopoly on holding company regulation, because banks would no longer need these parent companies. This would increase regulatory competition, which should benefit the industry, they write.

For a copy of "Organizational Freedom for Banks: The Case in Support," call 212-854-4398.

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The gradual transition to electronic money will result in higher inflation unless the Federal Reserve changes how it conducts monetary policy.

That is the conclusion of researchers Stacey L. Schreft of the Federal Reserve Bank of Kansas City and Bruce D. Smith of the University of Texas.

Electronic money will reduce the demand for cash, they write, so banks will be flush with dollars. That could spark inflation even if the Fed raised the overnight rate for loans, which is its primary tool for fighting inflation.

The researchers said the Fed would be more effective if it directly targeted the inflation rate. This would eliminate the risk that an unexpected drop in currency demand would result in an oversupply of cash, they say.

For a copy of "The Evolution of Cash Transactions: Some Implications for Monetary Policy," call 216-579-2918.

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Consolidation may not make it harder for banks to efficiently earn profits, according to Jeffrey A. Clark of Florida State University and Thomas F. Siems of the Federal Reserve Bank of Dallas.

The researchers examined the relationship between the size of a bank and its ability to efficiently earn profits. Past research found that efficiency slips as banks become bigger through consolidation, but Mr. Clark and Mr. Siems said these studies did not account for off-balance- sheet activities, such as derivatives trading.

When they add off-balance-sheet activities to their model, the researchers detect little difference in the ability of large and small banks to efficiently earn profits.

For a copy of "Competitive Viability in Banking: Looking Beyond the Balance Sheet," call 214-922-5428.

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Economic growth is possible only when financial markets are stable, according to Andrew Crocket, general manager of the Bank for International Settlements.

Without stability, a country experiences lower savings and investment rates. This reduces economic growth, he writes.

But Mr. Crocket warns against extensive government regulation to stave off all panics. That could result in moral hazard as investors take bigger gambles because they know the government will bail them out.

Instead, Mr. Crocket says, regulation should reinforce the market's self-policing efforts.

For a copy of "Why is Financial Stability a Goal of Public Policy," call 816-881-2683. Research Scan runs on the second and last Fridays of the month. Submissions should be sent to American Banker, 1325 G St. NW, suite 900, Washington, D.C. 20005.

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