Is the thrift industry, with the separate charter that we know today, a dinosaur?

The obvious answer is "yes." But this does not mean that all of today's thrift institutions must disappear.

What is certain is that the industry, as defined by its specialized charter, is obsolete and must change radically.

The industry was created to finance homebuying. A quarter-percent differential in deposit interest rates, guaranteed over years of protective regulation, gave thrifts an advantage in attracting the liabilities it needed to fund long-term mortgage loans.

Since thrifts' inception, many fundamental, structural changes have eroded their monopolistic position in home financing.

Sweeping Changes

The asset side of the balance sheet has been essentially deregulated by market forces.

New mortgage lending instrument were created -- instruments that offered variable rates and therefore gave other lenders more flexibility in asset/liability management.

In addition, the development of a deep and liquid secondary market for mortgages offered an attractive solution to any financial institution that was prepared to make mortgage loans but not to hold them.

A similar commoditization took place on the liability side of the business.

The once advantageous interest rate differential was phased out in the face of a de facto deregulation that followed the emergence of money-market mutual funds.

The deposit market became national and extremely yield-sensitive. The constant inflow of longer-term liabilities with predictable rates was seriously eroded.

In effect, both sides of the thrift balance sheet became fair game for any financial services competitor. Thrifts lost their discrete franchise.

Recognizing the Realities

Still, hundreds and hundreds of today's thrifts can and will survive and prosper.

The marginal institutions have already been eliminated by financial pressured and regulatory action.

More than 1,500 strong, profitable, financially viable institutions that operate under thrift charters have an excellent chance for survival -- if they recognize that change is an essential part of the business.

They must realize that they are in the financial-service industry, not the thrift industry.

Those that continue to view the thrift business as a standalone segment are doomed.

Though there is room for residential real estate lenders, and hundreds of thrifts could remain profitable in that role, most will be unable to survive the competitive pressures on both sides of the balance sheet without finding new direction and identity.

A Wealth of Opportunities

Their strategic options are many. Most thrifts have solid customer relationships and strong franchise values that can be leveraged. Business such as community banking, consumer lending, or mortgage banking all seem viable strategic focuses.

A thrift that that has a strong franchise value in its market and a loyal, local customer base is already, in a sense, a community bank. Expansion of the product line to full-service banking and a continued emphasis on high service levels would complete the transformation.

Similarly, mortgage origination strengths can be parlayed into a mortgage banking enterprise.

Profitable originators already have a competitive advantage through their distribution networks. Mortgage banking -- the origination, securitization, and servicing of mortgages -- capitalizes upon the built-in cost of the branch network and builds a fee-income business around it.

Above and beyond mortgage lending, consumer lending is a sought-after business these days.

Consumer loans offer wide margins and can be highly profitable. As a result, competition for that business has intensified, even though consumers are now reluctant to barrow.

Expansion into consumer lending may be tough in this climate, and bears some risks.

But if done right, this business offers a potential to solidify customer relationships and generate profits through a multiplicity of services.

Although the historical thrift charter is no longer meaningful, a strong business focus and a clear strategic direction can lead to the prosperity that every thrift executive is seeking.

Sticking to one's knitting is a good choice only when the market for the knitting is still viable.

For some thrifts, going back to their roots is a path to oblivion. For others, those roots can nourish a successful and more diversified future.

Ms. Bird is national director of financial institutions consulting at BDO Seidman, New York. Her book "Can S&Ls Survive: The Emerging Recovery, Restructuring, and Repositioning of America's S&Ls" is to be published this year by Probus.

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