We all were led to believe that the driving force behind last year's "narrow" banking legislation was the need to recapitalize the Bank Insurance Fund.

But the Federal Deposit Insurance Corporation Improvement Act went far beyond BIF funding. The legislation, a 436-page product, substantially increased the regulatory burden on our industry.

I don't fault the regulatory agencies. This was an act of Congress, where, unfortunately, our industry has few friends to champion our interests.

Regulators are taking the act very seriously. More than 80 teams were assigned to implement the various sections, writing at least 60 new regulations unaffected by President Bush's regulatory moratorium.

The improvement bill began as an ambitious effort to reform the financial services industry. It has ended up as retrenchment, not modernization.

Perhaps our elected officials are really saying that government should save us from ourselves by radically reducing management prerogatives.

For example, one critical provision of the bill requires regulators to set unspecified standards in credit management - areas that until now have not been subject to regulation. Today, bankers are allowed a range of flexibility in interpreting what is safe and sound, subject to regulatory inspection.

The new regulations could potentially eliminate flexibility. Most likely, they will be lengthy, complex, and absolute in their application. These areas are covered broadly in Section 132 of the FDIC improvement act:

* Internal controls.

* Information systems.

* Internal audit systems.

* Loan documentation.

* Credit underwriting.

* Interest rate exposure.

* Asset growth.

* Compensation, fees, and benefits.

* A maximum ratio of classified assets to capital.

* Minimum eanrings to absorb losses without impairing capital.

* And, to the extent feasible, a minimum ratio of market value to book value for publicly traded shares of bank holding companies.

Pass-or-Fail Scenarios

This list certainly doesn't give well-managed banks more freedom to complete. It runs counter to presidential directive and even counter to the intent of the new law itself. The improvement act calls for a "review of all laws under jurisdiction of the federal agencies or secretary of the Treasury affecting banks, to determine which impose unnecessary burdens on depository institutions."

As a consequence, we must expect circulars, guidelines, and supervisor flexibility to become regulation with pass-or-fail testing requirements.

The good news is that, in most critical areas, the final products are still being written. Banking institutions should be proactive with elected representatives, their primary regulator, and the FDIC on the subjects of greatest concern.

Banks large and small must respond comprehensively to all circulars that will be distributed for comment.

The only real division should be between the well-managed and the reckless. Reckless management should be eliminated by regulatory action. But successful institutions should not be micro-managed.

Route to Top Performance

We must persuade Congress and the regulatory world to keep the new rules in the range of macro-standards that reinforce sound practices and still allow management to achieve success.

Can exemplary performance be regulated or legislated? Isn't exemplary performance a function of management? If we must have such standards, they should be appropriate for the institution, not just generic rules.

Our job is to have adequate policies and procedures in place that fit our institutions, our markets, and our capabilities - not cookie-cutter rules that move us all toward the norm.

Underlying these policies and procedures must be a dedication to the fundamental principles and concepts that we all should have learned as bank trainees.

Mr. Greene is president of Robert Morris Associates, the association of bank loan and credit officers, and executive vice president and chief credit officer of First Interstate Bancorp, Los Angeles.

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