Internationally, but especially in this country, financial institutions are shifting toward market (and regulatory) arbitrage, with assets moving to environments of less regulation, lower taxes, and lower costs.

We have known for some time of the Federal Reserve statistics showing that by 1991, 45% of commercial and industrial loans were held by foreign banks, up from 18% in 1983, and about half were booked offshore.

More stringent supervision under the Foreign Bank Supervision Enhancement Act will push more business offshore or drive foreign banks out of the lending business -- as we have seen the Federal Deposit Insurance Corporation Improvement Act drive smaller banks away from lending here,

The '91 bank law is immensely burdensome, especially for smaller banks, and increasingly fosters an environment where banks' lending choices are effectively made by the government, not the marketplace.

A companion piece of legislation, the Foreign Bank Supervision Enhancement Act, is overwhelming foreign banks with Political retribution caused essentially by the Fed's embarrassment over BCCI and Banca Nazionale del Lavoro.

Robert H. McCormick, deputy New York State superintendent of banks, in an address to the Institute of International Bankers, said he hoped to see some modifying amendments to FDICIA and the foreign bank act so that regulation with appropriate supervision will move toward moderation and away from the extreme overregulation now evident.

Public debate of regulatory convergence and harmonization of standards points to a climate where affordable, market-accountable regulatory function is key.

In the United States, where the cost of compliance has been estimated at 6% to 14% of total bank noninterest expense, we suggest that a double standard in bank supervision has resulted in smaller banks increasingly bearing the brunt of costly regulation stemming from the demonstrated failure of money-center banks to be prudent.

How Strong Are the Big Banks?

Smaller banks have tightened their lending standards, but have the giants really changed? Are the newer superregionals such as NationsBank really so much better than their predecessors, and will they avoid the mistakes of money-centers? Do recent stronger earnings mask a real weakness in the banking system?

The "too big to fail" doctrine, long a cornerstone of policy, continues to place these institutions in the realm of public utilities: nurtured, protected, forgiven, and surviving through the benevolent aspect of supervision known as lender of last resort.

The progression is clear, from Continental (1984) to BankAmerica (1986) to Bank of New England (1989) to Citibank (1991). Even the Chemical-Manufacturers Hanover merger might be viewed as an outcome of this agenda.

Many smaller and midsize banks have felt the full weight of the less benevolent aspect of supervision -- examination -- and many throughout the country have been forced to merge, or close.

Veil of Secrecy

Throughout these dislocations, regulatory secrecy persisted and thereby bred a legitimate concern about the basic health of the banking system. A bank's use of the Federal Reserve discount window is kept not only from the public but also from other regulators.

Perhaps before consolidating or streamlining bank regulation an interim stage should require disclosure of bank Camel and holding company ratings. The FDIC's assessment risk classifications, which are used to determine risk-based deposit insurance premiums, should also be published.

This move in the direction of allowing the public access to information about the condition of banks (and exposing banks more to market forces) will help reach a goal of equal treatment of all banks and promote public accountability by the regulatory agencies.

To quote Jeff Jordan, resident of the Cleveland Fed: "As long as the insurance provider is a public agency, it is unlikely that political considerations would permit a range of deposit insurance premiums wide enough to fully reflect differences in risk or that such premiums would be changed promptly when the condition of a bank changes." Improved disclosure, then, has broad consequences.

Behavior Modification

The expected consequences for an individual bank would motivate correct decision-making habits regarding pricing, and allocation of risk-based -- or any other -- capital, and avoid the herding of banks toward unhealthy credit concentrations and erosion of underwriting standards.

Availability of information and the discipline of public disclosure, such as is required under SEC supervision, would level the field without loss of safety.

Rep. Tom Petri's bill to create a private, cross-guaranteed clearing/reinsurance network to replace the FDIC, Rep. Henry Gonzalez's work to rationalize regulatory activities, and Rep. Stephen Neal's multifaceted agenda of deregulation all point to a new horizon.

How will it be possible to function confidently in a world where centralizing supervisory structures have been dismantled? Where the Fed, for instance, focuses on monetary policy and not banking regulation or running, payment systems? Where the public interest is protected and served through the action of markets upon reliable information whose standards and dissemination are designed primarily to avoid fraud?

One begins to think, How can banks regulate themselves or at least instill prudent behavior that complements accountable regulation?

They will achieve safety and soundness when they naturally avoid loans with high riskweighted capital -- when they accept the consequences of their decisions. Once we begin to demystify the regulatory process, we also must:

* Examine our dual banking system: Regulators are primarily interested in forbearance, not loss minimalization.

* Examine market value accounting proposals currently under debate. Mark-to-market offers a framework for both the public and bank managements to comprehend the state of a bank, its risk assets, and true capital value by assigning an expected net present value to all assets, not just traded securities.

* Examine the tax impact of mark-to-market onloan and investment portfolios and whether divergence in accounting and tax practices might stimulate more unwarranted gains trading.

* Examine the impact of risk-based capital rules on bank lending and whether the true motivation for zero government securities' allocation is to finance the deficits of governments; expand the Basel scope beyond a rigid snapshot to embrace how assets are managed, what future cash flows look like, and how risk-adjusted return on capital (RAROC) an invigorate pricing and capital allocation.

Let's restore genuine fiduciary purpose to banking regulation. What are the implications for safety and soundness, global trade, borrowing and investment flows (and liquidity) for a world in which the discipline of markets and the availability of information determine a bank's success or failure?

We live in an age of sufficient technology, and in markets where the "unbundling" of financial services makes informed buyers of us all.

Effective and accountable regulation can make informed risk takers of us as well, and expose any movement toward "nationalization of the banking system through the back door," as the phrase goes.

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