In a speech Tuesday to the Association of Banks in Insurance, Comptroller of the Currency Eugene A. Ludwig tried to dispel what he called the "five myths about the banking industry's interests with respect to pending legislation."
Banking-related bills before Congress include legislation to repeal the Glass-Steagall Act and ease the industry's regulatory burden. The House has combined these measures and attached a five-year moratorium on the comptroller's power to expand bank insurance powers.
Edited excerpts from Mr. Ludwig's speech follow:
Myth #1: How bad can a five-year moratorium be?
History is replete with short-term fixes that became long-term fixtures in federal law.
If you don't believe me, think back to the bad old days of Regulation Q and the interest rate differential between banks and thrifts. The Reg Q differential was supposed to be a "temporary" fix. It was made possible by a law that was supposed to last just one year. But over the next 16 years, Congress repeatedly renewed this statute.
It wasn't until 1980, after a crisis in interest rates occurred, that the differential finally began to be phased out.
It doesn't matter whether the issue is national banks or state banks, insurance powers or otherwise, any moratorium on bank powers is a move in the direction of financial calcification, not financial modernization. If the banking industry wants to remain a vital part of our financial system, it cannot afford to step backward. It also cannot afford to delay. In any age of sophisticated technology and intense competition, giving competitors a six-month head start - let alone five years - is disastrous.
Myth #2: A regulatory relief bill would make it worthwhile.
When it comes to regulatory relief, I won't take a back seat to anybody. We were the first agency to institute an ombudsman program, the first to institute a review of all our regulations, the first to streamline our examination procedures for small banks, and so on.
Some parts of the regulatory relief legislation now pending in both houses of Congress could lower your costs. But no amount of cost cutting can ever make the banking industry competitive if it cannot offer the products its customers demand. In the end, profits come from revenues.
The regulatory cost that bankers should worry about above all others is the price they'll pay if their competitors are allowed in, and they're left out. Whether you sell insurance or not, you should care about what kinds of insurance activities national banks can undertake.
Why? Because nobody can say today what you will need to do in the future to compete effectively in your market. Maybe you'll need to offer insurance. Maybe not. But the banker who closed the door on potential markets - or potential revenues - today may not survive to regret it tomorrow.
If the price of more regulatory relief is restrictions on national bank insurance activities, bankers should think long and hard before closing that deal.
Myth #3: Glass-Steagall reform will make it all worthwhile.
Practically everybody supports Glass-Steagall reform. But is HR 1062 the reform the banking industry needs? Under the Financial Services Competitiveness Act banks would be subject to strict limits in underwriting and dealing in any financial product designated as a "security." This broad designation would cover not only future bank products, but current bank products as well.
The bill also would permit the chartering of a new class of bank, the Wholesale Financial Institution, or Woofie. These institutions would have bank charters, would have access to the discount window, and would be able to call themselves banks. But they would not be supervised as banks are currently supervised, and most importantly, they could not affiliate with a bank.
HR 1620 would let banks enter new areas of securities activity through holding company affiliates. That's an aggravation, but apparently not a big one for the very biggest banks; many of them already have securities affiliates. They already deal with all the extra regulators and regulatory expenses that this kind of corporate structure entails.
Myth #4: It's only the national banking system.
I know there are some bankers and some policymakers who reason that the ability of national banks to continue their existing insurance and securities activities - and embark upon new activities - doesn't matter as long as similar authorities exist somewhere in the state banking system.
I can't hide my parochial interest in this question, but I will venture the observation that those who reason this way could find out too late that they've been living in a fool's paradise.
Even if you are a state bank, you should care about how these issues play out. If the insurance interests can beat the banks in Congress this year, do you think they won't carry their battle to the state legislatures next year?
State legislatures have no history of staunch resistance to the insurance industry's blandishments, and there are a thousand ways to enact "nondiscriminatory" laws that effectively take banks right out of the insurance business. Take a look at some current state laws on bank insurance activities. In Texas, for example, presuming a bank can even get a license to sell insurance, it can only do so if all its officers - and directors and stockholders - are also licensed agents.
Myth #5: We can always perfect it after it's enacted.
Laws have a way of sticking around without being materially changed. A lot of bankers have grown old and died waiting for Glass-Steagall reform. And for more than 60 years since that law was enacted, there has not be one significant amendment helpful to the banking industry.
Moreover, banking will have to meet the pressures of the market, and nobody in this room can say with confidence what those pressures will be. No banker should want to be locked into a legal straitjacket that guarantees a competitive advantage to other financial service providers. But that is precisely the prospect all bankers are facing in the Congress right now.