Comptroller of the Currency Eugene A. Ludwig said efforts to update the banking laws must move beyond Glass-Steagall reform. In a speech Jan. 24 before the Exchequer Club, Mr. Ludwig talked about the challenges posed by technology, geography, and consolidation. Excerpts follow:

Let's suppose for a moment that Glass-Steagall reform passes tomorrow. Would we then breathe a collective sigh of relief knowing that our financial system is now prepared to carry America's economy forward into the next millennium?

We must stop fooling ourselves. Yes, properly executed, Glass-Steagall reform is good public policy, but to say it would modernize the financial system is like saying plowing one lane on Massachusetts Avenue completed Washington's snow removal effort.

My point is Glass-Steagall reform falls considerably short of real financial modernization. By focusing so much attention on Glass-Steagall reform, we are failing to deal with other, more central issues.

Our ability to bring banking and financial services into the 21st century will determine how fast and effectively we realize technology's vast, still untapped, potential to fuel economic growth and opportunity for American businesses and consumers.

Experts believe electronic commerce - $245 billion today - will account for nearly $3 trillion by 2005. And the Internet is only the tip of the iceberg. Totally electronic market trading, e-money, a paperless payments system, and vastly more sophisticated risk pricing and risk control models are all on the horizon.

What will it take to reap the benefits of what Bill Gates calls "friction-free capitalism," where even the most humble of businesses have the opportunity to reach a worldwide market through electronic commerce?

A key part of the answer lies in what consumers of all eras have always demanded - confidence in a payment system that offers security and guarantees privacy. America's banks, guardians of consumer confidence in their economic system for decades, should have a pivotal, leading role in realizing the potential electronic commerce holds.

But it's ironic that banks, which can give consumers and merchants the confidence to realize technology's potential, expand markets, and provide businesses new opportunities, have been on the receiving end of technology's growing influence.

Technology has blurred the distinctions between the products and producers of financial services and unleashed intense globalized competition between banks, nonbanks, and international financial institutions.

Consider stored value cards. Right now a number of firms are racing to bring more sophisticated stored value cards to market - cards that could be used to purchase goods or services in both physical and virtual locations. Some of these products would be issued by nonbanks.

Think about that for a moment. Suppose for $100 you buy a stored value card from a nonbank, usable to purchase a wide range of goods and services. Unlike a bank, that nonbank faces no minimum capital requirements, no liquidity standards. If it fails before you spend the value stored on your card, your card may be worthless and you may be out of money. No deposit insurance here.

I'm not here today to suggest that nonbanks shouldn't be in this business; there are serious arguments on both sides of this issue.

My purpose is to assert a much simpler point: if you share my belief that electronic commerce will grow rapidly, and that new payment technologies will grow along with it, you should recognize that the prospect of nonbank issuance of electronic value presents public policy questions - specifically, financial stability and consumer protection questions - of considerable importance.

More important from the banking industry's perspective, perhaps, nonbank issuance of electronic value could present the banking industry with a competitive inequality far more significant to a far larger class of banks than anything now troubling the proponents of Glass-Steagall reform.

Another question critical to the industry's future is the geography question.

Since its inception, this country has been committed to a legal infrastructure that ties the activities of all manner of banks closely to state laws. Even national banks draw many of their authorities from state laws. Technology has put this legal infrastructure under increasing strain. For example, who should we say has jurisdiction over a loan issued by a depository institution with offices in State A to a consumer in State B applying via a Web site maintained on a server in State C? You can make up rules based on geography, but an answer derived from any set of geography- based rules will seem arbitrary, diminishing the credibility of the legal regime.

In addition, financial markets are in fact steadily becoming more and more international. And though, to be sure, it has its own complexities, the regulatory regime established by the European Union may well turn out to be less complex and therefore more efficient than the complex system of bank regulation and supervision we have built up here in America. As international competition continues to intensify, that difference in regulatory efficiency will become a competitive disadvantage for American banks.

And putting further strain on the question of geography is the breakneck speed with which America's depository institutions are consolidating. A consolidated industry appears unlikely to support the full regulatory infrastructure of the existing system. Moreover, as significant numbers of multistate branch banks come into being under the Riegle-Neal Act of 1994, they are likely to become a potent political force for harmonizing the current legal differences between the laws of different states and between state and federal laws. Already, 20 states have exercised Riegle-Neal's early opt-in. The trend toward interstate branching is clear and will certainly gain even greater momentum in the months ahead.

Again, I'm not here today to argue for or against the preemption of state laws. My point is the much simpler one that the world is changing whether we like it or not. The impact of these factors on bank operations and the industry's regulatory and supervisory apparatus presents issues of critical importance - issues that have everything to do with financial modernization, but that Congress and the banking industry have not yet begun adequately to address.

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