Suppose a competitor complained that you have an unfair advantage because you can borrow money easily. But suppose the rest of the story is that your lender is your mother-in-law, that you rarely borrow from her, and that she starts nagging for repayment a soon as you do.

This is banks' situation as they compete for new insurance powers.

According to a Wall Street Journal survey, insurance agents complain that access to the Fed's discount window would be an unfair advantage for banks if they wanted to enter the insurance field.

To those rare bankers who have actually borrowed from the Fed, this is a joke.

Borrowing from the Fed happens seldom, and those banks that do tap this emergency source of funds immediately find they are under scrutiny on why they needed the cheap funds and what they are doing now to pay back the loan.

Further, it should be obvious that banks do not consider the discount window a routine source of funds, since they gladly pay more than the discount rate to borrow overnight federal funds. Federal funds - overnight loans of reserves among banks - come without any mother-in-law looking over your shoulder or mandatory visits to the local Fed branch for a "working lunch."

To bankers and most other observers, then, the discount rate is basically a signal of Fed intentions rather than a price set to encourage or discourage borrowing.

In my own work, I have come across a similar instance of competitors complaining that banks had an unfair advantage when this was patently not the case.

Fifteen or 20 years ago I was appointed to the Federal Home Loan Bank Advisory Council.

The advisory council consisted of about a score of savings and loan people plus two people representing the public.

I was one of the public governors. The other, believe it or not, was Gilbert Roessner, chief executive officer of City Federal Savings and Loan - New Jersey's largest thrift.

(How they could have considered Mr. Roessner an objective representative of the public was something to ponder. But it was the way things ran in the savings and loan business in those days.)

Council members had traditionally served for two years. I was the only member ever not reappointed for the second year.


Savings and loans saw that banks were authorized to hold Treasury tax and loan accounts while they were not. Part of their congressional platform was to get tax and loan accounts for savings and loans.

But I pointed out that tax and loan accounts merely serve as a means for the Treasury to collect taxes and revenue from bond sales without bankrupting the banking system before spending the money. Without such accounts, a hefty percentage of the nation's bank deposits would temporarily disappear from the banking system whenever taxpayers or bond purchasers wrote checks to the government - that is, if these funds went into the Treasury's account at the Fed.

Since the average tax and loan deposit stayed in a bank account only about 11 days at that time, I also told the council that these accounts would do thrifts little good anyway, since any mortgage loan that had to be paid off in 11 days must be on a very small house.

My reasoning did not win the other council members over. Their reaction: "I don't care what they are for. If the banks have them, then we want them, too."

And just so the point was made absolutely clear, I was thrown off the council after one year.

Well, I guess that since the banks used to be the nation's biggest and strongest financial institutions - an image that still holds - competitors feel that anything the banks have is something they should have, too.

So bankers ought to explain what these so-called privileges really are. That might keep competitor's often unjustified complaints from turning into legislation that could truly hurt the industry.

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