Treasury Secretary James A. Baker III, making his first appearance before the Senate Banking Committee, urged yesterday that interstate banking proceed "as soon as possible."
He also advocated further deregulation as a way of making the industry more profitable through enhanced competition with other financial service providers.
Speaking for the Reagan administration, Baker supported the concept of transitional regional banking leading to nationwide banking in five years, as passed by the House Banking Committee on Wednesday.
This position contrasts sharply with that of Sen. Jake Garn (R-Utah), chairman of the Banking Committee, who affirmed yesterday that his comprehensive banking bill would contain no provision for interstate banking.
Baker responded to the frequent accusation that interstate banking will facilitate the swallowing of small banks by big ones by saying, "The administration is not convinced that size is inherently bad."
He added that existing antitrust laws should be adequate to deal with undue concentration.
The House Banking Committee showed its concern about concentration when it voted this week to limit acquisitions so that no bank holding company could control more than 1 percent of total domestic deposits.
The secretary backed new products and services for bank holding companies, including sponsoring mutual funds and other unspecified financial activities to be determined by the Federal Reserve.
When asked by Sen. Paul Sarbanes (D-Md.) if leaving it to the Fed were a way to accomplish deregulation by indirection, Baker responded, "That might be one way to characterize it."
He called for selective exceptions to the Glass-Steagall Act, which separates banking from commerce, but he denied any intent to eliminate it entirely. Baker's predecessor, Donald T. Regan, had favored allowing banks to underwrite securities eventually, which Baker said would amount to a repeal of Glass-Steagall.
"He was in a different business than I was," quipped Baker, an attorney. Regan served as chief executive officer of the giant brokerage firm Merrill Lynch. Garn predicted that Glass-Steagall would not be dismantled while he is in the Senate.
The administration, which would like to get a comprehensive banking bill through Congress this session, has pulled away from a very aggressive deregulation policy outlined by Regan, who also favored authorizing insurance underwriting and real estate development through holding companies.
"We can count votes," Baker noted.
Opponents of more deregulation -- who blame it for the record number of bank failures -- have grown more numerous on the Hill, in academia, and elsewhere.
The International Bank for Settlements in Basel, Switzerland, recently warned that deregulation could lead to more inflation and a premature recession.
Baker termed the overall health of the banking industry as "quite good, with no structural problems."
He said that failures that have occurred are due to imprudent lending by those banking on continued high inflation, especially in the energy and agriculture sectors. He said that the failure rate in 1985 is no greater than in 1984, when 79 banks failed.
William Isaac, chairman of the Federal Deposit Insurance Corp., has predicted there will be more failures this year.
The Treasury secretary expressed optimism about savings institutions, although he admitted that the thrifts were in a "fragile transition period."
He said the administration would be willing to discuss a short-term extension of the net worth certificate program, due to expire next October. The certificates were invented by Congress to prop up troubled thrifts. The Senate bill proposes a three-year extension.
In response to a question from Sen. William Proxmire (D-Wis.), Baker said the administration was not overly concerned about the leveraging of corporate America. A rash of hostile takeovers, often financed with little cash, has burdened target companies with enormous debt and raised an outcry for legislation to stop it.
"There are no major abuses that we can see," Baker said. He called legislation to intervene unnecessary and said the situation could be handled by regulators.