Forget Iraq, at least for the moment. The real blood is about to begin flowing in this country. The banking industry is about to take more casualties (in the form of pink slips) than anyone fears in the Saudi desert, if and when the siege of Kuwait turns into a shooting war. But like the situation in the Persian Gulf, the skirmish here just may be worth the cost.
Starting in January, the Treasury Department is going to begin taking down the barriers that cramp and crib big American banks. As Treasury Secretary Nicholas F. Brady said in his Arthritis Foundation speech in November, "It is time to overhaul our financial system." He is right -- and there are very few people who will remain unaffected by the reforms.
The news last week was dominated by talk about how bank regulators do their jobs -- too easy on the thrifts, too hard on the banks, too fragmented on the insurance companies. But it is this balkanized system of regulation itself that is the real villain, not the regulators.
Some comparative perspective on the American banking industry helps. In context of battles over the recently discontinued talks on the General Agreement on Tariffs and Trade, it was often observed that nations have very different tastes in subsidies. The Italians, for example, have more farmers in their small country than there are in the entire United States. A complex pattern of agricultural subsidies and prohibitions reflect the fact that Italians like their wheat fields to come up to the city walls and prefer that suburban malls be relatively few and far between.
These crotchets are not peculiar to the Old World. Thanks to sets of regulations dating back to the New Deal, the Civil War and the Constitutional Convention itself, the United States has more bankers today than farmers. Chief among these statutes are the McFadden-Douglas Act, which prohibits banks from nationwide branching, and the Glass-Steagall Act, which keeps banks out of the investment business and vice versa.
The laws that created and protected the thrift industry as a kind of captive money machine for the real estate industry are a virtual sideshow to the main business of banking -- and even so, congressional tampering and interference with the oversight of the savings and loan industry cost the Treasury the equivalent of a small war.
The point is that the result of these and other laws is that any small town in America has more local banks, and more competition, than ever would have evolved had the industry not been hedged about and protected by extensive government supervision. But as well organized as the bankers are, all that is about to change -- chiefly as a result of international competition.
Between 1973 and 1988, the hierarchy of world banking underwent a dramatic geographic shift. According to Herve de Carmoy, a French banker with extensive American experience who has written a lucid and compelling guide to the situation, the Japanese banks grew at an annual average rate of 13.5 percent during those years, while American banks grew at 3 percent annually. The result, naturally, was that Japanese banks displaced American banks at the top of the assets pyramid, with a brief interlude at the beginning of the 1980s during which European banks were in the lead.
Interestingly enough, however, for all the shift in leadership among nations, there has been no increase in concentration in the global banking industry, de Carmoy says in "Global Banking Strategy: Tactics for Managing in Turbulent International Markets," which is to be published in this country next month by Basil Blackwell.
The 10 leading banks in the world accounted for around one-quarter of the lending activity of the 100 biggest banks in 1973, and about one-sixth of the biggest 300 banks; 15 years later, they still accounted for about the same market shares, according to de Carmoy. In other words, the world banking sector has undergone no fundamental structural change in the last 15 years.
The next 15 years will be different. Partly because of technology, partly because of increasing competition, partly because of regulation and partly because of the changing nature of what is humanly possible, world banking is about to enter a period of ferocious shakeout, according to de Carmoy. The economics of banking -- and the competition among nations -- now favors decisively the biggest banks.
Thus, he says, the industrial nations today are at "the beginning of a long period which will see the gradual formation of a world banking oligopoly. The strategic questions faced by all the players in this new game are twofold: to be or not to be a part of this world oligopoly in the more or less faraway future; and, as a part of it, how to survive and in what form."
It is the prospect of playing catch-up in this game with the Europeans and the Japanese that is motivating the Bush administration. It has to act -- and quickly -- if American banks are to have the freedom to combine and reach out to meet their foreign rivals. Bank of America, Chase Manhattan Corp. and Citicorp were last ranked one, two and three among world banks in 1974; today, they are dwarfed by their Japanese and European competition. Only Citicorp remains among the world's Top 10.
Other American banks can rise, through combinations and new lending, to take their places among the world's leaders, but only if the country's old-fashioned banking laws are extensively rewritten. Money markets of all sorts will change dramatically, of course, if insurance companies, banks, investment banking firms, payment systems and giant non-bank suppliers of credit -- such as the auto companies, General Electric Co. and Sears, Roebuck & Co. -- are all allowed to form gigantic integrated combinations to finance themselves and other corporations. But a streamlined system could be more satisfying to the customer, and cheaper.
One other good effect may come of American banking reregulation. It could become safer. The patchwork palimpsest of money supply control and bank supervision that has grown up over the years may have to be rationalized along with the banks. It was the failure of the political supervision of this apparatus that led to the thrift crisis in the first place; it is uneven and uncoordinated regulation that has imposed additional and unnecessary pain in the current credit crunch.
No fair-minded person should blame the regulators for doing their jobs; it's completely unreasonable to berate them for being too easy with the thrifts and then to demand that they go easier on the banks. But one can only wish the Treasury well as it goes about the high-stakes job of building an internationally competitive banking system -- and a regulatory apparatus to oversee it.
David Warsh is a columnist for the Boston Globe.