Timing is everything -- and the time is right to change the post-depression laws under which banks and other financial institutions operate. A recent measure approved by the Senate offers a viable framework for addressing this need.
Banks, particularly agricultural and energy lenders, are failing at a rate unseen since the Great Depression. In part, their demise is due to restrictive state and federal laws that create an inflexible regulatory system and impose artificial geographic and product boundaries on the markets in which they can operate.
At one time, these laws protected banks by allocating markets and shielding depository institutions from the excesses of unrestricted competition. Today, declining profit margins and rising failures reflect a fundamental change: banks required to operate under these antiquated protectionist statutes are unable to supply the range of products and services demanded by consumers. As consumers turn to other, less regulated suppliers of financial services, "full service" banks increasingly lose out to "fuller service" competitors.
In struggling with the question of how to restructure the financial system, the Senate has demonstrated that it recognizes the problem has not been solvable to date by Congress. The parties in interest are too persuasive, their PACs too strong and the territory too lucrative. Further, the interested parties have not attempted or have been unable to settle the issue among themselves.
As a result, senators are proposing to establish a blue-ribbon presidential commission, like the Social Security study group chaired by Alan Greenspan, to evaluate the problems and seek a solution acceptable to all segments of the financial services industry. It's an idea the conference committee should adopt when the Senate and the House get together to iron out differences between their plans to rehabilitate the Federal Savings and Loan Insurance Corporation.
The commission proposed by the Senate would have representation from every constituent group that has contributed to the unending debate over the future of our financial system -- the industry, regulators, lawmakers and consumers. This approach holds the potential to bypass competing "hired gun" lobbyists and allow the real parties in interest to get together to work on the problem. An open assessment could be undertaken of the needs of banks and other financial institutions, insurance concerns, investment banks and real estate interests.
A good starting point for these deliberations would be an evaluation of the various proposals presented by numerous academics, the New York Fed's Gerald Corrigan, Federal Reserve Board member Robert Heller, the Association of Bank Holding Companies and others.
The commission should deal with these questions:
Is it necessary to require the separation of banks from various types of business activities? Corrigan says "yes," and he would add new regulatory layers to achieve this objective; many of the academics say "no." This concept has many followers and has influenced the debate concerning the future of the financial services industry. It should be tested. The burden of proof that such a separation is necessary should be on those who would place additional regulatory restrictions on the industry.
Because banks, as all agree, must be subject to safety surveillance to ensure a stable banking system, what does this mean for their owners and affiliates? Should they be subject to the same kind and level of supervision?
Our banks are in a competitive battle at home and abroad. We cannot afford an overly complicated and costly regulatory system. We want to preserve the safety of our banking institutions, but this objective should be accomplished simply and at the least possible cost. The commission should determine whether a non-banking business can own a bank and whether a bank can affiliate with a securities firm, insurance company or any other type of business entity without exposing itself to excessive risk.
It must address the question of whether regulators can adequately insulate a bank so it is not jeopardized by the other business activities of its owners, subsidiaries or affiliates. If they can -- and professional regulators at the FDIC believe banks can be effectively insulated -- our regulatory approach could be simple and focused on banks, not on tiers of holding companies, as envisioned in the Corrigan approach.
Discussions regarding the future of our financial system have been going on for more than a decade. We should not wait for a crisis before taking decisive action.
Leaders of the financial community, both in and out of government, should "reason together" and fashion a sensible response that offers a structure all can support. Congress will then have the basis and consensus on which to act.
The writer is chairman of the Federal Deposit Insurance Corp.