Today, on top of record loan losses, bank failures and sagging earnings, banking is an industry desperately trying to find its niche. Archaic restrictions dating back to the Depression have handicapped the industry, according to numerous private and government experts.
The fact is, the current situation will slowly lead to a less safe and sound banking system. And a threat to banking is a threat to the availability of loans in the private sector; a threat to the financial system in which trillions of dollars change hands each day; a threat to the conduct of monetary policy; and even a threat to the safety of savings.
William Seidman, chairman of the Federal Deposit Insurance Corp., has won high marks for his innovative and independent approach to the restructuring of the banking industry. He has no allegiance to special interests, and he offended extremists on both ends of the spectrum when he unveiled his agency's sweeping blueprint for financial change. It combines strict supervision with a program to permit banks to compete with emerging financial supermarkets.
It is crucial to realize that financial markets and the forces that compete with banks have changed dramatically since 1933, when the Glass-Steagall Act first imposed a wall between banking and securities activities. Depression-era lawmakers decided that the banking crisis was caused by banks' dabbling in conflicting interests.
Hamstrung by the rules, banks have watched as virtually every banklike or thriftlike product has been taken over by diversified financial services firms -- the nonbanks that evade regulations by not making commercial loans. You can open a checking account at Merrill Lynch. You can get a loan at Sears.
''We are now in a new era of finance,'' states ''Mandate for Change,'' a recent FDIC publication that sets forth the Seidman manifesto. ''As a result, banking is threatened by the widening gap between the products and services demanded by financial-services customers and the permissible products and services that banking can offer.''
Some examples of how banks are losing the turf war to outside competitors: Banks are witnessing erosion in their consumer loan portfolios as savings institutions and finance firms vie for what used to be the banks' turf. The banks' share of the auto financing market dipped from 60 percent in 1977 to 41 percent in 1986. Over the same period, finance companies more than doubled their share. Historically, commercial banks' most important business has been commercial lending. But banks have lost an important chunk of this business in recent years to the cheaper commercial-paper market, Euro markets and foreign banks.
The Seidman plan is built on five simple principles: 1) Nonbanking affiliates and subsidiaries of banks would be separately capitalized so they could stand, or fall, alone, and not have to be propped up by the bank. 2) The operations of banks and their nonbanking affiliates would be clearly separated and rigorously supervised. 3) Transactions between banks and their affiliates and subsidiaries would be done at ''arm's length,'' as if totally separate firms were dealing with each other. 4) Both banks and their competitors would be able to be in the same businesses, meaning they could compete fairly. 5) Rules would be established to safeguard against concentration of banking and financial power.
In an interview with our associate Michael Binstein, Seidman talked about one of the deepest concerns stemming from banking deregulation -- the mischief-making potential of too many close connections between a bank and its subsidiaries or affiliates.
''The key question is, can you build a firewall around the bank that will keep it safe and sound through supervision? And, therefore, you don't have to worry about regulating its affiliates, its subsidiaries or its parent, just as long as the bank lives by the rules,'' said Seidman.
''Our . . . experience says that you can, in fact, create such a firewall, that it has been done in the past, since we are doing it and have been doing it as regulators of banks for 54 years in terms of insider lending abuses."