Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, February 11, 1991 TAG: 9102110244
SECTION: EDITORIAL PAGE: A-9 EDITION: METRO
SOURCE: GEORGE E. MORGAN
DATELINE: LENGTH: Long
And President Bush's proposals weren't designed just to benefit bankers, though that's what a recent comment by CBS' Dan Rather might have you believe.
Many bankers are scared to death of competition. Others, such as Signet and Sovran in Virginia, are energized by it. Bush's overhaul of the current banking system would benefit bank customers - and bankers know it.
Modern financial analysis shows that the current system actually benefits bankers. The existing system protects them from their own inefficiencies and from outside threats. Furthermore, the government sells insurance contracts to stockholders for deposits priced below their value. The system needs reform.
The lessons of history are unfortunately being ignored by those who oppose giving banks greater freedom to serve their markets. The savings-and-loan debacle is not the result of deregulation, but of efforts by bankers and regulators to conform to the current incentive system. The actions of regulators in the '70s to bury and obscure the losses occurring at S&Ls succeeded in deferring the inevitable. Testimony to the great success of that strategy is how faintly we remember the actions taken then by regulators and how much we now blame current officeholders.
Most of last week's proposal is based on the fundamentally sound yet relatively simple principle of increasing competition to enhance the services offered to banking customers, thus restoring vitality and vigilance to the banking system. As vice president, Bush chaired the Task Force on the Regulation of Financial Services, which recommended virtually all the features of the current proposal.
Often, such proposals take decades to sift through the political process to find their place among the thousands of pages of Section 12 of the U.S. Code. In this case, however, the movement from task-force proposal to administration-sponsored bill was accelerated by the ascent of the task-force chair to the presidency.
The concept of competition runs deep in the proposals. By allowing interstate branching, the strongest competitors will be allowed to enter the protected and until recently sacrosanct turf of other states' banks. Opponents to this proposal will wail about the "unfair competition" and about greedy large banks who will swallow smaller banks whole.
But let's look at the evidence:
First, the greater efficiencies that large banks supposedly have over smaller banks are virtually non-existent for banks whose assets exceed $25 million, which is one-seventh the size of the National Bank of Blacksburg. This is the conclusion of 20 years of careful research. Large size is actually a burden.
Second, opponents assume that small banks are better for customers than large banks are. But no one can force you or me to bank with a large organization. That's the beauty of increasing competition and lowering the barriers.
Those who prefer to bank with, say, the Blue Ridge Bank in Floyd can still do so. Such well-run, independent banks often confidently beckon larger banks to enter their market: "Come into my parlor, said the spider to the fly."
And if large banks are so greedily searching for profit opportunities, why would they buy those small profitable banks for large premiums and then proceed to cap the well that was the profits' fountainhead - the valuable service the small banks provide?
Besides, interstate banking already exists and will become nationwide banking in most states in the next few years regardless of the federal government's policies.
Letting non-financial firms purchase banking firms would increase competition and create another set of bidders for banks put on the auction block by the Federal Deposit Insurance Corp. The federal government could be saved significant amounts of money as a result. A number of bank failures have cost the FDIC substantial sums because only one bank, or none at all, bid for the closed bank.
One aspect of the proposals is at odds with the competitive bent of the other parts. The administration wants to reduce the number of bank regulatory agencies.
Competition between different banking agencies can counteract the inherent stodginess of regulation. Regulators that are faster to innovate safe and sound practices and products attract a larger clientele of banks, forcing other regulators to follow suit.
The proposed restructuring consolidates immense new power in the Federal Reserve. Establishing the Federal Banking Agency out of the current Comptroller of the Currency would give that organization some added clout, too, but the competitive spirit would be significantly sapped.
The proposed set of reforms shows a laudable vision and realism, promoting competition that will benefit customers - though, unfortunately, principles seem to have been suspended in parts of it.
In the end, the real beneficiaries will be the consumers and the regulators. Weary of battling the brute force of market innovation, the regulators have succumbed but still have the incentive to build empires.
On one level, they're promoting competition. But on their own level, regulators still want to be in control.
by CNB