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Banks Need Fewer Barriers to Do Their Job Properly

January 11, 1987

I would like to express a few thoughts on points that were raised in John F. Lawrence's column of Dec. 21, "Bank Failures Show Need for Tougher Rules."

As current president of the California Bankers Assn., and consequently a frequent spokesperson for its 450-plus member banks, I have also grappled with the complicated questions addressed in the column.

I share its conclusions on some of the issues, but I differ in my assessment of other banking issues addressed by Lawrence and Lowell L. Bryan (a senior partner in the consulting firm of McKinsey & Co.). First, I agree that the need for a strong regulatory system is of paramount importance to the banking industry and our country's financial system.

The CBA has supported federal legislation that would increase the banking industry's financial support for a strong regulatory system.

Banking regulators are funded through bank assessments, but they are not exempt from federal budget cuts that have resulted in a weakening of the regulatory process at a time when we need more qualified regulators.

In many cases it is not the lack of regulations that is a problem; it is the need for adequate personnel to enforce current regulations. For these reasons, CBA--with the American Bankers Assn.--actively supported legislation to exempt bank regulators from Gramm-Rudman and the civil service pay limitation.

Bryan blames some of the problems--particularly those of the savings and loans--on lenders being too cozy with government regulators.

I can certainly speak for the commercial banking industry when I say that a "cozy" relationship with our regulators, both state and federal, does not exist.

Bankers frequently find themselves at odds with government, whether it is over the classification of a loan or the promulgation of new regulations.

Bryan appears to paint a simple picture of the need for new regulations.

One proposal is to charge banks more for their deposit insurance as their bad-loan experience worsens. Such a "risk-related premium" has been discussed among academicians, regulators and industry leaders for several years.

There is agreement among many that although the proposal appears on the surface to be worthy of support, the actual implementation would be encumbered with problems and could cause more harm than good. Bryan's assessment that our system is "broken and getting worse" is a serious charge. Many improvements are needed to carry banking into the 21st Century, but I would not characterize the system as "broken."

Deregulation, technological change, non-bank competition, securitization, internalization and other facts of life have changed banking light years beyond the present legal and regulatory framework.

To preserve the safety and soundness of the banking system, opportunities for additional diversification are essential.

Concentration of assets in one location, industry and endeavor sets the stage for problems. During the last few years, over two-thirds of the states have passed some form of interstate banking. As banks move across state lines, diversification will strengthen the industry.

The need for change is obvious if you look at a major development in lending at commercial banks. The financing of corporate America has dramatically changed so as to greatly reduce the role of the banking industry.

I refer to the increasing domination of the use of commercial paper by businesses where commercial loans were once used. Under current laws, the commercial banking industry is excluded from participating in this commercial paper market. If the banking industry is to prosper, the rules of the game must be changed to allow banking to also participate in the new system as well. There is a lot of interest in forecasting the future of banking, and projections are all over the map.

I agree that the securitization of loans is an effective method to allow financial institutions to remain liquid. I also believe that at this time, the securitization of a wide variety of loans does not appear especially risky to investors since investors tend to demand that their return on an investment reflect the risks involved.

However, if marketplace demands are not met by commercial banks because federal laws place barriers restricting the ways banks can serve their customers, then perhaps Bryan will be correct.

If, however, Congress allows banking to operate in a fair, competitive atmosphere with appropriate checks and balances, the banking industry will prosper and consumers and depositors will benefit.


Executive vice president

Union Bank

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