Deregulation in banking: a call for doing it, not stumbling into it

The United States already has nationwide banking. But most consumers probably don't recognize this. That's because domestic commercial banks and thrift institutions, in general, are not permitted to accept deposits in more than one state.

John G. Heimann, who this spring recsigned as comptroller of the currency, notes, however, that interstate banking in many other financial activities exists. Many banks have interstate operations through loan production offices, Edge Act corporations for international trade, nonbank affiliates of their bank holding companies, credit card business, and so on. Bank of America, for instance, has more than 360 offices in 37 states. Foreign banks can operate in two states. (Some foreign banks and domestic holding companies have wider multistate activities "grandfathered in" by legislation.)

Moreover, institutions that do not call themselves banks and are not legally defined as banks are increasingly engaged in a variety of activities traditionally regarded as banking, Mr. Heimann points out.

People can write checks on their moneymarket fund accounts, now totaling something like $120 billion. Merrill Lynch alone manages more than $23 billion, invested in three money-market funds. Consumers can also write the equivalent of checks at their thrift institution or credit union. Or people can get cash through their credit cards, such as American Express, at airports, or elswhere. Mortgage companies and finance companies -- some belonging to banks -- make loans in many states.

"We will have nationwide banking de facto even if we don't have it de jure," said Mr. Heimann in a recent interview.

Mr. Heimann, who as comptroller was one of the nation's top bank regulators, would like to see the restrictions on banking across state boundaries "phased out over time in an organized way, rather than in the haphazard way now occurring. "

"We should plan change rather than react to change," he said. "Nationwide banking is in the consumer's interest. But banks have been restricted in providing the facilities that people want."

He divides these restrictions into three categories:

1. Geographical -- discussed above.

2. Price restraints.

At present, for instance, so-called Regulaion Q limits the interest rate banks and thrift institutions can give on deposits. This is being phased out, but only gradually.

This has enabled the money-market funds, by offering high interest rates, to compete successfully with thrift institutions and banks for deposits. "For the first time in years," Mr. Heimann said, "the consumer is getting a fair shake on his savings."

Some thrift organizations have urged new limits on the money-market funds. But Mr. Heimann comments: "I don't think the public would stand for it."

The cure for the problem the funds have been giving savings-and-loan institutions in particular, he argues, is greater freedom to offer higher interest rates.

"We must free up these financial institutions so they can compete effectively ," he said. "Otherwise, they will be weakened."

3. Product and service restraint.

Under various laws or regulations, commercial banks cannot own saving-and-loan institutions. Nor can they underwrite municipal revenue bonds. Further, they cannot own brokerage firms.

However, insurance companies or multinational financial firms can own brokerage firms. Brokerage firms can acquire trust companies. Retailers, such as Sears, Roebuck, can own savings-and-loan associations. Merrill Lynch can go into the real estate business, commodities, securities, insurance, money-market mutual funds, cash management accounts, credit cards, and so on.

"The marketplace is already far down the road of dismantling product segmentation," Mr. Heimann said. So he wants Consgress and the administration to "redraw the road map" for the financial institutions in an orderly, fair way.

He would like to see the Glass-Steagall Act of 1933 reassessed in regard to what lines of demarcation between financial institutions "make sense with respect to the financial needs and regulatory environment of today."

In recent testimony to Congress, he said, "Because the potential for undue concentration of economic power entails legitimate concerns, we believe that proposals to expand bank underwriting and dealing in securities should be subjected to rigorous but dispassionate scrutiny. At the same time, that scrutiny should encompass the clear potential for the formation of huge financial conglomerates outside the bank regulatory system and the competitive disadvantage which overregulation may be imposing on that system."

Mr. Heimann was also the top bank regulator in New York State. So he had wide experience in bank regulation -- and he figures there is too much of it. He calls for a major simplifications of the regulatory system, with its five federal regulatory agencies and 50 state agencies. The benefits, he says, would outweigh the costs.

Specifically, he would like to see consolidation of the federal regulatory structure in an indpendent banking commission. It would include the supervisory and regulatory responsibilities of the Federal Deposit Insurance Corporation, Federal Home Loan Bank Board, Federal Reserve System, National Credit Union Administratin, and the Office of the Comptroller of the Currency.

It would be a bank regulation revolution -- one talked about for decades. But changing tec hnology and consumer needs make it essential.