"WHAT'S THE difference between a terrorist and a bank examiner?," asked Rick Freer, a Federal banking regulator, as reported in The American Banker. He answered his own question: "A terrorist negotiates." Freer's self-mocking quip is as simple as it is revealing. Regulatory muscle-flexing has become the norm in the banking business, but not because regulators enjoy it. For many complex reasons, Congress has turned banking regulators into its own private pit bulls, and, as everyone knows, a hungry pit bull generally lacks the finer points of diplomacy.
The once genteel business of banking has become unfriendly and confrontational. Regulators and bankers have become mutually antagonistic, each blaming the other for diminishing margins and the imminent banking disaster.
Bankers claim, justifiably so, that the huge amounts of time and money they spend on complying with harsh and complex laws make it difficult to run a profitable business. Congress believes that, without these tough laws, the banking industry is courting disaster.
Unfortunately for the nation, both sides are correct. While the bankers and regulators squabble, everyone--including Congress--watches helplessly as the American banking business loses its competitiveness and prestige. Remedying the situation will require some tough, possibly unpopular actions by the President and Congress that recognize new realities in the banking business.
To be sure, banking is radically different than it was before. Banks are losing market share--and influence--to mutual funds and other competing products. Moreover, the increasing globalization of the world's financial markets, spurred by technological changes, have forced banks to alter the way they do business.
Nevertheless, banks still operate under a legal structure created more than 60 years ago. While fundamentally sound in 1933, this system is outmoded and can not handle current economic and market realities easily. Today, banks are a square peg crammed into a round hole.
The lag between the fast-paced changes in the financial markets and the snail's pace of those in bank regulatory structures has created some disasters. Most notable is the savings and loan debacle of the last decade. There also are potential catastrophes like the seemingly uncontrollable flow of deposits out of banks.
Rather than fix the problem once and for all by rewriting laws to take into account economic and market realities, Congress opted for a Band-Aid solution: Tighten the leash and "get tough" on banks.
It is incorrect to blame the regulators, though. They are faced with the daunting task of implementing a mare's nest of conflicting, overreaching, and outdated laws that are premised on a fundamentally outmoded structure.
Both needed and feared, regulators have become the focal point of bankers' anger and hostility, but this fury is misdirected. Congress should be the real focus of their wrath.
The Clinton Administration must take quick and decisive action to avoid a repeat of the multi-billion-dollar savings and loan debacle. The following is a seven-point plan to restore competitiveness to America's banking system:
Stamp out state-sponsored terrorism. "Banking regulation has become an agent of state-sponsored terrorism," laments one frustrated bank executive. Coming down hard on banks may be politically popular, but over the long term, it is economic suicide because American banks will lose to competition from overseas banks and U.S. non-bank companies.
In response to the savings and loan scandal, Congress produced an arsenal of absolute enforcement powers designed to let regulators nip potential financial disasters in the bud. These new laws can amount to regulatory overkill. While they let regulators move quickly to forestall a major disaster, they also allow regulators to pounce where no life-threatening problem looms. …