Clinton's Bank Plan Will Have an Effect `at the Margin'

WHEN commercial bankers get together, the conversation sometimes turns to "war stories" on their regulatory burden.

"Entire evenings can be spent on the subject with each tale topping the other," notes Carter Golembe, a banking consultant. He writes of 15 government examiners poring over the books of a six-officer bank and of the expanded reporting form designed to find ways of reducing the number of forms on which banks have to report. Mr. Golembe isn't clear whether these stories are rigorously true. No matter, he concludes: "Banking's regulatory burden defies rational analysis."

Evelyn Murphy, a bank regulation expert, estimates that regulation costs banks $17.5 billion a year, or about 14 percent of their 1991 noninterest expenses. That figure has probably grown since passage by Congress in 1991 of a bill tightening regulation, the Federal Deposit Insurance Corporation Improvement Act. Congress aimed to avert a crisis in banking similar to the costly one in the savings and loan industry.

So bankers probably found some cheer in the package of regulatory changes announced Wednesday by President Clinton. The president's goal is not so much to make bankers' lives more pleasant as to encourage "billions" more in loans, especially to the medium- and small-sized businesses that create most new jobs.

"Small companies are simply unable in too many cases to get loans from banks," Mr. Clinton said. "If these businesses can't expand or try new ventures, that means stagnation for our economy."

Bank lending actually declined last year, to $2.032 trillion at the end of December, down $20.5 billion from a year earlier. By contrast, banks last year put 10.7 percent more money into government securities, taking advantage of the huge spread between the low rates they pay on deposits and the higher rates they earn on securities. Further, banks have to put relatively less capital into reserves when they buy government securities. Bank profits reached a record $32.5 billion in 1992, the Federal Deposit

Corporation (FDIC) says.

The regulatory changes aim to reduce paperwork and help banks make more "character" loans to small business. These are loans based more on the borrower's reputation than on the collateral he or she can offer.

Another provision will make it easier for banks to sell the $28 billion of real estate they have obtained after foreclosing on loans. The four agencies that regulate banks and thrifts will also seek to eliminate overlapping examinations.

Jane D`Arista, a former Congressional staff economist who lectures on banking at Boston University, figures the changes "should have some small effects at the margin" on bank loan decisions. "But it is not going to do the job."

In a paper on "The Parallel Banking System" that was released this week by the Economic Policy Institute, Mrs. D'Arista and Tom Schlesinger, director of the Southern Finance Project, argue that the banking system has been permanently weakened by the emergence of finance companies, money market mutual funds, and the commercial paper market that operate outside the regulatory framework for banks.

The commercial paper market that provides many bigger companies with funds quadrupled in size in the 1980s. Three-fifths of the paper was issued by finance companies.

Though they control only one-quarter the total assets of banks, finance companies now claim two-thirds the volume of business lending by banks.

These nonbank institutions, D'Arista and Mr. Schlesinger hold, have eaten into the core business and profitability of commercial banks, raising the risk that banks and their depositors will need rescue by the FDIC.

That danger has been shrinking. Andrew Hove, chairman of the FDIC, said Tuesday his agency isn't likely to touch a $30 billion line of credit given its Bank Insurance Fund by Congress in 1991.

Mr. Hove estimates that perhaps 30 to 60 banks will fail this year, costing the fund about half the $10 billion previously estimated.

D'Arista and Schlesinger propose passage of a Financial Industry Licensing Act requiring all financial firms - including the parallel ones - to be licensed and to comply with the same major regulations with respect to soundness.

"The financial playing field must be leveled by raising, not lowering standards of prudential supervision and public obligation," they write. The business of these various institutions already overlaps greatly.

Such legislation isn't likely soon. But should it occur, executives of finance companies and other nonbank financial institutions may someday swap regulatory tales with bankers.