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The banking industry will continue to consolidate.  The

number of institutions will decline, but no danger to compe-

tition or service is on the horizon.  The 106th Congress

should act now to remove obstacles such as the Glass-Stea-

gall Act of 1933 and the Bank Holding Company Act of 1956.

Dismantling such barriers would allow commercial banks to

underwrite securities, offer brokerage services, expand into

merchant banking, and provide insurance.  In addition, Con-

gress should

· allow banks to have maximum flexibility to choose how

to structure those activities, through an operating

subsidiary or an affiliate in the bank holding company,

to permit the greatest scope for future innovations and

increases in consumer convenience;

· permit banks to own equity in nonfinancial firms and

thereby take a more active part in the U.S. system of

corporate governance;

· reduce the "moral hazard" of deposit insurance by

having the system mimic private bond covenants that re-

strict risk-taking behavior as a firm's capital de-

clines, building on the first steps taken in this di-

rection by the FDIC Improvement Act of 1991;

· not raise new obstacles to the rationalization and

consolidation of the banking industry and eliminate the

limit on the maximum national market share for banks;

and

· subject existing banking and financial regulations to

the same kind of rigorous cost/benefit review to which

health and safety regulations are subject.

Enacting these regulatory reforms would lift a heavy

burden from U.S. banks and make the financial services in-

dustry more competitive.  Expanding economic freedom would

both be in keeping with the Constitution and serve consum-

ers.  This is an opportunity Congress cannot afford to miss.

Notes

1.  This section and the next draw on Randall S. Kroszner,

"Rethinking Bank Regulation: A Review of the Historical Evi-

dence," Journal of Applied Corporate Finance 11 (Summer

1998): 48-58.