Presumably everyone can agree that from a national viewpoint a viable banking system in the United States is desirable. How, then, do we keep it healthy? Peter Drucker reminded us many years ago that the only purpose of a business is to create a customer. Without customers there is no business. In the swirling debate about regulation and deregulation, this basic truth is often overlooked.

It is no secret that what used to be called the commercial banking business is losing customers at an alarming rate. A few numbers throw the problem into stark relief. In the past 20 years the domestic commercial paper market has grown from $12 billion to about $300 billion, an amount that now exceeds the total commercial and industrial loans of all the weekly reporting member banks in the United States. If any other industry in the country lost that much market share in its core business, politicians would be on the stump looking for the villain, and the industry would be directing its entire effort toward finding new customers for new products. Banks have to do the same.

In simple terms, banks are losing out in the information age. They no longer possess more information about their customers than other people do.

As the credit bureaus, rating agencies, news organisations and information companies deliver more and more of their data electronically to anyone who will pay for it, the raw material on which commercial banks' competitive advantage was based becomes common coin. Today the financial vice-president of General Motors knows as much about the credit of General Electric as do the banks. The technology which creates, transmits and stores the almost unlimited and constant flow of data will neither slow down nor stop. This means markets will become even more efficient, which will lead inevitably to a further loss of bank customers to others.

The big American companies-those with assets over $1 billion-now obtain more than half of their short-term borrowing needs from the commercial paper market. Medium-sized companies are also moving out of the commercial banking system as high-yield bonds are sold in the marketplace in increasing numbers. It is not, however, just short-term borrowers who cease to be bank customers. Larger corporations are placing notes with maturities up to 15 years in amounts estimated in excess of $35 billion outstanding.

The consumer side of the banking business is also losing customers. Commercial banks' share of auto loans in the past five years fell from 60% to 47%, while the share of General Motors Acceptance Corporation (GMAC) alone doubled to 26%. Lest we think that GMAC, which earned over $1 billion last year, will go away, a glance at its annual report is instructive.

To diversify into areas complementary to its traditional activities, the company entered the mortgage banking business by acquiring the Colonial Group of mortgage banking and servicing companies and the mortgage servicing portfolio and related servicing facilities of Norwest Mortgage, Inc. We introduced an innovative investment opportunity for General Motors employees . . . in the form of GMAC demand notes . . . GMAC in December became the first automotive finance company to arrange a public sale of securities backed by new-vehicle retail instalment receivables. . . . We continue to look for new opportunities to broaden our financial services . . . Another new system to retail customers is known by the trademark ElectroChek. This system enables customers to authorise electronic transfers of monthly payments from their checking accounts to GMAC. In Canada, where a similar system has been used by GMAC for several years, more than 75% of our customers use this payment method. . . . It will be expanded throughout the United States during 1986.

Despite the clarity of this language, many in the banking industry still tilt at windmills, fighting the wrong battle with the wrong enemy. Perhaps Spinoza explained this phenomenon many years ago when he wrote: "When they see or hear anything new, they are . . . so occupied with their own preconceived opinions that they perceive something quite different from the plain facts seen or heard. . . ." While bankers wasted their energy railing at each other, Sears built a financial network, the Prudential Insurance Company bought Bache, American Express acquired Shearson and General Electric took over Kidder Peabody.

While all this was going on, the great state of Illinois passed a law permitting banks to establish up to five "community facilities", of which three can be located further than 3,500 yards from the head office, providing it is in the same county. This kind of micro management is another indication of the American banking industry shooting itself in the foot, while others are winning the race. While the gendarmes are out with their steel tape measuring the distance between a Chicago bank's head office and its branch, there is a growing realisation by many companies that we are moving from an industrial to an information society. General Motors, Ford, Chrysler and General Electric have got the message and are out to beat bankers at their own game.

If these portents at home are not enough, British Petroleum recently opened an in-house bank; Swedish Match Company established a finance subsidiary in Brussels; Volvo's in-house bank has a billion dollar balance-sheet and the British General Electric Company has set up GEC Finance. On the other side of the world, Mitsubishi, Toshiba and Sumitomo all have entered the market. There are many more too numerous to mention and others in the wings.

Some arguments have been advanced that bank deregulation should slow down, or stop, or be reversed because banks are "special". But who, after all, is ordinary? Without electricians the lights would go out; without plumbers sickness would spread; without doctors, our very lives are at stake. The list is endless. America's airline industry, which one might say is "special" as it involves human lives and helps tie the country together into a common market, has been deregulated, and the advantages to the public are evident. In the case of banking, the present Administration is clearly in favour of deregulation, as are some regulators. But other regulators construct arguments to please a particular legislator who, in effect, is their customer. These arguments pick up velocity when the economy is under strain.

Whenever the Federal Reserve implements monetary policies which cause a recession, or when an OPEC is formed or falls apart, or whenever Congress constructs poor fiscal policies, as it has, a certain number of banks are going to fail since their managements are unable to cope with the resultant negative change. Rather than make believe that we live in a risk-free environment, the Governor of the Bank of England, speaking at the Overseas Bankers Club last year, put it this way: "The process of change is likely to involve some accidents, and it would be wrong to expect the authorities to convoy everyone safely through the uncharted waters ahead." This is realism of a high order and contrasts sharply with some of the media events put on in the United States when a bank fails there. Some legislator, looking for TV exposure, acts as if we live in a riskfree society, and calls on the regulator in a public hearing to explain how the bank failure took place with the regulator sitting there watching. It is the stuff of headlines. The simple way for the regulator to respond is to call for increased capital ratios. This may be a wise move in itself, but it is not the solution to all problems.

History records that every bank that has failed in the United States since the 1930s exceeded the capital ratio set by the regulators on the day it failed . As in the classic story of the emperor's clothes, it is regarded as very bad form for anyone to point this out since everyone knows that a strong capital ratio is better than a weak one. But the central fact remains that if a business can't make a profit it will fail over time no matter how much capital it has. The best regulator of capital adequacy has always been the market, which decides on capital ratios for banks, as it does for any other industry. No regulator sets a capital ratio for competitors like Sears, Reuters, GMAC, American Express or General Electricthe market does.

If what regulators are trying to do is to maintain the stability of the system-which to my mind is the proper objective-rather than preventing a specific bank failure, then there are things that can be done to strengthen the ability of banks to compete and thus survive. The regulator can, and indeed has, constructed a life-support systern for an individual bank, in a manner not unlike the way doctors sometimes arrange to keep a patient alive in the face of great odds. But in the case of a bank, like a person, such a life-support system may only lead to a slower death at a higher cost if the fundamentals of the body are not functioning properly.

The fundamentals of a business, including the business of banking, are beyond the direct reach of any regulator. Indeed, in a very real sense, the fatal flaw in many banks was partly an unintended side effect of regulation. That fatal flaw is bad management. Nothing can save a business over time that has bad management-nor should we try. We have in the past created a lot of what turned out to be mediocre and poor managers in the American banking industry, partly because heavy-handed regulation rarely creates the atmosphere which attracts the best and the brightest. Until recently, we had the government telling bankers what they could pay for their inventory, and what they could charge for their product. The best men and women look for the challenge of the marketplace, not the backwater of businesses that are told what to do and how to do it.

It used to be that the best loan officer almost automatically became president of the bank. The urgent need for good loan officers remains as compelling and essential as ever, but today the skilled credit officer is watching his or her business slip away. New skills must be learned or be brought aboard to supplement the traditional ones, just as new products must replace old. All too often in the banking industry, deregulation has left old managements to deal with new problems. When the airlines were deregulated, well-known names faded from view and new entrepreneurial airlines rose and flourished.

As we move through the transition period to more intense competition, more hard days are ahead. Deregulation is now attracting better people to our banks. But good entrepreneurial managements are not built in a day, or a year, or even five years. Corporate culture does not change overnight. The biggest risks tomorrow will not be bad loans, although there will be plenty of those, but rather absorbing the costs and managing the complex operating and delivery systems which will be required to compete with the industrial giants. In the meantime, these corporations which allegedly are not "special" -- as defined by a Federal Reserve president -- are eating our lunch.

American Express, which the stock market capitalises at a value higher than that of any bank or bank-holding company, has all three characteristics the Fed calls "special," but none of the handicaps: Amex, via various subsidiaries, provides transaction accounts; it provides guarantees that give others back-up liquidity; and it is a "transmission belt" for monetary policy since it is a primary dealer in government securities.

Many of the laws we live by were passed many years ago, some to redress problems that careful historians with the benefit of hindsight now know were based on false perceptions. The President's Council of Economic Advisers stated recently:

It is now widely asserted that the length and severity of the banking collapse of the 1930s was not the result of overly risky bank portfolios. Rather, many economists argue that these failures became widespread, initially, because of the reluctance of the Federal Reserve System to engage in aggressive open market operations to counter the conversion of deposits to currency and, later, because of the Federal Reserve's failure to assure adequate liquidity to banks experiencing runs on their deposits. As banks scrambled to liquidate their assets to meet the demands of their depositors for currency, their asset values fell, thus creating insolvencies.

This was a mistake not likely to be repeated. Part of the reluctance in those days to supply liquidity was that the Fed's own reserves were strained as the run on the dollar was depleting its stock of socalled "free gold". The Glass-Steagall Act helped eliminate the problem by upping the amount of "free gold", and by making government bonds eligible as collateral at the discount window. It also did some other things in response to another place and time.

The distinguished Senator Carter Glass of Virginia, a one-time Secretary of the Treasury and the father of the Federal Reserve Act, and his colleague, Henry Steagall from Alabama, would have been amazed, not to say dumbfounded, to watch the activities at the Chicago Mercantile Exchange and elsewhere in futures, options, puts and calls on all kinds of commodities and securities. It is a wholly different world today than the one Senator Glass and Congressman Steagall knew. But even then, Carter Glass had no desire to protect markets. He wrote for example: "There is entirely too much running to Washington by business, by agriculture and by labour. That way lies paternalism, with socialism just beyond."

To a certain extent, the old statute now contributes to the danger to the banking system. Anything that prevents implementing the first rule of sound banking, the wide diversification of risk, contributes a potential hazard to the system. It follows from this, that if we are really interested in the stability of the banking system, we must find ways to deliver new products to new customers in order to maintain a spread of risk in a business that is losing traditional products and customers.

Recently the Comptroller of the Currency, Robert Clarke, stated the problem with great clarity: "Restrictions on allowable activities", he said, "have prevented US banks from effectively serving changing customer needs, while other financial competitors have made significant inroads into some of the best banking market segments." He went on to say that "efforts should be directed at how to structure the new activities so as to allow flexibility and still protect the bank-not at delineating which activities should be permitted. I think we will find that there are few , if any, activities that cannot safely be combined with banking. "

Another philosopher -- a non-financial one -- put our dilemma succinctly: ". . . A cousin of mine," Gertrude Stein wrote, "once said about money, money is always there but the pockets change, it is not in the same pockets after a change . . ." To a large extent it is the bankers' choice of whose pocket the money will be in: theirs or someone else's.