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The problem is that hot money knows no loyalty. At the first hint of trouble, rumored or real, these depositors tend to yank their funds. Says William Ogden, who was installed by Government regulators in July as chairman of Continental Illinois: "A modern run on a bank doesn't show up in lines at the teller windows, but in an increasing erosion of its capacity to purchase large blocks of funds in money markets." To ward off such electronic panics, many banks have tried to widen their deposit base to include a larger number of savers and to court better relations with big depositors.
As bankers try to diversify into new financial services, in order to compete with Sears, Merrill Lynch and the other money bazaars, they are pushing boldly into once forbidden fields, including insurance, stock brokerage and interstate banking. Congress has been slow in passing legislation that would control entry into these areas, so financiers have gone ahead on their own. Says C. Robert Brenton, former president of the American Bankers Association: "The Government has no vision for the evolution of the financial-services system in this country. We are quickly putting together a jerry-built financial structure, which includes flaws that work against the best interest of the public." Citicorp, for instance, plans to offer insurance by mail from offices located in South Dakota, the only state that allows banks to enter that field. BankAmerica and others also sell stocks through discount brokers, which is legal as long as they offer no investment advice directly in connection with the trade. The FDIC last week set rules so that 9,300 state-chartered banks can buy and sell corporate securities for their customers.
Despite the 1927 Pepper-McFadden Act and many similar state laws that forbid banks to set up branch offices outside their home state, major institutions have exploited technicalities to spread like kudzu across the landscape. Citicorp now operates 980 offices in 41 states. Comptroller of the Currency Conover gave the movement a boost this month by approving permits for 83 so-called nonbank banks. These are institutions that can take deposits and provide all other financial services except making commercial loans. Banks have also tried to boost their share of the mortgage market by acquiring thrift institutions, the traditional source of home loans. Last January Citicorp, for example, bought Chicago's troubled First Federal Savings & Loan ($4 billion) and Miami's New Biscayne Federal Savings ($1.9 billion).
The trend toward national banks worries people both inside and outside the industry. Says Rhode Island Democrat Fernand St Germain, chairman of the House Banking Committee: "Deregulation poses the greatest threat to the continued existence of a network of small and medium-size community banks. The claims [by the large banks] that deregulation is as good as ice cream and apple pie are beginning to wear thin." Donald Nutt, president of Baldwin State Bank ($25 million) in Baldwin City, Kans., frets about depersonalization. Says Nutt: "It's easy for the big banks to lose the human touch. If