Not many of us have owned a stock that has risen 25-fold over nine years (that's an annual average increase of 50%). Such stocks are almost always in the high-tech area: Microsoft, Dell, Intel, and so on. Seldom if ever are banks included in this list. However, Citigroup Inc. is now trading for approximately $50 a share; back in late 1990, adjusted for splits, it was less than $2. Some claim that the recent termination by Congress of Glass-Steagall, the 1933 Act that prohibits banks from engaging in other financial services, will mean banks are free to do what they could not do before, namely to buy other types of financial institutions and boost their growth rate. Technically Citicorp did not buy Travelers last year; it was the other way around, because the law permitted that. Banks could not buy other financial institutions, but insurance companies could buy banks. Now we are led to believe that somehow it will all be different. I don't expect Citigroup stock to continue to rise 50% per year for the next 10 years, and neither does anyone else. Most of the gain occurred because Citigroup figured out how to break down the walls of Glass-Steagall long before Congress got around to eliminating them. While Citigroup has had astounding success over the last decade, many other less famous banks have done almost as well. One of the major reasons was the widening of the spread between the prime rate and the federal funds rate from 1-1/2% to 3%, which allowed banks to recapitalize and expand their loan portfolios. In addition, a generally rising stock market has helped virtually all financial institutions. Having said all this, financial stocks are likely to underperform the market over the next few years, and since I expect only a 5% to 8% annual gain over that period, that means many bank stocks will be flat to lower. Far from ushering in a new wave of prosperity for financial-sector stocks, most of the big gains have already occurred. It's true that interest rates won't change very much, and the prime-rate/federal-funds spread will remain the same. Usually this type of environment favors banking stocks. However, the most important factor will be the negative impact of deteriorating loan quality once the economy does slow down and the unemployment rate begins to rise. The last few years have seen the return of the 125% mortgage and the negative-equity car loan. As long as those loan recipients retain their jobs they will keep making the payments, but as soon as they are unemployed, the keys will be turned back to the lending institutions. Also, the widespread practice of issuing loans over the Internet will benefit those financial institutions that already have the network in place, but will cut into the business of banks that have fallen behind the curve and plan to implement Internet access in a year or two. The upshot of all this is that some political wizards are going to put two and two together and come up with five, claiming that it was the termination of Glass-Steagall that caused banks to engage in unwise lending practices and ruin their capital position. If only banks had stuck to their knitting, they will say, and not tried to sell insurance and act as brokers. When the next wave of bank failures occurs, we are likely to face demands for more bank re-regulation, just as was the case a decade ago. Some banks will be able to rise above it, but they will be the ones that carefully plotted their strategies years ago, not those that suddenly awoke to take advantage of financial integration now that Glass-Steagall has been discontinued. Those Johnny-come-latelies will end up with the reward usually reserved for those who dally: the oyster instead of the pearl. Michael K. Evans is president of the Evans Group and professor of economics at the Kellogg School of Business, Northwestern University, Evanston, Ill. His e-mail address is [email protected].