Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, February 24, 1991 TAG: 9102250279
SECTION: EDITORIAL PAGE: D-2 EDITION: METRO
SOURCE:
DATELINE: LENGTH: Medium
Even so, Congress should deliberate with great care on the phone-book-length proposals the Treasury Department has offered for overhauling banking regulation. Its plan would radically alter the current system which, though frayed and tattered, was organized as a response to bank failures during the Great Depression.
There is mostly good in the Treasury's proposals, to be sure, and timid measures won't do. But hard work will be required - amid clamorous lobbying - to sift through the plan, enacting and strengthening the sound, debating the dubious and rejecting the harmful recommendations.
Among the good proposals:
An erasing of barriers to interstate banking. Banks should have the same opportunities to open branches and expand in this country as they now have abroad. The effect of diversifying markets (so a New England or Texas bank, for example, might not be so closely tied to the fortunes of a single region) would buttress banking. There still would be a niche for small, service-oriented local banks.
Greater discipline in bank lending. The Federal Deposit Insurance Corp., under the Treasury Department's proposal, would impose higher fees for deposit insurance on banks with risky portfolios. This would add incentives for prudence and reward banks with strong capital reserves and performance records.
Permission to diversify into other lines of business. Insurance companies, mutual funds and brokers don't like the idea, but there's no good reason why - with proper safeguards - banks shouldn't be allowed to sell insurance or stocks. As long as capital requirements are raised, and other lines of business are properly separated from insured accounts, such diversification would benefit banks and consumers.
Mandatory intervention when bank reserves begin to slip. The tradeoff for allowing banks to diversify has to be closer regulatory scrutiny and less-arbitrary regulatory discretion. To avoid any repeats of the savings-and-loan debacle, struggling banks must be prevented from granting dividends or extending new loans before their losses become a hemorrhage.
The Treasury proposal has its bad points as well. For example, it would break down to too great an extent the separation between banking and commerce. It's one thing to allow well-capitalized banks to sell insurance. It's another to allow industrial companies to own big banks.
As financial consultant Henry Kaufman has pointed out: "A large corporation that controls a big bank will give in to the temptation to use it for extending credit to those who can benefit the whole corporation . . . [while withholding] credit from those who are, or could be, competitors." Credit decisions would be corrupted, and the economy made less efficient. Commercial ownership of banks isn't allowed in any other major industrial country.
The Treasury plan's other major fault is that it doesn't pare back deposit insurance sufficiently to protect the federal insurance fund. Under its proposal, an investor could insure an account up to $100,000, and keep another $100,000 insured in a retirement account. This $200,000 in fully insured deposits could be duplicated in any number of banks, so there really would be no limit on what is insured.
Congress should limit federal insurance to $100,000 per depositor. As the nation has been painfully reminded, taxpayers have to assume liability for such insurance. Nearly all depositors still would be protected, and big depositors would have more incentive to keep an eye on bank management.
If these faults and others are fixed, the Treasury's package will be well worth enacting. More profitable banking, properly regulated, would be safer banking. More credit would flow again, and everyone would benefit.
by CNB