Banks on Thin Ice

September 17, 1990

Washington is now fully alerted to the need to reform the way commercial banks are regulated and individual deposits are insured to avoid a repeat of the savings and loan mess and its consequent mega-billion burden on U.S. taxpayers.

Two back-to-back reports last week from congressional watchdog agencies warned that bank failures and a rolling recession could seriously deplete the funds of the Federal Deposit Insurance Corporation, the agency created in the depths of the Depression to restore confidence in the banking system. The result is a move to tighten banking regulation and strengthen financial guarantees with a thorough overhaul of the FDIC.

After the General Accounting Office and the Congressional Budget Office issued bleak reports warning that FDIC insurance funds are on thin ice, Federal Reserve Board chairman Alan Greenspan rushed to Capitol Hill with words of reassurance. "The chance of having the type of problems with banks that we have with thrifts is very significantly lower," he declared. Nonetheless, Mr. Greenspan went along with key legislators in proposing increases in the premiums banks pay to the FDIC to insure deposits -- so long as higher charges do not push weak banks over the edge. FDIC chairman L. William Seidman has taken a similar position but has said a recent premium boost should be sufficient for the coming year.

In contrast to a fairly wide consensus on this point, proposals for reform of the banking system are all over the lot. Mr. Greenspan would favor increases in reserves, though this would work at cross-purposes to his desire to end a credit crunch that is exacerbating problems in the real estate market and depressing the economy. Various members of Congress have urged everything from applying deposit insurance fees to overseas deposits to having the Federal Reserve System pay interest to the FDIC on the $34 billion in reserves it holds from the commercial banks.

Beyond such fire-extinguisher responses, there also should be an effort to force more responsible practices on high-rollers in the industry. Perhaps banks loaded with risky-loan portfolios should be charged, like bad drivers, a higher insurance rate than soundly operated banks. Perhaps the $100,000 limit on insurance per individual deposit should be lowered as a means of discipline.

Whatever is done -- either rush-rush legislation now or action at a more deliberate pace next year -- significant steps must be taken to avoid having the cost of another financial catastrophe dumped on the taxpaying public. The whole financial system and its various regulatory (i.e., protective) agencies is a confusing, cross-hatched mish-mash. Unless the nation has reason to believe commercial banks are sound and prudently managed (as many are), the economic outlook will become immeasurably darker.

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