High Priority on Bank Reform

October 03, 1990

Troubles in the banking industry have fostered a quick consensus in Washington that action is needed to shift the risk from taxpayers, already burdened by the S&L bailout, to the banks and their depositors. The pivotal player in such a change would be the Federal Deposit Insurance Corp., whose funds are under threat because of a growing list of bank failures.

While Capitol Hill is awash in various reform schemes, the Bush administration's recommendations are likely to set the broad parameters of major legislation next year.

Its early ideas are promising: Imposing higher fees on banks with high-risk loan portfolios; tightening standards for real estate loans which have been the main cause of the current downturn in the industry; transferring riskier transactions to affiliated institutions not eligible for FDIC protection and limiting coverage for pension funds and other big depositors.

All these and other proposals will have to be judged on the basis of their potential financial impact. It will do neither the nation nor its taxpayers much good if the banking industry is pulverized in the name of reforming it. FDIC officials contend that warnings from two congressional agencies of S&L-scale problems were alarmist.

In the end, most of the costs of deposit insurance -- like all other costs of doing business -- will be passed to the public in the form of higher banking fees or lower interest payouts. Therefore, reforms will have to do more than protect the FDIC insurance fund without tipping still-viable institutions into bankruptcy. They will have to instill discipline through higher capital requirements, oversight, limits on risk-taking and incentives for sound banking practice. The too-big-to-fail theory, which in the past has provided greater protection for large banks than for small banks, also needs close scrutiny.

While recent legislative hearings have provided a basis for prompt action next year, the Bush administration will now have responsibility for keeping the momentum going past the election and into the new congressional session. A formal, detailed proposal before year's end would help.

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