The federal government has to take care not to destroy the banking industry for the supposed purpose of saving it.
Although taxpayers are in no mood to bail out shaky commercial banks after having to shell out $200 billion for failed savings and loan institutions, proposals to slap a $25 billion special assessment on banks should be approached with caution. While something must be done to bolster the fast-shrinking fund that insures each deposit up to $100,000, it will do nobody any good to push wobbly banks over the edge and deny stronger banks the capacity to make loans essential to get the nation out of recession.
So if political realities make it imperative for banks rather than taxpayers to take the hit, the government will have to be considerate of weak institutions and take actions that limit damage in the industry as a whole.
One step would be to lift Depression-era restrictions so that commercial banks can get into insurance, trading in securities, direct investment in physical assets and interstate operations. This would help some big money-center banks faced with foreign competition. What it would do for smaller banks is open to debate. Closer regulation would be required to avoid risky ventures that would merely compound current problems.
Another step, which deserves instant approval, is to enforce dividend restraint on banks whose earnings no longer justify usual payouts to stockholders. While this might depress the value of certain bank stocks, it would retain capital needed both for continued lending and for dealing with problem loans already in the portfolio.
Because the nation has entered the recession with so many of its financial institutions in terrible shape, the plight of the banks cannot be divorced from the state of the general economy. The Federal Deposit Insurance Corp. was organized for the express purpose of preventing the kind of banking collapse that deepened and prolonged the Depression. This policy still obtains. The FDIC's Bank Insurance Fund must be preserved at all costs if the public confidence necessary for an early economic recovery is to be preserved.
Next month the Bush administration will be offering a banking reform package that attempts to combine the sour and the sweet. Higher assessments for the FDIC fund, tougher regulation, incentives for sound banking practices and limitations on dividends should be accompanied by the lifting of obsolete restrictions on the fields banks can enter. This could be the biggest overhaul of the banking system in more than half a century; it had better be a good one.