Banking: Survival of the Fittest

December 04, 1991

Darwinian is the word for the banking measure passed in the dying gasps of the 1991 Congress. Its effect, for better or worse, will be to insure the survival of the fittest and the demise of the weakest. Banks already in trouble will become even more endangered species. Government will exert a heavy hand by imposing strict capitalization requirements on wobbly banks that might force their closure or their absorption by stronger financial institutions.

Thus, the deregulation binge of the 1980s has led to re-regulation in the 1990s. Irresponsible lending practices that got a lot of banks and S&Ls in trouble during the free-wheeling Reagan era will be followed by tougher discipline and a continuing shakeout in the industry.

In strictly business terms, this was a minimal reform waiting to happen. Its timing, however, could hardly be worse, coming at a time when the economy is gripped by double-dip recession. Re-regulation, plus the higher fees that now will be imposed to finance a $70 billion replenishment of the Federal Deposit Insurance Corp., will impose higher costs on a faltering industry precisely at the moment when a faster flow of credit would do much to stimulate a recovery.

Such perversity is primarily the fault of Congress, which allowed itself to be so immobilized by powerful lobbies working at cross-purposes that it muffed a chance to make the banking industry more profitable and more able to compete effectively with giant conglomerates in Japan and the European Community. President Bush, however, has to share the blame. Although Treasury Secretary Nicholas Brady made a valiant if clumsy effort to promote the most sweeping banking reform since the New Deal, the president never put his full prestige behind it.

What emerged, instead, was largely a measure to bail out the FDIC -- "must" legislation that tended over time to work against rather than for the cause of broader reform. Out the window went proposals to allow banks to establish branches nationwide and to engage in insurance and securities operations with the flexibility now allowed many other financial businesses. Rivalry between turf-conscious House committees and poor leadership on the part of Senate Banking Committee chairman Donald W. Riegle Jr., D-Mich., led to the unraveling of what was supposed to be a Bush administration priority.

Prospects for next year are dim, partly because of exhaustion and largely because of politics. The economy can expect no help from this quarter. What happened to banking legislation is a commentary on what is wrong with Washington.

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