Government Study Urges Banking System Changes

An Administration study group, reacting to signs of continuing problems in the nation’s banking system, is set to recommend that banks and other savings institutions be required to boost their capital base to shore up their soundness.

The draft recommendations, nearing formal approval by a working group of the Cabinet Council on Economic Affairs, also call for revamping the deposit insurance system for the first time in 51 years and requiring more disclosure of banks’ workings.

The study, which brings together a variety of suggestions under consideration among the several federal regulatory agencies for more than a year, notes that “a modern record of 5% of banks were identified as problem cases” in 1984.

It found that the top 10 banks now control 25% of total banking assets, compared to 20% in 1958, and that this trend “makes the stability of the largest banks even more important to (the) stability of the entire financial system.”

Moreover, it said, “the largest banks also seem to have invested in some of the riskier loans.”

The study was to have been adopted and made public Thursday, but Administration officials who discussed the report only on the condition that they not be identified by name said it was held up to give incoming Treasury Secretary James A. Baker III an opportunity to review it.

The study group was headed by Thomas J. Healey, the assistant Treasury secretary for domestic policy.

While noting that the current deposit insurance system has worked well since its inception, a summary of the draft report concludes that “there is concern that the economic changes and the potential increase in riskiness of large institutions may threaten the ability of the insurance funds to fulfill their goals.”

Without getting into specifics, the report outlines five basic recommendations:

- Replace the flat-rate percentage of deposits that institutions must pay into their federal insurance funds with a sliding scale pegged to the degree of risk.

Institutions with a high proportion of potentially “bad” loans would have to pay a higher percentage than more conservative institutions. All now pay the same: 1/12 of 1%; 60% is usually then rebated.

- Require the institutions to increase their capital bases, including holding shareholders and other unsecured investors more liable for maintaining bottom-line soundness.

- Impose new accounting and disclosure requirements that would give both the public and regulators a better insight into how the institutions conduct their day-to-day business.

- Consider increasing the target sizes for the federal insurance funds and impose premium payment requirements on foreign as well as domestic deposits for institutions that have foreign branches.

- “Work to improve the examination, supervision and enforcement functions of the regulatory agencies.”