Overhaul of Bank System Indicated : Deregulation: Treasury secretary suggests he may propose allowing institutions to sell other services. He opposes lowering $100,000 limit on deposit insurance.

Treasury Secretary Nicholas F. Brady on Wednesday hinted at the broad outlines of the Bush Administration’s forthcoming plan for overhauling the U.S. banking system and urged Congress not to let the current savings and loan crisis block further deregulation of banks.

In testimony before the Senate Banking, Housing and Urban Affairs Committee, Brady indicated that the Administration probably will propose allowing banks to sell other financial services, such as insurance and corporate equities, and permitting them to operate across state lines to help make them more competitive.

He also indicated that he opposes suggestions that the government reduce the current $100,000 limit on federal deposit insurance for banks and savings institutions, despite contentions by some critics that the generous insurance level encourages irresponsible investments by bankers and thrift operators.

“I can’t see a rush to lower it (the insurance ceiling) at this particular time,” Brady said.

Brady’s remarks constitute an early, if still tentative, glimpse at the plan for a sweeping restructuring of the financial system that the Administration is preparing to send Congress in a few months. Brady is overseeing the effort, which currently is under tight wraps. The Treasury recommendations are expected to be made public next year.

Despite continued questions from committee members, the Treasury secretary declined to divulge specifics about what the Administration is considering in its review of the banking system. But he expressed a willingness to consider other proposed changes, although he implied that many of them would be difficult to implement.

Brady indicated, for example, that one possible reform might be to restrict federal deposit insurance to one account per person. “If you were going to start any place,” he replied to a question from Sen. Alan J. Dixon (D-Ill.), “that would be a place to start.”

And he agreed that the idea of charging more for deposit insurance to those banks that have risky portfolios is something “we should look very closely at.”

Many analysts have blamed the high ceiling on deposit insurance--which was lifted from $40,000 to $100,000 in the early 1980s--as contributing to the S&L; debacle by encouraging thrift owners to expand into risky ventures without worrying about potential losses.

Raising the ceiling made it far easier for high-flying thrifts to attract large depositors by promising to pay them above-market interest rates, these analysts said.

Brady, however, argued that the underlying problems with the U.S. financial system generally lie elsewhere and indicated that he does not think the federal guarantee to protect depositors against losses is chiefly responsible for the S&L; mess.

If the Administration does propose to end the federal ban on branch banking across state lines, it in many ways essentially would ratify what has become a trend in the marketplace.

Although banks currently are prohibited from establishing branches in another state, many larger institutions, such as Citicorp, have gotten around the restrictions by purchasing S&Ls; in other states and converting them into savings banks that issue checks and provide most consumer banking services. Such institutions all bear the Citicorp logo.

Opponents of interstate banking have contended that allowing banks to expand across state lines would enable large money center banks to take over the lion’s share of the banking business in the nation, pushing out many smaller local banks that would not be able to compete.

But those who favor allowing banks to establish branches at will say that that change would provide improved service for consumers and would strengthen the entire banking system. Sentiment in Congress has been moving toward this point of view.

Brady’s testimony provided important insights into his current thinking, echoing Federal Reserve Chairman Alan Greenspan, who testified on the subject earlier this month. Brady argued that the key reason for the collapse of many thrifts in recent years was a failure to require operators to invest more of their own capital.

As a result of wasteful S&L; loans and investments, out-and-out fraud and poor management in the face of the financial market upheaval that began in the late 1970s, the thrift debacle is expected to cost taxpayers at least $150 billion before interest costs are added.

“We learned all too painfully from the thrift crisis that a crucial protection for the taxpayer is requiring firms to have a substantial amount of their own money at risk to absorb losses,” Brady said.

At the same time, Brady contended that the thrift industry catastrophe, which many blame on the fact that deregulation allowed S&Ls; to move outside their traditional role of financing home mortgages, should not deter lawmakers from permitting banks to broaden their operations.

“We will not propose changes . . . that would increase the taxpayers’ exposure,” Brady insisted. But “a system that produces institutions that are less profitable and less competitive is inherently unsafe and unsound in the long run.”

Current law, which seeks to limit banks to traditional practices despite the erosion of their franchise by powerful economic forces, actually has the perverse effect of encouraging banks to pour too much money into risky Third World loans, junk bonds, commercial real estate and regionally limited energy and farm loans, Brady said.

The Treasury secretary warned that U.S. banks will find it difficult to compete overseas, the way foreign banks are expanding in the United States, unless they are given broader powers similar to those that European and Japanese banks enjoy.

European and Japanese governments permit their banks to offer a wide range of services that American banks currently are not allowed to sell. U.S. bankers argue that as a result they are rapidly losing potential market share in the face of increasing globalization of the banking industry.

Brady also said that the complex system of financial regulation in the United States ought to be streamlined. Currently, there are three agencies regulating banks, another for S&Ls; and another for credit unions at the federal level. In addition, there are 50 state regulatory agencies.

“We . . . need to explore the reform of our regulatory structure, although, to be frank, the inevitable turf fights involved may prevent the full achievement of this goal,” he said.

Brady cautioned in his testimony that the Administration still has not made final decisions on what might be in its package to overhaul the banking industry and is not likely to do so for several months. However, the provisions to which he alluded in his testimony long have been favored by Republican policy-makers and the Senate has passed similar legislation in the past, although it has been derailed in the House.

Senate Banking Committee Chairman Donald W. Riegle Jr. (D-Mich.) said that he would support the Administration’s effort to reform banking regulations but it is not clear how quickly Congress might act on any proposal that the Administration might send it.