Reform You Can Take to the Bank : Slowly but surely, please, in a tricky area
At no time since the Depression has the question of bank safety and soundness been so worrisome. Recession jitters, exacerbated by a credit crunch and other unsettling banking news, are obscuring the fact that most banks are relatively healthy. To help restore public confidence, the Administration and Congress need to make some large and overdue changes in U.S. banking.
In his State of the Union address Tuesday night, President Bush said he will offer Congress proposals calling for the first major overhaul of banks since the 1930s. He did not give specifics but the proposed changes would permit structural changes to allow banks to diversify into other businesses; lift restrictions on interstate banking; create a super regulatory agency, and shore up the Federal Deposit Insurance Corp.
The Administration also is expected to propose dismantling of the traditional separation between commerce and banking. That separation was created after the Depression, when banks failed partly because they speculated in company stocks. Under the Administration’s expected proposal, banks would be allowed to underwrite and sell corporate securities, a practice now largely prohibited.
THE NEED: Banks undoubtedly are in need of such reforms. Their traditional base of corporate lending has long been cannibalized by new competitors spawned by deregulation of financial services in the 1980s. To replace the lost business, banks turned to real estate loans, which are souring at a rapid rate in the current recession. With the squeeze on profits and closer scrutiny from federal regulators, banks have recently been shy to lend, despite six interest-rate cuts by the Federal Reserve Board since August. Banks need to tap new business to raise much needed capital.
The big challenge for Washington is to come up with an intelligent, doable package that steers clear of political land mines. While the banking industry is much healthier than savings and loans, Congress is still smarting from the S & L mess. The Pandora’s box opened with the wholesale deregulation of S & Ls taught us all prudence, if nothing else.
THE WORRY: The premise for reforming banks is to restructure-- not to deregulate. Allowing banks expanded new powers must be accompanied by appropriate regulation and supervision. Maintaining and enhancing safeguards are crucial to protecting insured bank funds from unnecessary risks. As is, the Federal Deposit Insurance Corp.’s $9-billion bank insurance fund, which covers deposits, could run out of money by year end and may need $10 billion from the Treasury, according to an estimate by the Congressional Budget Office. This raises the awful prospect of yet another taxpayer bailout.
Solving the FDIC’s problems is a key and necessary element to bank reform. But, given the fund’s fragility, taking change too far, too fast might weaken Congress’ political resolve. Still, Washington cannot afford to shirk this unpopular task. It has done so too many times in the past, with disastrous results.
