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Make Federal Deposit Insurance a Lasting System : Financial reform: Shun the special interests and consolidate regulatory functions in one independent agency.

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Deposit insurance reform offers Congress the best opportunity since the Depression to put in place a stable financial system that will last. The economic future of the nation depends on the ability of Congress to act and not succumb to the onslaught of demands from the special interests.

Unfortunately, deposit insurance reform lacks the burning spotlight of the media and the public indignation that spurred Congress to make the tough decisions on the savings and loan bailout of 1989. Unless the public’s attention can be focused again, we are certain to see the financial lobbyists invading Washington, dusting off longstanding industry wish-lists, seeking special treatment and a new round of regulatory loopholes.

The Administration has taken its first step toward reform with the release of an ambitious study, titled “Modernizing the Financial System.” There is much to be commended in this huge document, but already we see evidence that the special interests and the regulatory bureaucrats have been gnawing at the edges of the Administration’s announced resolve to reform the system.

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The Administration insists on adding new risks--expanded bank powers--to a proposal ostensibly designed to reduce risks. Expanded powers to allow entry into securities and insurance arenas have long been on the wish-list of the nation’s big banks. These issues should be given consideration, but not at a time when the insurance funds and the industry are already carrying a full load of risks.

Surely, good public policy calls for the speed limits to be posted, the highway patrol officers hired and the guard rails installed before we send taxpayer-insured vehicles--banks--speeding onto a new superhighway.

Even more troublesome is the proposal to allow commerical firms--presumably corporate giants like General Motors--to own bank holding companies. This raises the specter of massive economic concentration that could limit competition across a wide sector.

This year’s reform effort should focus on the real needs--strengthening of the deposit insurance funds and establishing the kind of airtight regulatory approaches that minimize taxpayer risks and increase stability. At best, the new powers proposed by the Administration could be used by only a handful of the biggest of the big banks. This would do nothing, even under the most favorable of economic circumstances, for the great majority of the nation’s 13,500 commercial banks.

The Administration, however, should receive high marks for recognizing the need for stronger supervisory powers. It is right on the mark in its proposal to require early intervention by the regulators when an institution’s condition deteriorates and threatens to endanger the insurance fund.

Unfortunately, this forward step by the Administration is accompanied by an outlandish plan for restructuring and scattering an already horribly scattered and disjointed federal regulatory structure. National banks and thrifts would be regulated in a subagency of the Treasury Department; the Federal Deposit Insurance Corp. would be stripped of its regulatory powers, and the Federal Reserve Board would find itself regulating all state banks. Meanwhile, regulation of bank holding companies would be scattered somewhere within the Treasury and the Federal Reserve. Credit unions would be in still another agency. It would take a 10-pound directory and a team of guide dogs to work through this structure.

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What is needed instead is consolidation of all the federal regulatory functions in a single agency, which would operate under the direction of an independent five-person board. Such a panel would be free of political departments like the Treasury and outside of agencies that are dominated by other duties such as the Federal Reserve’s critical monetary policy functions. The tremendous job of regulating an increasingly complex financial community requires the full-time effort of an independent and coordinated agency. Otherwise, we are setting the nation up for another costly regulatory failure that could make the savings and loan disaster look like a walk in the park.

Deposit insurance reform must be undertaken with a sense of urgency that rises above the outmoded regulatory structures and the special pleadings of the industry trade associations. Reform cannot be accomplished by handing every regulatory bureaucrat and every segment of the financial industry a piece of cake. The taxpayers can no longer afford such a system.

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