Doing Banks the Wrong Favor : Liberate the industry, don’t just fix the FDIC fund

House Banking, Finance and Urban Affairs Committee Chairman Henry B. Gonzalez (D-Tex.) plans to get a banking bill to Congress before Memorial Day. Unfortunately, the measure is expected to focus solely on the Federal Deposit Insurance Corp., which oversees the federal fund that insures bank deposits. That makes it half-baked.

How can such narrow legislation offer banks some answers to the crucial, broader questions, such as how banks can make more money so that they can flourish, and avoid the kind of trouble that triggers the need to draw on the funds of the FDIC?

The bank fund is indisputably in need of shoring up, but Congress must not stop there; that would be a mistake. Banks are badly in need of legislative changes that would free them to open branches across state lines and enter new businesses, such as securities and insurance. Hemmed in by outdated Depression-era laws, banks have had to rely on an increasing volume of risky real estate loans that have tumbled into default. That in turn has triggered the bank failures that are eroding the FDIC fund.

The temptation in Congress is to just fix the fund, especially with an audit by the General Accounting Office expected to put new spotlight on how fragile that fund really is. The GAO’s estimate of the bank insurance fund, to be disclosed Friday, is said to be roughly half the $8.4 billion the FDIC said it had at the end of last year. Considering that the FDIC fund is the banks’ safety net, that’s really not enough safety.

Gonzalez’s bill is expected to provide for recapitalization of the insurance fund, faster intervention on troubled banks, annual examinations and audits, improvement in controls on bank management and better regulation.

All this is needed, and the faster the better, to help the FDIC and troubled banks.

But what about healthy ones, trying hard to succeed? They need enhanced powers to expand their businesses, albeit with the necessary safeguards to protect depositors. It’s true that banks are in better shape than battered savings and loans, but banks still need to find new sources of capital. What’s needed is to reinvigorate the banking industry, whose troubles after all are at the heart of the FDIC’s problem. Legislation that just addresses the fund is shortsighted and neglects a key element of what’s needed to accomplish true reform.

Bank reform is a political hot potato: In the wake of the savings and loan disaster, Congress is gun shy about getting involved. But if it ducks this one, it may find another serious and politically treacherous problem hanging over Washington.