Some Banking ‘Cures’ Are Not : The Administration would let industrial companies own banks--and that’s foolhardy

With remarkable speed and efficiency, the Administration’s ambitious package of bank reforms is moving through legislative committees. So far, so good--the troubled banking industry is in need of change. But progress should not be at the expense of prudence, especially when it comes to opening up bank ownership to just about anyone. That happened with the savings and loan industry, and the rest is nightmarish history.

That’s why the Administration’s proposal to allow industrial companies to own banks for the first time would be a big mistake. The need for new capital doesn’t justify the potential risks. And the timing is poor, considering current weaknesses in the banking system.

The Administration’s banking package will soon go to the House Committee on Energy and Commerce. Overall, the legislation seeks to free banks of Depression-era laws that put them at a competitive disadvantage. That means allowing banks to branch across state lines and enter new businesses, such as insurance and securities. Such welcome changes would enable banks to tap new revenue sources, as long as they establish separate units to sell the new services. Establishing “fire walls” between such activities is critical to making sure that insured bank deposits are not misused.

But opening up bank ownership to industrial companies needlessly complicates bank reform. Many commercial and industrial firms already are in the lending business and are doing just fine. The so-called non-banks operated by U.S. corporate giants such as General Motors, General Electric and others make a variety of loans to consumers and businesses. These non-banks have been operating outside traditional bank regulations and are not protected by federal deposit insurance. The vagaries of the marketplace force discipline on the non-banks, which have prospered by competing with traditional banks.

The goal of banking reform is to make traditional banks more competitive with these new entities, not to make non-banks more like banks. Under liberalized bank ownership, opportunists could abuse their bank privileges, knowing that the government would pick up the tab for any misdeeds, as the S&L; debacle so painfully illustrated. Imagine if some hard-pressed company decided to dip into the till of its government-insured bank affiliate and then it went belly up. Who would pay?

The proposal should be abandoned. Legislators ought to focus instead on imposing new, stricter deposit insurance limits. Banking reform must solve existing problems, not create new ones.