Top '91 priority goes to reform of financial sector


Washington--The Bush administration will seek a broad overhaul of the commercial banking and securities industries as one of its top priorities for the forthcoming congressional session, according to top Treasury officials.

The plan, which President Bush intends to emphasize in his State of the Union address, would amount to the largest revamping of the financial industry since the restrictions on bank powers were imposed during the Depression.

Proposals being drafted by the Treasury Department would remove the barriers to interstate banking, allow the merger of banks with securities firms and move deposit insurance at least partially back to its original purpose of protecting only small depositors.

The intent is to strengthen both the ailing banking and securities industries.

With the banking system in its weakest condition since the Depression as a result of a depressed real estate market, heavy debt incurred by developing countries and losses on corporate buyouts, the administration believes that allowing banks to enter new fields, such as trading and underwriting securities, would encourage new capital to flow into the institutions.

That fresh capital would help the banks recover from the current slump by giving them a greater cushion against losses, officials say.

New capital also would dampen speculative investments and loans, since more of an institution's own money would be at risk. Officials point to past speculation by the savings and loan industry, allowed by deregulation in the early 1980s, which has led to the current huge taxpayer bailout of that industry.

The administration intends to couple its proposals, to be made public early next month, with increased charges on banks as a means of shoring up the severely depleted deposit insurance fund.

For consumers, the new charges would mean somewhat higher fees for bank services, an increase in interest rates on loans and slightly lower interest earned on deposits, to the extent that banks can pass along the increased costs to their customers.

A major battle over the administration's proposals is likely, as smaller banks take issue with recommendations that they fear will favor large institutions.

Under the administration's proposals, the most visible part of the government's banking role -- insuring deposits up to $100,000 per account -- would remain intact.

But officials said the administration intends to scale back one aspect of the deposit guarantee -- the enlargement made in recent years, under a "too big to fail" doctrine, to cover deposits above $100,000 in large banks whose demise regulators feared would jeopardize the economy.

Insurance would be reduced on deposits that exceed $100,000, officials said.

To protect big banks and savings and loans, regulators have foundbuyers to take over those institutions, despite the heavy cost to the deposit insurance fund. But this policy has not been applied to smaller banks, whose failure was believed to have limited repercussions, even on local economies.

Last summer, the Federal Deposit Insurance Corp. covered all deposits when it seized the National Bank of Washington, but the agency did not protect all deposits over $100,000 when the Harlem-based Freedom National Bank, one of the country's largest minority-owned banks, failed last month.

The bankruptcy of the savings and loan insurance fund and the severe depletion of the FDIC fund has forced the government to seek ways in its new reform package to curtail such guarantees for all depositors, officials said.

The guarantee itself has contributed to the shaky condition of the thrift and banking industries, Treasury officials said, by making largerdepositors indifferent to the stability of the institutions in which they place their funds.

At the same time, savings and loans in particular used the guaranteed funds to make highly risky investments, which brought on that industry's crisis.

Even though a limit on insurance is imposed, Treasury officials said the proposals would allow bank regulators flexibility if there were a risk to the economy from some bank failures.

But small banks fear that this flexibility would encourage a flight to larger institutions, which the public considers more likely to be rescued from any catastrophe.

The overhaul package came out of the 1989 legislation to bail out the savings and loan industry. That bill asked the administration to revamp deposit insurance, but Treasury Secretary Nicholas F. Brady said any insurance change must be considered in the broad context of expanding banks' powers to make them more competitive.

"The administration feels strongly that issues of deposit insurance reform -- that is, the extent and charter of the safety net -- are so closely intertwined with the question of reform of the industry's structure that it makes no sense to treat them separately," Mr. Brady told a recent meeting of security industry officials and dealers.

For several years, the Reagan administration pressed for expanding banks' powers, but the vigorous opposition of the securities industry stymied congressional action. This time, the weakened securities industry is backing changes as a way of strengthening itself.

Under the administration's package, Wall Street firms, as well as other businesses, would be allowed to buy banks, something now banned under the Glass-Steagall Act of 1933.

Banks also would be allowed to buy other banks and open branches wherever they choose, which would create the first nationwide banks. Many states have agreements with

one another to allow banks to cross state borders, but the McFadden Act of 1927 generally has limited the ability of banks to open branches across state lines.

As an incentive to strengthen a bank's capital base as a safeguard against further losses, the administration's package would grant the strongest institutions the freedom to expand into new ventures.

At the same time, the weakest banks would come under much closer scrutiny and would be subject to continued restrictions on their activities.

Those banks also would pay higher premiums to receive deposit insurance, reflecting their greater risk to the insurance fund and the potential for a loss to taxpayers. Currently, there is a flat rate for deposit insurance.

As an essential part of the overhaul package, banks would be required to isolate their expanded, riskier activities in separate affiliates so that no insured deposits would be endangered.

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