The Year for Banking Reform


Next to the gulf war, the issue most likely to engage this recession-year Congress is the need for the most sweeping reform of banking and deposit insurance since the New Deal. A wave of bank failures, depletion of Federal Deposit Insurance Corp. funds and the financial drain of the savings and loan debacle have created a crisis atmosphere.

If there is anything that makes the current recession different -- and more worrisome -- than recent economic downturns, it is weakness in many of the nation's financial institutions. And because huge federal deficits prevent pump-priming to hasten a recovery, banking reform may be the most telling response to recession Washington can muster.

The Bush administration has moved smartly to get debate going with a huge batch of proposals -- some timid, some dubious, but others designed to deal with real problems and move the banking system into a position where its biggest players can compete with much larger institutions abroad.

In the short term, the most urgent requirement is to shore up FDIC funds before taxpayers have to take a hit for failed banks as they did with S&Ls.; Treasury Secretary Nicholas Brady's compromise solution is to limit deposit insurance per customer to only two accounts of $100,000 each, one regular and one for retirement, in as many banks as the customer wishes. Smaller banks headed off a more radical plan to permit a customer these insured accounts in only one bank, but they still fear there could be a drift of funds to banks "too large to fail."

Mr. Brady is also moving to instill greater discipline in bank lending. He would have the FDIC impose higher fees for deposit insurance on banks with risky portfolios. Stronger banks with a good performance record and hefty capital would be charged lower rates and would be eligible to take part in the most intriguing of Mr. Brady's long-term reforms -- nationwide banking and branching.

Distrust of concentrations of wealth in dominant financial institutions is as old as the republic. It was manifested during the New Deal with populist legislation that barred commercial banks from dealing in securities, insurance and other financial services or operating out of state.

In recent years, however, various states have responded to new challenges by permitting banks to expand across state lines. Mr. Brady, in one fell swoop, would give this trend federal authorization. Banks could open branches and buy banks in other states more easily. Industrial companies would be permitted to own banks and, with restrictions, offer a wide array of financial services.

Congress predictably, and probably correctly, wants FDIC problems cleared up as a first order of business. But if the United States is to improve its position worldwide, its banking system will have to be up to date in financial marketing and technology and positioned for economic expansion.

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