Treasury bank plan would risk deposit insurance, GAO says


WASHINGTON -- The General Accounting Office said yesterday that the Treasury Department's banking reform proposal may hurt the deposit insurance fund by placing too much emphasis on making U.S. banks internationally competitive.

The Treasury's proposal would give banks powers to underwrite securities and enter related businesses to enhance their ability compete on the world market.

However, the congressional investigative agency warned that "the more competitive markets get, the more tempting it becomes for banks to abuse expanded powers and attract federally insured deposits to take greater risks in attempts to gain market share or higher profits."

GAO, in a report to Congress released yesterday, said banking powers should only be expanded after Congress enacts laws requiring bank holding companies to:

* Ensure their subsidiaries meet minimum capital requirements.

* Limit transactions between affiliates.

* Provide adequate disclosure on products sold by various affiliates.

GAO noted that the Treasury proposal would simultaneously allow expanded powers while trying to strengthen the holding company structure. However, the improvements in the structure "should be made before consideration is given to expanded powers, not coincident with their approval," it said.

The Treasury tries to limit the scope of deposit insurance and impose more losses on uninsured depositors "than is possible or consistent with maintaining market stability," GAO said. Such limits should be attempted only when "the banking system is stronger, and regulatory, capital, financial reporting and other reforms have been adopted, and depositors are provided with alternatives" for protecting deposits that exceed $100,000.

GAO said it did not believe encouraging non-banking firms to acquire banks is necessary to ensure safe and sound banking. GAO also said it saw no need to reconfigure the banking regulatory structure.

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