Rewriting Banks' Insurance Policy

Financial oversight of U. S. banks is still rooted in the Depression. In those days, regulators felt their mission was to keep as many banks viable as possible. But distinctions between banks and other financial institutions have eroded; a consumer may be able to earn a better yield on his cash by taking it out of his federally insured bank account and opening a money-market account with American Express. As long as banks can count on Federal insurance protecting their depositors, they have little reason to become more efficient to meet this threat. Instead, to produce the profits necessary to offer returns as good as the competition's, banks have taken greater and greater risks. Federal regulators looked the other way as long as income statements stayed out of the red. Now, U. S. taxpayers are paying a hefty price for this inattention.

The Administration wants to help banks to compete by cutting the number of agencies regulating the industry, and by giving them broader powers, including branching nationwide to diversify their risk. All well and good. But Washington must insist that if banks want to keep up with the competition and retain federal insurance, they have to drastically cut operating costs. To accomplish this, banks may have to offer lower yields on insured accounts. In any case, banks may have to shrink, consolidate, or merge.

New international capital standards mean many U. S. banks will have to beef up capital sharply by 1992. That's sure to speed up the consolidation process. Even as it considers allowing banks to meet their unregulated competitors product for product, Congress and the Administration must set a timetable for reducing the scope of federal deposit insurance, as well as ensure that banks are run soundly. A harder line may cause some banks to go belly up. But even more will fail if the U. S. doesn't pull its Depression-era regulatory system into the 1990s.