One Good Turn In Banking Reform...

It's called the "December Surprise." Under a law that Congress enacted last year, after Dec. 19 federal regulators will be forced to seize or close many banks unable to meet stiff new capital requirements. Right now, regulators can seize institutions only when all of their capital is gone. But Congress decided the tougher approach was necessary to prevent the kind of regulatory forbearance that added billions to the cost of the cleanup of failed savings and loans. The Democratic leadership, with the consent of the Bush Administration, set D day for six weeks after the election. That set the stage for what could be the closure of dozens of troubled banks when the new law takes effect.

Although it comes late, the legislation is a sign that Washington has begun to confront the banking industry's problems--and their financial impact on the government. By enabling regulators to move when a bank may still be attractive to a buyer, the new law could save taxpayers vast sums.

But lawmakers haven't quite finished the job. It is even more important that Congress find the guts to scale back deposit-insurance coverage to a maximum of $100,000 per individual. Large depositors may howl, but surely they have the financial sophistication to find banks where their money would be safe. And banks would have a bigger incentive to keep their balance sheets clean.

The Treasury Dept. has already lent the banking industry $70 billion to cover the losses in closures. While the industry insists that the money will be repaid, there is no guarantee that Uncle Sam won't end up footing part of the bill. Stricter limits on deposit-insurance coverage could help shrink the ultimate tab.

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