Commentary: Opening The Door To Another Banking Crisis

Would you buy a certificate of deposit from Microsoft Corp. if it offered better interest rates than your bank? Or how about buying a CD--the musical kind--from Chase Manhattan Corp. if it beat Tower Records' prices? Sounds great. And, in fact, those choices could become real if some members of Congress have their way. But that wider selection would create a huge risk to taxpayers: the possibility of severe damage to the nation's financial system.

In coming weeks, Congress will begin marking up several bills to update the antiquated laws governing how financial services are sold. Make no mistake: There would be considerable benefit to consumers from dropping the remaining competitive barriers separating banks, brokers and insurance firms: For instance, current law lets federally chartered banks sell insurance only in towns with fewer than 5,000 residents. If allowed to sell from their other branches, banks vow they could undercut most insurance agents. The Treasury Dept. estimates that opening up competition throughout financial services would save consumers at least $3 billion a year.

PLENTY OF CAPITAL. But Representative Richard H. Baker (R-La.) and Senate Banking Committee Chairman Alfonse M. D'Amato (R-N.Y.) aren't content to stop there. They aim to eliminate many, if not all, of the barriers between banks and commercial companies like Exxon Corp. If these lawmakers prevail, we could be in for a repeat of the 1980s thrift debacle, when federally insured s&ls were deregulated and permitted to expand helter-skelter into unrelated ventures. That triggered the failure of hundreds of thrifts, at a cost to taxpayers of more than $120 billion.

Those who favor mixing banking and commerce vow to erect "fire walls" to ensure that banks wouldn't use their preferential access to money to fund nonfinancial ventures. That's wishful thinking. If the collapse of a commercial subsidiary threatened the solvency of a major bank, regulators would bail out the institution to avert a public panic. That's why regulators rescued Continental Illinois in the 1980s and took actions to head off the possible failure of Citibank in the early 1990s.

While relaxing obsolete rules separating financial institutions makes sense, there's little evidence of benefits to consumers and the economy from letting banks and industrial companies merge. The banking sector doesn't need a capital infusion--bank capital ratios are the highest in decades. And the frenetic pace at which banks are acquiring smaller institutions and buying back stock suggests there's no shortage of credit either. "A compelling economic argument for the unbridled mixing of banking and commerce has simply not yet been made," James L. Bothwell, General Accounting Office chief economist, told Congress recently.

Advocates of melding banking and commerce counter that the U.S. financial sector risks becoming internationally uncompetitive. Au contraire: The track record of Europe's "universal banks" and the Japanese keiretsu offer the most compelling arguments for the status quo. The leading banks in France, Germany, and Spain have suffered heavy losses on their nonfinancial ventures in recent years--remember Credit Lyonnais' disastrous foray into Hollywood? And Japanese banks, which were treated as personal piggy banks by their corporate owners in the 1980s, show why it's critical to preserve the independence of banks. A big reason for Japanese banks' huge losses was the billions in dubious loans made to affiliated nonfinancial companies. This irony isn't lost on former Federal Reserve Chairman Paul A. Volcker, who questions why momentum is building in the U.S. for bank-commercial mergers just as "doubts have arisen [abroad] about the wisdom of such linkages."

To be sure, rapid changes in technology may make it increasingly hard to keep high-tech titans such as Microsoft out of banking. For now, though, we should move cautiously. Representative Marge Roukema (R-N.J.) advocates limiting banks' nonfinancial activities to 25% of their business. But Paul S. Sarbanes (D-Md.), ranking minority leader on the Senate Banking Committee and a foe of reform, dismisses that idea as "just an invitation year after year to head further down the slippery slope" toward a complete melding of banking and commerce. Sarbanes is right. Merging banking and commerce offers too small a payoff for the enormous risk.