Savings safety

UNFORTUNATELY, there are ample lessons for the American public and the US banking industry stemming from the current state-chartered Ohio savings-and-loan imbroglio. But one lesson in particular stands out: If federal and state officials, and the banking industry, want Americans to save more for their own financial security and later retirement years in this new age of financial deregulation and lessened dependence on federal safety net programs, then government and industry have a special responsibility. That is, they need to be far more aggressive than has been the case in recent years in ensuring that financial institutions conform to the highest possible standard of good business practices.

Saying that is not to impugn the banking community in general.

Perhaps today's very climate of deregulation and innovation explains, but certainly does not excuse, some of the banking problems of recent years -- occasional bad loans and questionable investment decisions made by some banks, including questionable loans abroad.

This week's bank holiday in Ohio -- in which some 71 state-insured savings-and-loan associations were closed pending the arrangement of state legislation designed to prevent a run on the S&Ls -- is only the most recent example.

Some banking experts are now arguing that the 71 Ohio S&Ls should be forced to eventually join the federal insurance program. And certainly federal insurance backing would probably help offset any possible lessening of consumer confidence in the 71 Ohio S&Ls.

What needs to be kept in perspective, however, is that even though giant Continental Illinois National bank was in a federal insurance program and was a federally supervised bank, those factors did not prevent that institution from going through a financial crisis of its own not so long ago. Likewise, the large Seattle First National Bank not so long ago, also federally insured, was saved from financial plight by a friendly takeover. In other words, federal insurance protection for the state-insured S&Ls in the five states that now have such institutions -- Ohio, Massachusetts, Maryland, Pennsylvania, and North Carolina -- would likely make sense in restoring public confidence. Indeed, the very workings of the marketplace will probably impel small state-insured S&Ls to consider joining the federal system just to hold their depositors. But merely forcing those state-insured S&Ls to have federal insurance backing is not by itself enough. Other steps, underscored by the past problems of banks such as Continental Illinois, are also required:

Bank regulators, federal and state, need to tighten auditing and reporting requirements. State legislators must also be more alert.

The banking industry, once noted for its fiscal conservatism, needs to exercise greater care involving its loan and investment portfolios. Shareholders need to be more attentive to actions of management.

Industry and government need to do a better job informing the public about the financial alternatives available in banking. Stories out of Ohio, for example, suggest that many depositors in the 71 S&Ls had no idea that their funds were insured by a state system. Moreover, few people in Ohio, even at the highest levels of state government, seemed to know that the insurance fund was an industry owned, as opposed to state owned, fund. If such insurance programs are allowed to exist, they should at least have sufficient assets on hand to meet a potentially serious bank failure.

Washington needs to know more than it currently does about the largely unregulated government securities market. Lawmakers should be zealous in probing the industry in the federal hearings that begin later this week.