Banks: Safe and Agile

A BANK shows signs of weakness. Depositors rush to pull their money out before it's lost or frozen. The bank collapses, and the federal government shells out tax dollars to protect insured depositors. Nearby banks, alarmed by their competitor's plight and weighted down by their own bad loans, tighten credit. Their business customers, deprived of capital, retrench, laying off workers. Business and mortgage loans go into arrears, pushing other banks to the brink. This spiral has played out around the US in recent years. Banks in the oil patch and the Northeast have been hit hardest by a combination of imprudent lending and recessionary forces, but no region has been spared.

The American banking system is in its shakiest condition in half a century. Over 200 banks failed in 1989, 168 more last year. The federal fund that insures depositors is expected to decline this year to just $4 billion, down from $18 billion in 1987.

The banking system's troubles, moreover, go beyond the temporary problems related to economic downturn. It is inefficient, uncompetitive, and, with more than 12,000 banks, burdened with over-capacity. The system has become increasingly ill-equipped to compete in a global financial market. Today, only one of the world's 30 largest banks is in the US.

This is the backdrop for banking-reform efforts being undertaken in Congress. In February the Treasury Department sent up a reform package aimed both at shoring up the banking system and making it more competitive. Democratic lawmakers have introduced their own alternative measures. The Senate Banking Committee is holding hearings on the problems and policy options.

Potentially conflicting objectives create policy tensions. The goal to limit taxpayer liability for bank failures by narrowing deposit insurance pulls against the desire to bolster depositor confidence, the bedrock of the system. The aim to strengthen banks by raising capital requirements and tightening regulatory oversight could fight against efforts to make banks more efficient and competitive, as by permitting interstate banking or allowing banks to sell securities and insurance.

Lawmakers will have to pick their way carefully through competing interests and goals to enact reforms that will produce a banking system that is at once sounder and more competitive.

It's clear that the answer doesn't lie in ``deregulation'' superficially defined. Archaic restrictions on banking practices need to be modernized, but, at the same time, there have to be more bank examiners with greater powers of early intervention against faltering institutions.