Lack of oversight, loose rules on deposit insurance, risky investments, mismanagement and even fraud all played a role in the savings and loan debacle of the 1980s, which saw one-third of the S&L industry go bankrupt. Taxpayers are still shelling out hundreds of billions of dollars to rescue federally insured S&L depositors.
But that hardly justifies putting the remaining 2,000 S&Ls out of business by forcing them to become banks and then limiting federal deposit insurance to banks that invest their money in Treasury bills and other easily sellable short term debt.Both of those ideas are among several recommendations this week from a six-member commission appointed by Congress and the White House to find out why the savings and loan industry collapsed and to suggest new safeguards.
The proposals certainly would take most of the risk out of deposit insurance. But they also would contribute to significant economic problems, divert money into T-bills instead of loans, make it significantly harder to get real estate and business loans and leave much of the banking industry unregulated, uninsured and highly vulnerable.
Under the plan offered by the National Commission on Financial Institution Reform, Recovery and Enforcement, the government would:
- Force S&Ls to become commercial banks and be regulated as such. S&Ls had their genesis as real estate lenders specializing in home mortgages.
- Require all banks to set up affiliated "monetary service companies" for all insured deposits. These affiliates would not be permitted to invest deposits in real estate or other "high-risk" ventures. In return, there would be no limit on deposit insurance, currently set at $100,000 per account.
The enormous impact on the real estate market seems to have been entirely overlooked. If the only real estate loans come from uninsured accounts, where are the banks going to find the money to make such loans? What would it do to real estate interest rates?
Bank depositors would have to choose between low-interest insured accounts and higher-interest uninsured accounts that the bank could use to make loans. If many accounts were uninsured, what would prevent panicky "runs" on banks - a Depression-era occurance that deposit insurance was designed to eliminate?
The new banking structure would suck money out of a community and into T-bills instead of putting it back in the form of local loans. It might also undercut current laws requiring banks to invest in their own communities.
Other suggestions by the commission would:
- Eliminate the Comptroller of the Currency and the Office of Thrift Supervision and retain only the Federal Deposit Insurance Corp.
- Appoint a nonpartisan oversight board for the FDIC.
- Require every bank regulatory agency to have an anti-fraud unit.
These regulatory moves are less controversial. While some tight supervision and tough rules are in order for banks and S&Ls, forcing the system into a straitjacket is not the answer. The proposed reforms ought to be dropped into the nearest wastebasket.