Toward Safer Banks

MORE than 200 American banks failed last year. In many others, loan losses are causing balance sheets to tilt precariously. The banking system needs shoring up. That's the purpose of the restructuring plan unveiled by the Treasury Department last week. It proposes to make banks safer by raising capital requirements, opening up sources of new capital, permitting banks to diversify products, and streamlining the bank-regulatory mechanism. It calls for the most sweeping changes in the banking system since the Depression.

Two specters will hover above congressional deliberations. One is the Depression itself, when many depositors, like investors on Wall Street, lost their life savings in runs on banks. Freewheeling banking practices led to the regulatory framework that has been in place for 60 years.

The other specter is a contemporary one - the savings and loan debacle, which is frequently attributed to deregulation. Lawmakers rightly will be loath to tear down regulatory fences if that would encourage unsound banking practices and necessitate another massive taxpayer bailout.

But if visions of the Depression and the S&L crisis, like Banquo's ghost, cannot be ignored, no more should members of Congress yield to unreasonable fears in bringing about badly needed bank reform. The United States economy and political climate has changed beyond recognition since the '30s, and comparisons can be more misleading than enlightening. Similarly, the causes of the S&L crisis are complex, and deregulation was but one contributing element. The pitfalls can be avoided.

The proposals to vest regulatory power in two agencies rather than four, and to mandate early regulatory intervention for weak banks deserve prompt enactment. So does the plan to permit banking across state lines, thereby allowing banks to diversify their assets and realize economies of scale (this has already started to happen anyway).

The ideas to let commercial companies own banks, thereby infusing banks with additional capital, and to let banks become financial-services emporiums by selling securities and insurance, raise questions and deserve close scrutiny. They are not inherently dangerous, however, particularly buttressed by regulations that safeguard depositors' money and by the rigorous application of securities and antitrust laws.

Clearly, the Treasury proposals are a major step in the direction of a sound, but modern and competitive banking system.