US Banks Still Sound

WHILE it happened in our neighborhood, it's more than provincial news when a major United States bank is declared insolvent and seized by federal regulators. The collapse of the Bank of New England Corporation, the third largest bank holding company in New England, most immediately sent ripples of anxiety through depositors in the corporation's banks in Massachusetts, Connecticut, and Maine. But the announcement Sunday also caused shudders in banking, financial, and political circles across a country sinking into recession. The Federal Deposit Insurance Corporation was right to act decisively once the troubled corporation's latest loss report triggered a $1 billion run on its banks last week. By moving swiftly, it shored up public confidence in the safety of the banking system.

The FDIC's announcement that it would protect all deposits in the seized banks, including those above its $100,000-per-account insurance obligation, is more problematical. This is the latest application of ``too big to fail,'' Washington's notion that some bank failures would so devastate an entire state or region that bailout relief should be shared among all taxpayers. Certainly a major, unprotected bank collapse would hammer New England's economy, already in the recession's vanguard. But open-ended deposit insurance contributes to the kind of undisciplined lending practices so prominent in the savings-and-loan debacle.

Also, ``too big to fail'' raises questions about the long-term solvency of the federal deposit-insurance coffers. The insurance fund lost $4 billion last year.

The bank-regulatory framework built during the depression has served America admirably for half a century, but conditions have changed. Planners in the Bush administration and Congress are working on needed overhaul proposals.

The big story in banking, though, is not the rising tide of failures, but rather the fundamental soundness of the system.