BANKABLE REFORMS

SO FAR, SO GOOD. That's the best way to describe the government's attempt to modernize the nation's antiquated banking system. The bill that emerged from the House Banking Committee late last month does more to protect depositors and taxpayers than anyone would have predicted six months ago. The challenge now is to preserve those gains as banking reform begins its journey through the Senate.

The fragile state of the banking system hit home in January when federal regulators were forced to bail out the insolvent Bank of New England. Perhaps that helped convince lawmakers to take a bold approach to banking reform. The House package, for example, allows banks to open branches in more than one state and to enter new businesses, such as insurance and securities underwriting.But the real heart of the package is new power for regulators to seize banks quickly before their losses mushroom. Without this simple but vitally important change, the other banking reforms wouldn't amount to much.

The Federal Deposit Insurance Corp., which ensures bank accounts when an institution fails, is in trouble. Chairman L. William Seidman told Congress recently the bank insurance fund is approaching insolvency faster than originally forecast. A $30 billion line of credit from the Treasury, included in the House bill, will help to sustain the FDIC, but early intervention by regulators is the best way to reduce the need for big future bail-outs.

Under the House proposal, regulators could place restrictions on banks that fail to meet certain minimum financial standards. One such step would be to limit the interest rates paid on deposits. Struggling banks also could be forced to sell additional stock, limit dividend payments or cut back on executive salaries and bonuses until their financial condition improves. Most important, regulators could quickly seize and close any bank or thrift whose cash, equity and earnings fall below a critical level. That would prevent a failing bank from making desperate financial decisions that would only increases its losses - which would fall on the FDIC and, ultimately, the taxpayers.

Other reforms in the House bill are designed to help banks diversify so they can protect themselves financially and earn more money. Opening branches in other states, for example, means banks would not be affected as much by an economic decline in one region. Allowing healthy banks to underwrite securities and sell insurance gives them the chance to earn profits in new businesses. Profitable banks are less likely to run into the kinds of problems that require a government bailout.

The most controversial part of the House package is a proposal that would

allow virtually any company to buy a bank, an idea aimed at infusing more capital into the system. Although the company - IBM or General Motors, for example - and the bank would be forced to keep their finances separate, opponents worry that such a bank would give preferential credit deals to the company's customers. Those fears are understandable but misplaced.

Strict safeguards in the House bill would prevent self-dealing and limit any future government bailout to the bank, not the commercial company. Still, the Senate's banking bill, which was unveiled Tuesday, would not allow such affiliations and Rep. John Dingell is determined to strip the proposal from the House bill.

The notion of a manufacturer or retailer owning a bank may seem unusual, but it is not unprecedented. Germany and Japan, for example, have tie-ins between big banks and commercial companies. Banks need capital, and commercial concerns constitute almost 80 percent of the capital of U.S. businesses.

If the House bill has a flaw, it's that it doesn't do more to restrict deposit insurance. Individuals and companies now can have an unlimited number of federally insured $100,000 accounts. Deposit insurance originally was intended only as a safeguard for small savers. It has become much more that, and the government cannot afford the potential liabilities of covering unlimited accounts.

If federal insurance was limited to, say, $200,000, big depositors would

put additional funds only in the safest banks, introducing market discipline into the system. Banks determined to have some form of security for big depositors could purchase insurance privately. Banks would have to be financially healthy to obtain such insurance, ensuring they would act in a financially prudent manner.

The Banking Committee discussed, but ultimately defeated, the idea of creating two types of banks: one with deposit insurance but with limited flexibility to make loans, and another with no deposit insurance but more

financial freedoms. Whether Congress eventually adopts that approach or some other, it's clear that further limits on deposit insurance would provide added safeguards for the banking system.

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