How Beneficial Is Banking Industry Safety Net?

Article excerpt

WASHINGTON - When L. William Seidman, the chairman of the Federal Deposit Insurance Corp., held a press conference last week on the banking industry's record profits for the third quarter, another bit of information was disclosed almost as an aside: that 1988 would see another record - for bank failures.

As recently as 1980, only 10 banks, with assets totaling $232 million, collapsed in the United States. After the books are closed for 1988, Seidman estimated, as many as 220 of the nation's 13,329 banks, with assets of almost $54 billion, will have been either shut down or given federal assistance by his agency.

Yet the financial markets did not even blink at the report of the seventh yearly record of failures in a row.

Depositors appeared to remain confident. No runs have been reported.

In a country in which the banking crisis and devastating runs of the Depression days are relatively recent history, perhaps the most striking element about last week's announcement is the calm with which the public takes such news these days.

t Insurance Corp. and head of the Secura Group, a banking financial consulting firm in Washington, agrees that deposit insurance is a first line of defense to keep the public's confidence during a bank failure. But he and other analysts argue that de facto 100 percent insurance has eliminated market discipline and so created even more failures.

``We have become abolutely addicted to the safety net, and we can't live without it, yet in the long run we can't live with it,'' said Isaac. …