Academic journal article ABA Banking Journal

Plans to Remodel Banking Proliferate

Academic journal article ABA Banking Journal

Plans to Remodel Banking Proliferate

Article excerpt

Treasury weighs in with its long-awaited, and hefty, proposal How do the blueprints compare?

What started as a relatively short section of the Financial Institutions Reform, Recovery and Enforcement Act blossomed into a two-inch-thick tome called Modernizing the Financial System: Recommendations for Safer, More Competitive Banks.

The Treasury Department report began life as a means of separating the thrift crisis from the state of the bank deposit insurance fund to enable FIRREA to pass relatively expeditiously. Over time it became not only a declaration of the Administration's banking views but a plank in its anti-recession effort.

Many proposals for banking reform were introduced in Congress before Treasury announced its blueprint. These include: H.R. 6, proposed by House Banking Committee Chairman Henry B. Gonzalez (D-Texas), and H.R. 15, introduced by Chalmers Wylie (R-Ohio), the ranking minority member of the House Banking Committee. On the Senate side, subsequent to Treasury's release, Donald Riegle (D-Mich.), chairman of the Senate Banking Committee, reintroduced-with some changes-the reform bill he proposed in the last Congress. The new bill is S. 543.

What follows is a recap of the Treasury proposal, contrasted with others, that bankers can use as a resource for following the debate.

DEPOSIT INSURANCE REFORM

TOO BIG TO FAIL

Bankers who hoped Treasury would directly address the "too big to fail" issue by adopting ABA's final settlement payment recommendation were disappointed. Treasury seeks to limit protection to insured depositors whenever possible, but it does not include ABA's automatic haircut in its plan.

Treasury Secretary Brady called "too big to fail" a misnomer. "What we're really talking about is `too important to fail.'" He said also that having "a strong industry, with strong capital, will cut down on the `too important to fail' issue.

Least-cost test. Under the proposal, FDIC would be barred from covering uninsured deposits unless doing so was part of the least costly means of resolving the failure.

Where a failure is deemed to pose risk to the banking or economic system, FDIC would be permitted to choose a means of resolution that was not the cheapest.

Determining which failures pose such "systemic risk" would require a decision by the Federal Reserve Board and Treasury. The Fed is proposed because of its economic role and the Treasury as an arm of the Administration-"more directly accountable to the taxpayer than the Federal Reserve."

This recommendation would formalize steps FDIC already takes.

The extra cost of engineering such resolutions would be paid up front with Fed advances to FDIC. FDIC would have to repay these with industry-as opposed to taxpayer-monies. What constitutes "industry monies" was not specified by Treasury.

While the plan envisions uninsured depositors being covered in such cases, it proposes that nondeposit creditors never be covered.

S. 543, proposed by Sen. Riegle, and H.R. 6, proposed by Rep. Gonzalez, both set deadlines by which FDIC must eliminate "too big to fail."

Riegle's bill would require "least cost" resolution. And after 1994, uninsured depositors and creditors could not be protected. S. 543 would also place "too big to fail" decisionmaking solely at the Fed. It would also require the Fed to set rules limiting a depository's credit exposure to another depository. A bank accepting interbank deposits would have to be well capitalized.

WHAT'S INSURED?

If the Treasury plan went through, small savers could sleep well, but large depositors might be troubled. Me package would put an end to the practice of setting up accounts in a variety of capacities-individual, joint, etc.-to secure more than $100,000 coverage at one institution.

Coverage would be limited to $100,000 per individual per institution, with an additional $100,000 of coverage for retirement savings in the institution. …

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