Academic journal article ABA Banking Journal

Banking Reviews the Blueprints

Academic journal article ABA Banking Journal

Banking Reviews the Blueprints

Article excerpt

The latest reform Plan-from Treasury-leaves bankers around the nation murmuring approval, voicing objections, and scratching their heads

Any banker who's had a house or a headquarters designed by an architect knows that many variations can spring from even the most explicit set of instructions.

Thus few builders would let the architect turn the blueprints over to the general contractor without having a look-and, most likely, suggesting changes.

That's the stage at which bankers find themselves now regarding the Treasury Department's recommendations for deposit insurance and financial reform. The proposals were put forth in February in the report Modernizing the Financial System: Recommendations for Safer, More Competitive Banks.

Many bankers interviewed praise the overall thrust of the Treasury blueprint, or at least the fact that it has provided a centerpiece for what many consider long-overdue action.

Fred Martin, senior vice-president and director of government relations for Bank of America, is very positive. The thing he likes best about the Treasury package, he says, is the way it links insurance reform, recapitalization of the Bank Insurance Fund, and banking modernization.

"Without the linkage, it would be a disaster," says Martin. Solely recapitalizing BIF, he explains, means "you're only treating the symptom and not the patient." Many of the issues and ideas raised by Treasury are not new, he adds, and joining them together stresses, in his view, that "it's about time" to act.

Other comments were somewhat less ebullient. "I'm not unreceptive to it," says Connecticut community banker John Hamby of the plan. "It has some merit, overall." Hamby is president and CEO of $265 million-assets Glastonbury Bank and Trust Co.

"From the bank reform side, I'm generally pleased," says Kevin Kelly, executive vice-president of U.S. Bancorp, a $17.6 billion-assets holding company based in Portland, Ore.

"I'm not sure I'm in love with everything about it, but it's a start," says John McCoy, chairman, president, and CEO at $30.3 billion-assets Banc One Corp., Columbus, Ohio.

These views on the Treasury plan-which the agency recognizes is a long-term blueprint for banking reform-play against the present difficulties of the Bank insurance Fund.

Too big to fail. The central issue facing Treasury drafters and Congress as they take up bank reform measures is "too big to fail."

Most bankers interviewed think Treasury failed to adequately address the challenge of "too big to fail." Treasury proposed requiring FDIC to always use the cheapest means of resolving a failure, unless the institution's failure would cause "systemic risk." If so, the Fed would advance funds to resolve the situation, and FDIC would repay it later from industry funds.

"It was sort of a wishy-washy answer," says Connecticut banker John Hamby. Like most community bankers, he is completely against the concept of too big to fail.

"This government, the FDIC, and the world cannot afford it," says Hamby. He says it is ridiculous for FDIC to bail out large banks and then turn around to say that it doesn't have any money.

While B of A's Fred Martin thinks the general direction was proper, he believes the Treasury plan should have explicitly called for barring forbearance of any kind. Further, he believes failing institutions should not receive any infusions from BIF capital.

Many bankers agree with the basic premise put forth by Texas banker Charles Hrdlicka. "If the Fed and Treasury make the decision that because of a systemic risk" a large institution must be bailed out, "then that is a cost of business of the government, and not of the insurance fund," says Hrdlicka, president and CEO of $1.3 billion-assets Victoria Bankshares, Inc., Victoria, Texas.

"Make the insurance fund do what it is supposed to do," says Banc One's John McCoy-cover smaller savers and not protect the economy as a whole against a big bank failure. …

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