Newspaper article THE JOURNAL RECORD

Panel Recommends Radical Deposit Insurance Overhaul

Newspaper article THE JOURNAL RECORD

Panel Recommends Radical Deposit Insurance Overhaul

Article excerpt

WASHINGTON (AP) _ A national commission on the savings and loan debacle is recommending a radical overhaul of the financial system that would restrict deposit insurance to money-market style accounts invested in safe securities.

Deposit insurance didn't cause the debacle, but it allowed it to spiral out of control, the commission said Tuesday in a long-delayed report.

"In the S L crisis, deposit insurance was the gasoline that suffered a series of matches," said commission member Robert E. Litan, a fellow at the Brookings Institution, a Washington-based research organization.

The three principal causes were the interest-rate spike from 1979 to 1982, deregulation that allowed S Ls to make risky investments unrelated to home mortgages and the relaxation of capital rules which permitted S Ls owners to operate institutions with little or none of their own money at stake.

Fraud, the commission said, accounted for only 10 percent to 15 percent of the nearly $200 billion debacle.

The report said deposit insurance allowed sick S Ls to raise and lose large amounts of money in deposits, regardless of their health.

Its key recommendation, which it said was "central to avoiding future disasters," calls for the creation of federally regulated "monetary service companies," which would offer insured checking accounts.

The money in the accounts would be invested only in safe and easily sellable, short-term corporate debt and government securities. That would keep losses to the government's insurance fund at a minimum. After a several-year period of transition, deposit insurance for all other types of accounts would cease.

Monetary service companies could be owned by any type of financial institution, including but not limited to banks and S Ls. They could share personnel and facilities with their owners.

In effect, a bank customer could end up having a choice between an insured but low-interest checking or passbook account, which would be invested in marketable securities, or a higher-yielding account which the bank could use to make loans.

It would no longer be necessary to maintain a separate system of banks and S Ls. …

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