AS THE financial troubles of the banking system deepen, the case for banking reform becomes more pressing. The Treasury yesterday published its proposals, at least in general terms, to strengthen the banks. The idea is to allow them more freedom to expand nationwide, to let them or their parent holding companies enter previously forbidden lines of business and to restrict deposit insurance more narrowly to cover only private individuals' savings.
It's a plan that's more likely to please bankers than their competitors in other financial businesses, and more likely to please big banks than some of the small ones. But that doesn't necessarily mean that it's wrong.
One strength of the Treasury's concept is the emphasis that it puts on requirements for capital -- the money that the owners have invested. The capital rules present a hard choice to the Treasury, since it desperately wants the banks to lend more liberally through the recession while higher capital requirements tend to constrain lending. The Treasury does not propose to go beyond the international capital standards now being phased in, but especially among the big banks there are some that are still well short of them. Substantial capital standards are really the only way to prevent a repetition of the S&L disaster.
In response to the banks' pleas, the Treasury proposes to allow them, through segregated affiliates, to get into other financial services like securities and insurance. While banks need to be more profitable, it's by no means clear that putting them into the securities or insurance businesses will help much. Those are highly competitive fields with troubles of their own.
Similarly, to open up new sources of capital for banks the Treasury would allow commercial and manufacturing companies to own them. That would end a long tradition of keeping banking and commerce separate, a thing that Congress ought not do without hearing a stronger case than has yet been made for it.
The Treasury does not deal directly with one unhappy reality -- that there are too many banks in this country and, by merger or failure, the number is going to have to come down substantially before the system is stable. Similarly, this plan is silent on its most urgent single element, the need to find billions of new dollars for the insurance deposit fund. The administration is negotiating with the banks and evidently wants to withhold comment until those talks are farther along.
The Treasury's banking recommendations are less a highly integrated plan than a series of interesting and important proposals. They leave the final choices on the architecture of banking reform up to Congress.