Recommendations for safer, more competitive banks.

Where have we heard that before? That or something pretty close to it was the rationale for giving savings and loans the authority in 1982 to operate more like commercial banks. We know what happened after Congress approved legislation ostensibly to make S&Ls safer and more competitive. The additional powers merely sped up the flow of the S&L industry down the tubes, a process that began more than a decade ago.

"It is imperative that Congress address the structural changes in the financial industry," Richard T. Pratt, a former chairman of the old Federal Home Loan Bank Board, declared in 1981. Pratt, like key members of the Reagan administration and some industry leaders, believed bigger would be better for the nation's beleaguered thrifts.

The thrust of their argument, which was embodied in legislation passed by Congress -- would, as Pratt explained, bring about "a wholesale revision of the statutory authority governing thrifts to permit them to choose the line of business they will be in and to compete on an equal basis with other providers of financial services."

Many of them did choose the lines of businesses they wanted to be in, of course, and failed. Some, like John Hanson Savings Bank of Beltsville, are barely hanging on. Some, like Trustbank Savings of McLean, overreached and spun out of control before being taken over by federal regulators. Others, like Perpetual Savings Bank of Vienna, took advantage of thrift deregulation to grow bigger and compete with other providers of financial services, as Pratt had envisioned. Now, however, with the economy in the doldrums, the thrift industry in worse shape than it's ever been and regulators desperately enforcing new rules in an attempt to salvage what's left of the S&L industry, Perpetual is being made a whipping boy.

The Bush administration, attempting to compensate for the shortcomings of the bigger-is-better-and-safer guidelines for thrifts, won legislative approval two years ago for the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). The cumbersome and complex FIRREA was supposed to be the answer to a widening S&L crisis. It imposed stricter loan limits on S&Ls and is forcing them to make radical adjustments to new capital requirements. Wielding the FIRREA regulations, rigidly unsympathetic regulators forced out former Perpetual chairman Thomas J. Owen, advising him, in effect, that bigger and more competitive isn't necessarily safe under the new rules.

FIRREA is yet another clumsy effort to correct misguided attempts at deregulating the thrift industry a decade ago. The nation's S&Ls were dealt a mortal blow in the early 1980s by high interest rates and deregulation. The government phased out interest rate ceilings on deposits, hoping to enable S&Ls to compete with money market funds that were offering higher rates to lure savers. But the S&Ls were forced to fight a war with sticks. Their liabilities -- higher interest paid for deposits -- far exceeded their assets in the form of low-yield, fixed-rate, long-term mortgages. The industry never recovered.

Now comes the Treasury Department with its "recommendations for safer, more competitive banks." That's essentially the subtitle for its sweeping reform proposal, "Modernizing the Financial System" -- a document almost twice as thick as the District's telephone directory. As news accounts have shown, the Treasury is proposing to, among other things, reduce the amount of deposit insurance coverage on multiple individual accounts, improve bank supervision, restrict risky investment activities by national and state-chartered federally insured banks, allow national interstate branching and restructure the banking regulatory machinery.

Among the arguments advanced in the Treasury's reform report is that nationwide banking would lead to "safer, more efficient and competitive banks, directly decreasing taxpayer exposure to losses." The cure-all 1982 S&L deregulation law, known as the Garn-St Germain Act, was supposed to accomplish the same thing for thrifts. We now know that Garn-St Germain was too much all at once for S&Ls and regulators to implement while attempting to guarantee the integrity of a system and an industry in turmoil.

It soon became apparent that in a deregulated S&L industry there weren't enough safeguards against economic highfliers and their abuses of the system or against wide swings in the economy.

Thrifts became more competitive, to be sure. They grew bigger but they did it in many instances without regard for safety and soundness. To make matters worse, the regulators weren't minding the store. They were nowhere to be found when S&L executives were investing in health spas, topless go-go bars and speculative real estate that turned out to be swampland. Where were the regulators when Trustbank decided to take a flier with other S&Ls in a deal to finance what was to have been a casino in Atlantic City? Only a sharp-eyed lawyer prevented Trustbank from getting snookered in that deal. In the end, however, there weren't enough lawyers around to prevent the Trustbanks of the thrift industry from investing in deals and markets about which their managers knew little.

National interstate banking in some form is inevitable. Thirty-three states now permit interstate banking through bank holding companies and 13 have regional interstate banking laws. But opening up the country immediately to nationwide branching without adequate safeguards could prove disastrous for a system that already has too many branches. The same holds true in the case of proposals calling for well-capitalized banks to go head-to-head with insurance companies and securities firms. The temptation to grow bigger and become more competitive might be too great for the highfliers of the banking industry. Furthermore, banks -- much like the thrifts in the 1980s -- could find themselves ill-equipped to compete against corporate giants that aren't under the same regulatory constraints.

True, the Treasury recognizes that "supervisory and regulatory policies need to be modified and strengthened," though that assertion may be intended more as a selling point for adopting the entire proposal. Included in the Treasury's recommendations for reform, nonetheless, is a statement that should serve as a constant reminder of past follies: "We have been unsuccessful in restraining the deterioration of the bank and thrift industries despite the presence of more bank examiners than any country in the world."

A stronger argument couldn't have been made for proceeding cautiously with any proposal to make commercial banks bigger and more competitive with non-bank firms.