BECAUSE banks are getting more cautious in their lending, the Federal Reserve Board is going to make more credit availableto borrowers. The idea is to hold the economy on a steady course, as Alan Greenspan, the chairman of the board, explained last week to a Senate committee. In principle, that means a healthier lending policy -- fewer loans to risky borrowers, but lower interest rates for safe ones.

The background to this maneuvering is the collapse of those hundreds of savings and loan institutions, and the widespread fear that a similar disaster could overtake the banks. That unwelcome thought has made banks' lending officers increasingly careful, particularly because the federal regulators have been leaning on them to acknowledge their losses on the bad loans made in the freewheeling past. In the 1980s this country went on an enormous borrowing spree, and the hapless S&Ls are only the most visible of the damage. During the decade the banks were caught in two major cycles of bad loans, first in Latin America and more recently in real estate.

There's a gathering momentum for reform, but it has yet to find a direction. One line of argument holds that the target ought to be the deposit insurance system. It's the deposit insurance that accounts for the inordinate cost to the public of the S&L bankruptcies, and it was deposit insurance that permitted the bankrupts to stay in business with no capital. But Mr. Greenspan, one of banking's chief regulators, has concluded that it's wiser not to tamper with the insurance. The federal insurance fund will be safe as long as banks have the capital -- the owners' money -- to absorb their losses. What's needed to protect the public are high capital requirements, close supervision and clear rules compelling the regulators to intervene promptly when losses eat away that capital.

The American banks have been pleading for more freedom to enter new kinds of business and to compete more broadly with their foreign counterparts. One way to organize it is to try to construct legal barriers -- fire walls, as they are called in the jargon -- between a bank's riskier activities and those that are covered by deposit insurance. Mr. Greenspan told the senators that, in the light of recent experience, he does not have much faith in fire walls. He suggested that if banks are to have more freedom, they must earn it by investing more capital.

That puts the emphasis in the right place. Banking is a risky business. The law needs to ensure that it's the bankers' money, not the taxpayers', that is at stake.