Banking once was the most regulated, most protected and safest business in the United States.
In the years following the massive failures that devastated banks and bank customers during the Great Depression, federal regulators, depositors and bankers placed the "safety and soundness" of the banking system on a pedestal.
They were content to let the federal government set ceilings on the amount of interest banks could pay depositors, confine banks to narrow fields of operation and keep competition out of the banking business.
Today the Depression is a faded memory to bankers, depositors and government officials. The tightly regulated world of the banker is a phenomenon of the past, and the future promises fewer regulations and more competition. Competition brings risk. The more risks banks take, the greater their chance of failure.
The safety and soundness of the banking system remains paramount to the regulators and the depositors, but bank regulators--the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Federal Reserve Board--are less able today to protect bankers from themselves. In the 12 to 18 months that normally occur between bank examinations, "in today's environment a bank could make enough mistakes to put itself out of business four times over," said an official in the comptroller's office.
To the chagrin of many banks, the regulators, led by FDIC Chairman William Isaac and Comptroller of the Currency C.T. Conover, are looking for ways to impose the "discipline of the market" on banks, whose sole overseers in the past have been bank examiners.
On June 30 agencies will require all banks to report publicly a host of data designed to give regulators and depositors information about a bank's assets, liabilities, problem loans and contingent liabilities.
The hope is that big depositors will shy away from banks that are not properly managed or that seem to be taking too many risks. A fact that has been long lost on most depositors, according to an official of the FDIC, is that a deposit is no more than a loan to a bank.
Until the spectacular failure of Penn Square National Bank of Oklahoma City last summer, most depositors, those with $1,000 checking accounts as well as those with $1 million certificates of deposits, felt that their funds were safe.
Even though the government is legally committed to cover only the first $100,000 of an account at federally insured institutions (which represent all but a handful of the nation's more than 14,000 banks), the regulatory agencies normally found other banks to assume all accounts of a failed bank. Deposit losses were seldom a worry.
The new reports will force each bank to reveal its total of "problem" loans, those that are past due, or in which the terms have been changed to make it easier for the borrower to repay. Banks also will have to report their commitments to make loans and a host of other materials that should enable sophisticated investors to make sensible judgments. Conover has said in an interview that, even with the new data, the condition of Penn Square might not have been apparent to investors.
But for the most part, regulators say, the new disclosure rules will make it easier for big depositors to divine the condition of a bank. If big depositors are uneasy about a bank, they may not place their money there or they may charge the bank extremely high interest rates for their deposits. Either action should force problem banks to clean up their acts. To encourage depositors to pressure banks, Isaac is toying with forcing big depositors to lose some portion of their deposits that exceed $100,000, even when agencies succeed in merging a failed bank with a healthy institution.