Another savings and loan association has now suffered a run, this time in Maryland. Once again, as in Ohio two months ago, it's an S&L insured not by the federal government but by a private fund operating under state law. Unlike the federal deposit insurance agencies, the private funds have only limited resources and, reasonably enough, depositors find them less reassuring. Private deposit insurance has become a dangerous anachronism.
Maryland's regulators understand, fortunately, the first lesson of the Ohio episode: that under no circumstances must they close an institution in the face of depositors' trying to withdraw their money. That can only compound the anxiety and suspicion that generates those long lines of people on the sidewalks. The Old Court Savings and Loan, the institution hit by last week's panic, has kept its offices open.
The second lesson of the Ohio runs, now confirmed in Maryland, is that the time has come to shut down all deposit insurance agencies but the federal government's. The privately insured S&Ls will have to join the federal system or go out of business. Only a few states allow these private systems; they fill no essential purpose.
They originated in attempts by some of the states to preserve small neighborhood S&Ls that could not meet the rigorous standards of the federal system. But some of the privately insured institutions have grown large, like Old Court. Because depositors consider private insurance to be riskier than a federal guarantee, the privately insured S&Ls -- if they are to grow -- have to offer higher interest than their federally insured competitors. That puts them under pressure to make investments that pay high returns, usually involving a commensurate degree of risk. At the time at which the run began, Old Court was paying its depositors rates that were as much as 3 percentage points higher than those being offered by most of the federally insured S&Ls in this area.
The troubles of Old Court are as much warning as Maryland or any other state ought to need. Private insurance under state law does not provide the degree of stability that financial institutions require. Just as Old Court is not the first S&L to fall into difficulties this year, neither will it be the last. The basic reason, running through all of these cases, is that in 1979 the country decided to fight inflation with tight monetary policy resulting in high and fluctuating interest rates. When mortgage rates jump up one-third, the value of a fixed-rate mortgage in an S&L's portfolio drops by one-third. That drop in the value of their assets has hurt even the most carefully managed S&Ls. There is no easy solution. But as an antidote to panic, federal insurance is a great help -- as well as the rigorous supervision and examination of each member S&L that go with it.