GOV. HARRY HUGHES proposes to force all of Maryland's big privately insured savings and loan associations into the federal insurance system. That's the right move. But he also wants to set up a state insurance agency for the small S&Ls that can't meet the federal standards, and that's dangerously wrong. The legislature will need to take a long and skeptical look at the governor's plan when the emergency session begins on Friday.

There's a simple rule to follow: those S&Ls that can't get federal deposit insurance ought not to be in business. It's time to think hard about protecting depositors and public confidence -- and to stop thinking about protecting the S&Ls. There will be a lot of sentimental pleading for the little Mom-and- Pop corner S&L, which will be alleged to represent a vital neighborhood tradition, etc. But why should Maryland taxpayers have to underwrite S&Ls that can't meet federal rules?

It is simply wrong to suggest that these small S&Ls provide services that the bigger ones can't, or won't, extend. That was occasionally true a generation ago, but no longer. Some remain sound, but collectively they represent a source of perennial weakness in the financial structure. Only four states still allow S&Ls to operate outside the federal insurance system. Gov. Hughes is making an important mistake in this attempt to perpetuate an anachronism.

As a practical matter, the governor's emergency order limiting withdrawals to $1,000 a month will probably be the end of those S&Ls with no federal insurance. Careful depositors will think twice about putting money into institutions from which, in the past, they have been unable to make withdrawals. Without federal insurance, small S&Ls will be able to survive only by offering interest rates much higher than their competitors. How does Gov. Hughes expect them to raise the money to pay those rates? Isn't it a formula for pushing them into increasingly risky investments? Recent events make it painfully clear that the examination of the non-federal S&Ls and the enforcement of the private insurance regulations have been extremely weak.

A lot of developers and builders will tell the legislature about the virtues of small S&Ls and the necessity of propping up those that can't meet federal standards. But how about the depositors? How about the people who have been standing in line for hours and have now been told they can withdraw only limited amounts of their money?