It's Time to Dispense with Different Charters
There is no longer any benefit to maintaining statutory or regulatory distinctions between commercial banks, savings banks, and savings and loan institutions.
Differences in charter, which formerly created useful market distinctions among types of depository institutions, merely lead to unnecessary expense, uncertainty, and confusion.
Indeed, it appears that some of this confusion made it difficult to deal with the savings and loan losses as they developed.
Changes in the 1980s
Thrift institutions, both savings banks and savings and loan associations, had an honorable and important history in the financial structure of the United States until the 1980s.
Then the losses that the savings and loan institutions suffered, the demise of their federal insurer, and the consequent taxpayer expense combined to highlight the changes in economics and technology that have made these specialized lenders unnecessary.
Almost 2,000 savings and loans failed, basically because they were unable to adopt to a changed economic environment. The fraud and mismanagement that accompanied many of those failures merely added to the inevitable losses.
The Basics of Banking
The function served by all of our forms of depository institutions - savings and loans, savings banks, and banks - is banking. And the function of banking is to act as an intermediary between those that want to put money in a safe place and those that want to borrow.
On both sides of the balance sheet, markets may be shrinking because of new technology and the development of mutual funds for savers and secondary markets for loans. But regardless of the market's size, the market facts are the same for all depositories, regardless of their history.
These institutions should be called the same thing and the playing field among them should be level. We should call them banks for legal purposes and should give them a free choice to adopt their own specialties within normal banking powers, however those powers are defined.
But regardless of their legal definition, they should be permitted to call themselves banks, savings banks, or savings and loans, according to the functions and marketing strategies that they adopt.
Most savings institutions are likely to continue to be community oriented banks, since that is the function for which they appear to be suited. Some will emphasize real estate finance, others will not.
The Necessary Legislation
The laws that would have to be changed to accomplish this, while numerous, have few controversial points. Some points, which even a year ago would have stirred great controversy, do not appear radical today.
In order to effect this reform, Congress would have to provide that savings institutions will be regulated by the same regulator that regulates banks - treating federally chartered savings institutions like national banks and state chartered ones like state chartered banks. This would allow us to eliminate one federal agency but otherwise would impinge on no one's turf.
The law would also have to be changed so that the powers of savings institutions and similarly situated banks be the same, and that they be treated as banks for purposes of all federal and state consumer protection rules.
Deposit insurance premiums for all depositories would have to be made the same, and Congress would need to combine the two insurance funds. This would eliminate the inefficiencies imposed by the exit fee from the Savings Association Insurance Fund and the entry fee to the Bank Insurance Fund.
The deposit insurance premium issue was a great divider until bank premiums were raised to pay for bank failures. Now the issue is virtually moot.
Another necessary change would be to equalize the taxation of all depositories by applying commercial bank rules to all of the institutions that we would call banks.
In this connection, it would be necessary to repeal the rule that now requires recapture of past bad debt reserves when thrifts convert to bank status.
Thrifts have favorable bad debt reserve deduction rules to encourage them to invest in housing. These would be outmoded in an homogenous system.
Equal Capital Requirements
There is no need for the recapture of past deductions, since the thrift institutions have already passed these benefits along to borrowers, as was originally intended. On a net basis, this reform probably is a revenue enhancer.
The law would have to be changed so that savings institutions would have whatever capital requirements similarly situated banks have, with a phase-in period of three years. This process already is going forward so the changes would be minor.
And Congress would have to equalize the treatment of holding companies for banks and thrifts. In this case, I believe that the thrift holding company approach has proved more fruitful than the bank holding company approach.
A corporation with outside resources is more likely to serve as a source of strength than a shell corporation that has no other business. Equalizing the powers and playing field for all depositories might force Congress to come to grips with this much debated issue.
Some types of thrift institutions may have assets or activities that do not conform to the powers of similarly situated banks. These should be disposed of or terminated within five years. The changes that this would require are minor.
Home Loan Banks
Mandatory membership in the Federal Home Loan Banks could be phased out over a period of years, allowing these home loan institutions to compete for members based on their utility, while guarding them against precipitous declines in capital by mass resignations.
Former savings institutions can remain publicly owned stock corporations, privately owned stock corporations, or mutual organizations. Only technical changes are required.
Changes Overdue
These recommendations would save administrative time, congressional time, and legal fees. They would simplify and strengthen the American financial system by encouraging equal competition and by making consolidations easier to accomplish when efficiencies can be achieved.
The system that we had before 1980 - when interest rates could be controlled and markets were local and protected - served us well.
The changes suggested here might have saved us a great deal of money had they been adopted 20 years ago. But they can do much good if adopted even now.
They are in accord with the philosophy of the administration's proposals and no substantial part of the financial community would oppose them if they were adopted as a whole. The only aspect that reasonably remains controversial is the holding company changes.
Mr. Lowy is counsel to the law firm of Rosenman & Colin and former vice chairman of Dollar Dry Dock Bank, both in New York. His book, "High Rollers: Inside the Savings & Loan Debacle," is to be published this fall.
