DALLAS Robert D. McTeer Jr. has always been more of a professor than .a banker.

Arriving in Texas three years ago as president of the Federal Reserve Bank's 11th District, Mr. McTeer came after the state's banking crisis was over and the carnage - about 900 institutions failed or were taken over by the government - had been cleared.

Not surprisingly, the career economist and former academic has focused on the lessons of recent Southwestern banking history. In an interview, Mr. McTeer talked about the region.'s economic outlook, the passing of the post-crisis credit crunch and issues such as the North American Free Trade Agreement.

He was joined by Robert D. Hankins, senior vice president at the Dallas Fed, who oversees supervision of some 1,100 institutions in the district, which includes Texas and parts of New Mexico and Louisiana.

Both men see evidence that loan volume is picking up and say they remain vigilant for signs - such as loosening credit standards - that bankers have forgotten the lessons of the last downturn. Indeed, this may be the first year in a decade when no institution fails.

For his part, Mr. McTeer 51, declines to talk about recent increases in interest rates by' the Federal Open Market Committee, on which he served through 1993.

He came to Dallas after 11 years as head of the Baltimore branch of the Federal Reserve Bank of Richmond. While there, he lectured in economics at Johns Hopkins University and taught at his homestate alma mater, the University of Georgia.

Mr. McTeer offered wide-ranging views on subjects other than interest rates. Most significantly, he argued that the banking crisis illustrated how federal deposit insurance gives some investors incentive to chase yield into failing institutions, which only drove up the cost of bailouts.

He does not argue for the reduction of bank insurance coverage, but suggests that Congress could find a way to discourage the flow of hot money between institutions in troubled times.

Q.: You arrived in February 1991, after the banking crisis was effectively over with. What lessons have you learned?

McTEER: When I talk to people about lessons learned, one thing that I was told over and over was that the healing process, once you have banking difficulties, is going to take longer than everybody anticipates. I think that was the message that the people here tried to convey to the Boston Fed when the problems moved to New England.

Q.: What were the trailing effects of the crisis, the last remnants if you will?

McTEER: Even after things were improving dramatically here, the volume of loans made in Texas continued to decline. It didn't actually start growing again until 1993.

Three months after I got here, they asked me to testify to Congress about the credit crunch. I quoted [former Federal Deposit Insurance Corp. Chairman] Bill Taylor on the subject. He said that when a cat sits on a hot stove, he doesn't sit on a stove again for a while whether it's hot or cold.

Q.: So what was it that finally eased the credit crunch?

McTEER: I don't think it was anything in particular that policymakers did. I think it was that the healing process had run its course. For a while there it was hard to tell if it was weak loan demand or supply constraints that was the problem. We're willing to use the term credit crunch here, but there was a tendency for people elsewhere to use quotation marks around it.

Q.: Credit crunch implies it is the lender's fault?

McTEER: That's right. Even here a lot of the bankers continued to maintain that it was a weak loan demand. There was loan demand, but not from those who they considered worthy borrowers.

Q.: Through yearend 1993 there was still an indication that any growth was very anemic. Is that your view from here?

HANKINS: We haven't seen first quarter numbers yet, but I've had conversations with a number of bankers and they see a lot more loans being made.

Q.: Do you see it as a long-term issue about what bankers might do if loan growth is slow in coming?

HANKINS: You always worry about bankers going to the other extreme: loosening up too much and liberalizing credit guidelines in a repeat of the 1980s. But I'm not all that concerned because we haven't seen that. But, it's always in the back of your mind.

Q.: So, a lesson from the 1980s is to watch for rapidly changing lending standards?

HANKINS: You look at what their guidelines are today and you look at what kinds of loans they are putting on the books. Then you look to see how often those guidelines are revised. You look at how much equity they want from the borrower and how much the bank is taking.

But our examiners are much better firemen then they are predictors. We try to throw water on the tire, but we can't predict where the next fire is going to be.

Q.: What's the outlook for banking in this district?

McTEER: Given the bank powers that now exist there are probably still too many banks and there will be further consolidation. But that doesn't mean we are going to collapse into only a handful of big banks. The economies of scale may not be there and little banks have all sorts of advantages over big banks.

Q.: What is your outlook on the economy here and for the impact of the North American Free Trade Agreement?

McTEER: I heard an economist make a comment the other day that I liked. It was that Texas was the low-wage, low-cost center of North American trade.

That's a pretty bullish statement. We are strategically located to benefit.

Q.: You said the free trade agreement is a win-win-win for the three countries. That's a nice macroeconomic view, but there are some areas that stand to lose because of the pact.

McTEER: I was for Nafta because I am a free-trader ideologically. It was just a bonus that we seem to be so well located to benefit from it. Anytime you free up trade there are going to be winners and losers, but I don't think they will be very concentrated in any area.

There may be manufacturing facilities that go south of the Rio Grande, but Nafta didn't create the incentives for that, it reduced the incentives for that.

Q.: In your,new annual report "These Are the Good Old Days," you take a very optimistic view of the nation even though growth has been painfully slow.

McTEER: It's just an attempt to go back and see what's changed in our standard of living that may not be reflected as growth in domestic product.

Nobody ever claimed that GDP was a good measure of standard of living, but I think the gloom and doom over how poorly the U.S. economy is doing has been exaggerated. It ain't so bad.

If you divide the world into the pessimist, the gloom-and-doomers and the optimist, we want to be on the side of the optimist.

Q.: Last year in a speech to credit unions, you said there needs to be a system that doesn't reward depositors who chase higher interest rates even when they know an institution is on the verge of failing, Could you expand on that?

McTEER: The point is that 100% insurance up to $100,000 does give you some perverse incentive in a troubled situation. I don't think the insurance system causes, necessarily, financial institutions to be reckless.

I don't think that's what moral hazard means. But once an institution gets into trouble and is trying to survive, having that insurance does give it that ability to go for broke. It can lead to bad decisions that can make bad problems worse.

Q.: Realistically, what can be done?

McTEER: Somehow or another you need to introduce some market discipline into the insurance fund. I don't know how to do that. We have a financial system that has built up over a number of years with that fealure [deposit insurance] and it would be unfair to take it away.

But just as sure as people probably spend too much on medical care if they have insurance, you could probably introduce some rationality to the system if they had to share in the cost of service. It would be something along those lines.

Maybe you should let people buy their own deposit insurance. Maybe they can get one rate uninsured for the deposits and another slightly different rate if it is insured. Maybe you ought to just insure 90% of their deposits, rather than all of it.

Certainly, it should never have been raised from $40,000 to $100,000.

Q.: Would lowering the level of insurance solve the problem of hot money flowing between troubled banks?

McTEER: I doubt that it would and I wouldn't recommend doing it after all this time. I'm not a crusader on this and I don't have a program. It is unfortunate because what it has lead to is that it has given Congress the rationale to over-regulate.

Congress has the banking industry in a bear hug right now because they are scared to death there is going to be a another crisis. If you break the link between the risk in the banking system and the exposure to the taxpayer, then there could be more rationalized regulation.

Q.: You once said that taking risk out of banking was like trying to take the fat out of sausage.

What did you mean?

McTEER: My point is that banks are designed to make loans and there is always a chance that somebody won't be able to pay those loans back. You have got to deal with that, but if you try and eliminate that then you cut at the core of what banking is all about.

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