I have never been much of a fan of the oversight work produced over the years by the staff of the House Banking Committee. It has tended to be short on expertise and long on political rhetoric.

A staff report issued Sept. 9, analyzing bank deposit insurance fund losses from 1986 through mid-1991, is better and more interesting than most. The study attempts to correlate losses on bank failures to the type of supervision the banks received.

While I have concerns about the methodology employed, the study raises that cry out for further attention.

Small Banks, Big Losses

The study breaks down bank failures by size of institution. A small bank is defined as under $1 billion, midsize as $1 billion to $10 billion, and large as over $10 billion.

one of the most striking findings is this:

During the period under study, small-bank failures caused the insurance fund losses of $9.3 billion more than all small banks paid for deposit insurance. This was 75% of the Federal Deposit Insurance Corp.'s net loss.

There are, to be sure, distortions in the numbers that need to be addressed. For example, failed subsidiaries of holding companies are generally treated separately in the analysis. It would seem more appropriate to aggregate them by holding company and treat them as a single failure under the charter of the lead bank. moreover, the period studied is very brief.

Power Shift Possible

STill, if this finding holds up under closer scrutiny, it could alter the balance of political power in Washington between large and small banks.

The Independent Bankers Association of America has been fairly successful in conveying the impression that small banks are less risky than large banks and that, because the large banks pay no premiums on foreign deposits, small banks contribute disproportionately to the FDIC's support.

A challenge to this perception could affect the dabate about the desirability of interstate branching.

The finding also seems to have implications for the supervision of small banks. The banking agencies, including the Fdic under my watch, have tended to focus their scarce resources on the larger banks. These, it was felt, posed the greatest threat to the insurance fund.

The study doesn't tell us why small-bank losses were so disproportionately high. Are small banks inherently less safe? Did the emphasis on supervising large banks curtail their losses? Did the failure to closely supervise small banks increase theirs?

In any event, it seems a safe bet that the agencies will approach small-bank supervision in the future with renewed vigor. Many small banks might not find that a happy thought.

Another Perspective

The other major finding is that national banks caused $9.1 billion of the FDIC's $12.4 billion in net losses during the period. State banks supervised by the FDIC caused $4.3 billion in net losses, while state banks supervised by the Federal Reserve contributed a positive balance of $1 billion to the insurance fund.

Again, there might be serious distortions in the data. The Federal Reserve supervised relatively few institutions in the Southwest, where the losses were staggering. Also, it's possible that national banks had the highest losses because they received the harshest supervisory treatment; if examiners don't require writeoffs, the FDIC might never be called upon to handle a failure.

Finally, there might have been other variables at work, such as the age of the banks (newer banks have a higher failure rate), capital ratios, city versus rural locations, and usage of brokered funds.

Rating the Regulators

The study concludes that the Comptroller's office is the least effective bank supervisor, the Federal Reserve is the most effective, and the FDIC falls somewhere in between.

The study attributes these differences to how often the agencies perform full-scope examinations.

The statistics offered in the study are compelling but don't settle the question. The Federal Reserve or the relevant state authority conducted full-scope examinations each year on 97.2% of the banking assets under their jurisdiction. The figure for the FDIC and the Comptroller's office were 64% and 36%, respectively.

The Comptroller's office made extensive use of targeted exams, which the study says were not very effective.

In view of the magnitude of the losses suffered by the FDIC during the past decade we must try to understand what went wrong and how to fix it. The study represents a decent beginning, but it needs a great deal of follow-up.

The focus should not be on which agency is the best - I'm convinced each has good, highly motivated people. Rather, we should try to learn as much as possible about which approaches to supervision and regulation work best.

Mr. Isaac, a former chairman of the Federal Deposit Insurance Corp., is managing director and chief executive of the Secura Group, a Washington-based financial services consulting firm.

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