We are within reach of an historic breakthrough in the long and arduous battle to modernize the U.S. financial system. The big question is whether the politicians have the wisdom to allow sufficient time for a comprehensive legislative package to take shape.
It's been clear to experts for decades that a narrowly specialized, separately regulated thrift industry is not viable in the modern financial world. The Hunt Commission suggested, nearly 25 years ago, a series of measures to address the incipient problems in the thrift industry.
The commission recommended that thrifts become more bank-like and that they be allowed to affiliate with banks to create stronger, more diversified companies. The commission's recommendations eventually became law, but not until $200 billion of taxpayer funds were wasted in a thrift crisis that clearly could have been avoided if special interest politics had not blocked the reforms for a decade or more.
We are presented today with a rare opportunity, in a noncrisis atmosphere, to take a giant step toward financial modernization. A major force driving change is the prospect of a large disparity in the deposit insurance premiums paid by thrifts and banks.
Because the Bank Insurance Fund has reached the mandated 1.25% of deposits, bank premiums are scheduled to decline to a few cents per $100 of insured deposits per year. Because the Savings Association Insurance Fund is nowhere near 1.25% of deposits, thrift premiums are scheduled to remain at more than 23 cents per $100 into the next century.
Banks and thrifts, until very recently, have been strongly - one could almost say religiously - opposed to merging the two insurance funds. I began calling for a merger of the funds as far back as 1982, when I was chairman of the Federal Deposit Insurance Corp. I thought it was our last hope to avoid a crisis in the thrift industry.
Bankers thought I was trying to sell them down the river. Thrift executives thought I was attempting a power grab. Virtually no one wanted to even discuss the issue. I was informed, for example, in 1984 at the outset of the deliberations of the Vice President's Task Group on Regulation of Financial Services that the subject of merging the two deposit insurance funds was not on the table.
Today the thrifts need to cut a deal to eliminate the looming disparity in deposit insurance premiums. The banks are willing to negotiate because they fear Washington might impose unilaterally a costly solution for which the banks might receive little, if anything, in return.
So the leaders of the banking and thrift industries have begun discussing in earnest a resolution of the problem. It appears they are close to an agreement to merge the two insurance funds, create a uniform charter for banks and thrifts, and consolidate bank and thrift regulation.
The thrifts would pay a one-time assessment to bring the thrift fund to 1.25% of deposits. The banks would shoulder a big piece of the burden of servicing the Fico bonds issued to fund the S&L cleanup. The problems of the thrift industry would be put behind us once and for all.
There is talk in Washington these days about taking a short cut to resolving the problems of the thrift fund. The strategy would be to impose a short-term financial fix on banks and thrifts as part of the budget reconciliation process.
This narrow, short-sighted approach would not address the underlying structural issues such as eliminating the special thrift charter, would further politicize the FDIC, and would bring to an abrupt halt the constructive dialogue in which banks and thrifts are finally engaged. I have a bridge I'd like to sell to anyone who believes a satisfactory solution to the structural problems of the thrifts will be negotiated once the financial fix for the thrift fund is in place.
The banks and thrifts, given time, are likely to resolve their differences and agree to merge their industries. It doesn't require much imagination to envision their proposal being coupled with the two banking bills currently pending in the House: Glass-Steagall reform and regulatory relief.
The result would be the most significant piece of banking legislation since the Great Depression. It would put the U.S. well along the road to developing the strongest, most modern and competitive financial system in the world. We shouldn't let this historic opportunity slip through our fingers in favor of a quick fix.
Mr. Isaac, a former chairman of the Federal Deposit Insurance Corp., is chairman and chief executive officer of Secura Group, a financial services consulting firm based in Washington.