A prominent economist has come out in favor of a radical approach to bank restructuring.

Saying it is the only way to restore a vibrant commercial lending business, and hence economic growth, Michael K. Evans of Washington-based Evans Economics Inc. is calling for a "twotier banking systems." One would take insured deposits; the other would make loans.

Deposit takers - "core banks." as others have defined them - would pay regulated interest rates and could invest only in U. S. government and agency securities with remaining lives of five years or less.

Lenders would be essentially unregulated, paying whatever they wished for deposits and freely making asset-quality judgments. There would be no guarantees on depositors' principal. Private-sector rating agencies, and perhaps private insurance or guarantees would supplant government oversight.

Under this conditions, Mr. Evans reasons, the nature, cost, and opportunity of risk would be clear to the marketplace.

Restoring Credit Flow

Credit would flow again "to those who had legitimate borrowing needs, without [banker's] worrying about examiners yanking the line of credit for small and expanding businesses at the worst possible time," Mr. Evans wrote in a recent article.

He conceded that the two-tier idea is not under serious consideration in Washington. But his article was published in the magazine of the American Production and Inventory Control Society, which may indicate potential support from the manufacturing community.

"Core banking," as championed by McKinsey & Co. consultant Lowell Bryan and others, had a boomlet during and shortly after the debates on the Federal Deposit Insurance Corporation Improvement Act of 1991.

Ludwig Knocks the Idea

In a speech 10 days ago, Comptroller of the Currency Eugene Ludwig referred to the idea, only to knock it. He said he wants to expand bank's powers, not constrain them.

Mr. Evans contends that only his proposal is far-reaching enough to break the economy out of its sluggish growth pattern.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.