Don't let banks repeat the mistakes of S&Ls.

As historians look back on the United States in the late 20th century, they are bound to highlight the failures in the thrift industry and the subsequent government bailout, just as financial historians have stressed the panics of the 1800s and the stock market collapse of 1929.

We have recently lived through quite a time! Bank runs recurred despite federal insurance, solid institutions with histories of over a century have been wiped out, and hundreds of thousands of people who counted on their financial institutions for jobs, for credit, or for safe-keeping of their wealth have been severely hurt.

What caused this? What will be the lessons of our financial debacle that historians of the future will provide our children and grandchildren as they read about the mess we have made of our financial structure?

Lessons from the Recent Past

It is hard to hazard a guess as to how they will analyze our crazy era. But is is worthwhile trying, for there are lessons from our recent past that must be learned if we are to avoid a second shock wave in the years remaining in this century.

This is how I would explain the entire situation:

Savings banks and savings and loans developed because at the time each filled a special need of the public. But when the need for their services was no longer intense, instead of shifting to meet some additional needs, either through inertia or through legislative blockage, they remained saddled only with powers to fill this one need that was no longer keen.

Changes Came Too Late

The inevitable result was an industry whose fortunes declined to such a degree that, when it finally did fight back, it overreacted. It got powers it was incapable of utilizing properly and that were so lucrative that they attracted buccaneers and raiders who took advantage of the situation to loot the industry and its federal insurers.

The thrifts should have gotten the power to change their goals modestly when their basic role as collectors of variable-rate savings and providers of fixed-rate home loans became untenable in a rising interest rate environment. Then we never would have seen the later pressure for drastic change that so debilitated the industry.

It is not hard to defend this thesis. Had the savings banks and savings and loans been willing and able in the 1970s and 1980s to develop variable-rate mortgages to match their variable rate deposit liabilities, in the way countries like Canada operate, we would not have had the profit squeeze that led to pressure for such developments as "supervisory goodwill" being used as a source of capital and to complete freedom in asset determination.

In sum, savings banks were started because the nation had no other place to save. Savings and loans started because we were extremely short of mortgage money to finance home construction. As banks, mortgage banks, and other lenders entered the mortgage market, and as commercial banks started to solicit savings deposits, the specific needs for these thrift institutions ended.

Problems Allowed to Fester

The logical next step would have been either to change their goals and powers or to close them. Instead, we kept our eyes shut and let matters fester until we had the explosion of new powers and abuses that we saw in the mid 1980s. The rest, as they say, is history.

Why is it worth writing a column about this historical situation in a daily newspaper that is focused on today and tomorrow instead of the past?

At least to this observer, we may be heading for the exact same situation now with regard to thrifts.

Banks used to have a monopoly on commercial loans. No more. Now a great many companies have turned to the commercial paper market and to other borrowing sources like foreign banks and investment banks and major asset based lenders.

Banks used to be the place where the bulk of savings were placed. Now the money funds and other capital market institutions and instruments compete head to head with the banks. But in this competition, the banks have the serious disadvantage of much higher capital requirements and Community Reinvestment Act obligations -- disadvantages that many feel more than offset the advantage of federal insurance.

Profit Squeeze Seems Unlikely

Are the banks likely to feel a profit squeeze such as a the thrifts felt before they fought to change their powers and goals so markedly a decade ago in the steps that eventually led to the decimation of the industry?

Today it does not appear so. But what happens when spreads between the cost of funds and return on funds narrow and bank competitors stress their regulatory and legislative advantages even more.

Who knows? But it does appear that the banks must get the power to adjust to a changing financial world of broader activities and broader geographical limits of operation in the way their competition operates.

Otherwise the historians who write the texts our children will read may have to talk about the decline of commercial banks in the late 20th century in terms similar to those now certain to be applied with regard to the thrifts.

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