Banking can be seen through a number of prisms. Customers tend to see it as a safe haven for deposits and a source of loans. Shareholders see it primarily as a source of profit. Regulators see it as the backbone of the economy, the vehicle through which the Federal Reserve applies its monetary policy and through which it implements its lender-of-last-resort responsibilities.

The weights given these views vary with the era. In the decades following the Great Depression, the heaviest emphasis was on the safety and soundness of the system. The focus began shifting in the 1970s, moving from safety and soundness to the interests of investors.

Last month's proposal by the American Institute of Certified Public Accountants thus a logical step in the rapid evolution toward a system almost totally geared to the demands of investors. The CPAs recommended that banks not be allowed to set reserves against potential losses unless a specific loan were in or near default. That proposal could become the basis of new rules by the Financial Accounting Standards Board.

From an investor's perspective, that's a great idea, and not surprisingly it's one that has been pressed by the Securities and Exchange Commission. The SEC's function, of course, is to protect the investor, not the banks or the system. The SEC and the accountants argue that banks have been using their loan-loss reserves to "manage" earnings, making it difficult for investors to understand what they're getting when buying bank stocks. To a degree, that's true.

But is it bad? From the SEC's perspective, it is. But not from the view of bank regulators. The regulators--and the supposedly market-oriented banks--are arguing, correctly, that reserves should be put aside as a cushion in case problems arise, and should not be tied to specific problem loans. The idea is to be prepared for the worst. Traditionally, that has been seen as the prudent path.

Wachovia Corp., for example, in June said it would add $200 million in the second quarter to its allowance for loan losses because it expected a 30% increase in non-performing loans. It couldn't be sure these loans would become non-performing, and it cannot be sure that even non-performing loans wouldn't be paid. Thus, the CPAs' proposed rules probably would not have allowed Wachovia to take that hit. It certainly wasn't fun for Wachovia; its stock plummeted almost 19% that day. But it was prudent. Sadly, the accountants and the SEC are fostering imprudence.

The current scene is a bit reminiscent of the mid-1970s, when New York's mutual savings banks were flush with reserves, and consumer groups were urging that the banks be forced to reduce those reserves and use the money for social programs. Fortunately, that idea was resisted and the banks were allowed to keep their nest eggs. And, as we all know, the rainy days did come. Most thrifts were driven out of business, costing taxpayers hundreds of billions of dollars. The only survivors were those, such as the Dime Savings Bank, that had heavy reserves.

Once again we're enjoying boom times and the possibility of rainy days seems remote. Maybe the outlook is that cheery, but maybe not. In any case, banks should be prepared.

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