Anthony Downs, a senior fellow at the Brookings Institution, prescribes a tonic that beleaguered bankers would gladly swallow: more lenient regulation.

But the treatment also calls for the tapering off of deposit insurance, a prescription bankers are not so wild about.

This regimen runs counter to the prevailing approach, which calls for swift action to contain problems. But the regulatory version of castor oil is making matters worse instead of better, Mr. Downs warned.

Accelerating the Tailspin

Each time regulators force a bank to liquidate troubled real estate too quickly, he said, the industry's tailspin accelerates.

"Federal financial regulators need to recognize the urgency to the threat of banking viability posed by the current downward spiral in commercial real estate prices," Mr. Downs said, echoing the arguments of bankers and real estate developers alike.

A heavy-handed emphasis on dumping real estate at any cost "threatens to undermine the capital structure of the entire banking system," Mr. Downs concluded.

The second action he is proposing, scaling back deposit insurance, has failed to win as much support from bankers, who are concerned that tinkering with deposit insurance could undermine depositor confidence and cause runs.

Exposure

But Mr. Downs said government must reduce its exposures to bank failures if it hopes to prevent a repetition of the risk-taking that has led to the current dire predicament.

Besides, he said "taxpayers deserve a reform in this system in return for their huge investment in covering savings and loans losses."

In a paper prepared for the Urbank Land Institute and the National Realty Committee, Mr. Downs urged five regulatory tactics.

* "Top-level regulators -- from the President on down -- should immediately make much more vigorous and clearly visible efforts to impress upon their subordinates the importance of not choking off all credit in commercial real estate markets."

Forbearance

* Officials should treat the real estate credit problems in the same way they initially handled bank's problems with loans to less developed countries -- by exercising forbearance.

* Bank examiners should stop forcing banks to classify loans as nonperforming just because collateral values are temporarily impaired.

"If borrowers believe their properties are worth enough to continue paying off their loans in a timely manner, they surely do not believe the market values of those properties have fallen below the amounts of the loans on them."

* Washington should delay the enforcement of new capital standards. Banks now must increase capital levels just when conditions are especially unfavorable for the sale of assets such as real estate that is needed to meet the requirements.

* Officials should reduce the risk-weighting for commercial mortgages when calculating capital requirements.

An Easier Route

That would make it easier for banks to refinance maturing construction and miniperm loans, and thus stem the erosion of real estate values.

He also suggested three ways deposit insurance could be reformed to eliminate the temptation of bankers to depend on the government to bail them out if the risky loans go under.

* Eliminate federal deposit insurance gradually, enabling banks to buy private deposit insurance.

* Impose drastic limits on the size of insured accounts.

* Divide banks into two types, one with federal insurance that could invest only in liquid securities, and another type, without the insurance, allowed to invest in more risky loans.

An Imbalance in the Market

Timing is always sensitive, but in this environment it could make the difference between solvency and insolvency for some institutions.

"Too many banks are trying to sell their real estate to too few buyers, a condition that depresses the prices of sales actually completed."

If mark-to-market accounting for real estate loans is imposed, he said, it could slash the system's equity by 43%, assuming values have fallen at least 25%.

Anticipating objections from those who will compare his cure to the forbearance offered to thrifts in the early stages of their bout with a similar fever, Mr. Downs said the patient is different this time.

The banking system has a stronger net equity position than the savings and loans did. Fewer banks have engaged in the risky fast-growth strategy that the thrifts pursued. And fraudulent self dealing has been less prevalent, he said.

"Bank regulators commendably have pressured banks to be more conservative about their lending practices than did thrift regulators," Mr. Downs said. "But that regulatory pressure has gone too far. It is time for financial regulators and politicians to recognize that their rigid, anti-forbearance attitude is forcing banks to adopt a self-defeating strategy."

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