An analysis of the banking and thrift crises of the late 1980s finds that regulators often are powerless to prevent excessive risk-taking by insured institutions.

In a two-volume report, Federal Deposit Insurance Corp. researchers find that regulators often are unable to prevent healthy banks from investing in risky projects. Also, the study says regulators cannot prevent systemic crises caused by sharp economic downturns or government policies.

But the study finds that regulators can limit the spread of banking crises by maintaining big enough deposit insurance funds to close ailing institutions. It also recommends limiting the discretion of regulators to save failing depositories.

For a copy of "History of the Eighties: Lessons for the Future," call 202-416-6940, or visit www.fdic.gov/databank/hist80.

Rather than assign ratings based on the quality of investments, regulators evaluate safety and soundness by judging how well institutions manage risk.

That is the conclusion of Robert DeYoung of the Office of the Comptroller of the Currency, Joseph P. Hughes of Rutgers University, and Choon-Geol Moon of Hanyang University, who looked at Camel ratings at 356 midsize banks.

They conclude that examiners split banks into two groups: strong risk managers and weak risk managers. Strong risk managers are given greater freedom to invest in risky projects, while weak risk managers are downgraded for making similar investments.

For a copy of "Regulatory Distress Costs and Risk-Taking at U.S. Commercial Banks," call 202-874-5043 or e-mail kevin.satterfield occ.treas.gov.

Consumers would be hurt if the government imposed taxes or community reinvestment obligations on credit unions, according to a study by an economic consulting firm.

The paper, prepared for Boeing Employees' Credit Union, finds that credit unions offer lower consumer loan rates and higher deposit rates. For instance, customers would have lost $363 million if they invested in bank money market accounts rather than similar accounts at credit unions.

Credit unions' rates force banks to hold down loan rates and boost savings rates, according to David S. Evans of National Economic Research Associates and Bernard Shull of Hunter College.

Imposing taxes or reinvestment obligations would eliminate these rate advantages by making credit unions more expensive to operate, they write. "Credit unions are a financially secure and competitively vibrant part of the banking industry," they write. "There is no sound reason for making it harder for these institutions to compete."

For a copy of "Economic Role of Credit Unions in Consumer Banking Markets," call 617-621-0444.

In a similar study, Navy Federal Credit Union has issued a policy paper on the cost of applying the Community Reinvestment Act to credit unions.

Credit unions would be forced to invest in expensive computer software, hire people to monitor lending, and submit more paperwork to regulators, the paper says. These costs would force them to reduce savings rates or boost loan rates, the paper says.

Though it would impose high costs, extending the CRA law to credit unions would not spur lending, according to the study. "Strong evidence exists that credit unions already meet and exceed the performance or assessment criteria called for in CRA," the study said.

For a copy of "The Community Reinvestment Act and Credit Unions," call 703-206-3137.

Research Scan runs on the second and last Fridays of the month. Submissions should be sent to American Banker, 1325 G St. NW, suite 900, Washington, D.C. 20005.

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