The Fed's Argument for Flexibility

Q&A Since arriving in Washington less than three years ago, David W. Mullins Jr., 45, has emerged as one of the capital's most influential banking policy makers. During a 1989-1990 stint at the Treasury Department, he helped craft the 1989 savings and loan bailout law.

Now, as vice chairman of the Federal Reserve Board, Mr. Mullins is considered one of the central bank's leading lights.

He recently talked with staff writer Debra Cope about Congress' plan to rein in Federal Reserve lending to weak institutions through the discount window and other banking issues.

American Banker: What's your view of the proposed discount window limits? David W. Mullins Jr.: They've tried to maintain a degree of flexibility, which we need to deal with emergencies.

But a more formal process, no question, reduces our flexibility. We need to protect our "lender of last resort" role. It has worked quite well through history.

AB: Did the Fed lend too freely to Bank of New England and National Bank of Washington? DWM: When you look at the facts, in both cases we come out ahead. We lent with the recommendation of the primary regulator, as we always do.

We like to lend to viable institutions, rather than using the discount window as a kind of body bag. We're not comfortable with the old regime. It would be useful to get over the habit of paying off uninsured depositors. Everyone would be comfortable with starting the process over again. The ultimate answer is to move these institutions away from the edge.

AB: What's it going to take to boost bank lending?

DWM: Conditions which led to the constraints on credit availability that we were seeing last year have improved. Banks are in a better position now. Most of the bad news is out, though we have these little flare-ups.-

It's a matter of slack demand, not supply. We won't have a test of whether enough credit is available until demand picks up.

AB: How do you rate FIRREA today? DWM: It certainly isn't perfect. But the best way to think about its impact is: What would have happened if we hadn't confronted the problem with comprehensive action?

We would have entered the economic downturn with 500 to 700 very weak thrift institutions and a weak insurance fund. That's a recipe for very serious systemic problems.

AB: Do you favor splitting the FDIC from the RTC?

DWM: There is considerable logic for separating the two. Now, the RTC's job is assets: How can we divide them and package them?

The FDIC would appear to have its plate full in the banking industry. If we get comprehensive legislation, it might be useful to have the FDIC focused exclusively on that task.

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