WASHINGTON -- A congressionally appointed commission recommended Tuesday that the savings and loan industry be eliminated and federal deposit insurance be limited to narrow banks to avoid another crisis like the S&L debacle.

"Fundamental reform of the deposit insurance system is central to avoiding future disasters of the sort that we were asked to examine," said John W. Snow, co-chairman of the commission and chairman and chief executive officer of CSX Corp., the international transportation company.

'Monetary Service Companies'

The National Commission on Financial Institution Reform, Recovery, and Enforcement recommended that institutions be allowed to offer federally insured deposit accounts only through separately capitalized "monetary service companies," which would be allowed to invest only in low-risk, short-term debt.

Mr. Snow said that under the proposal, there would be "no need to limit the amount of funds one could put into an insured account." The monetary service companies could be affiliates of noninsured banks or other financial institutions, which would be allowed to keep their traditional lending and other activities.

Insuring only the monetary service company subsidiaries "would significantly reduce the risk of taxpayers ever having to pay for losses," Mr. Snow said. Sen. Christopher J. Dodd, D-Conn. praised the commission's report. "The best way to guarantee the safety and soundness is to limit the type of investments banks and thrifts can make with insured deposits," he said. "I think it's a key element to modernizing our financial service industries."

In addition, the commission said all S&Ls should be converted into commercial banks. "We see no remaining rationale for a separate thrift industry receiving special charters from the federal government," Mr. Snow said. "All distinctions between commercial banks and S&Ls should be eliminated."

Paul A. Schosberg, president of the S&L trade group, the Savings and Community Bankers of America, said the commission's recommendation to eliminate the S&L industry was irresponsible and wrongheaded.

"It is a silly proposal. The savings institutions that are doing business today not only are not a threat, but are making significant contributions to the social and economic life of their communities," he said.

Robert E. Litan, director of the Center for Law, Economics, and Politics at the Brookings Institution, differed with the commission on the future of deposit insurance. He said deposit insurance should be offered not only to monetary service companies, but also to smaller, community banks.

There is no reason, he said, to disturb the "many many thousands of small institutions," that use deposit insurance, as long as they were not allowed to link up with larger banks.

Deposit Insurance Proposal

Bert Ely, an Alexandria, Va.-based banking consultant, strongly opposed the commission's proposed restrictions on deposit insurance.

"A lot of people," Mr. Ely said, "to get the higher yield, are going to put their money in the uninsured part of the bank." But if the bank fails and people lose their money, he said, they would protest that the government should have been protecting them.

Kenneth Guenther, executive vice president of the Independent Bankers Association of America, derided the commission's proposal to scale back deposit insurance as "highly irresponsible."

"Community banks and thrifts depend on deposit insurance to maintain their core deposits," Mr. Guenther said.

Policymakers Assailed

James L. Pierce, the commission's executive director, said a key cause of the S&L crisis was "complete disregard by government policymakers of the role that deposit insurance played," by creating "a no-lose situation for operators of savings and loans" that were having trouble but wanted to gamble by making risky investments.

"Most fundamenatally, misguided, and ill-advised government policies," created opportunities and incentives for crooks during the 1980s that culminated in the S&L crisis. "These individuals just didn't descend on the industry -- they were attracted to it," by govermnent policies, said Mr. Pierce, who is an economist at the University of California at Berkeley.

"Roughly one third of the industry acted on the incentives and the opportunities that were created," Mr. Pierce said. "These incentives were truly perverse", because with deposit insurance it paid to bankrupt a company," he said.

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