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THE FAILURE of a big commercial bank can cause serious repercussions in the banking industry. That is why federal insurance has traditionally been used to pay off many individual and corporate depositors -- even beyond the $100,000 official limit on insured deposits.

But federal regulators are now realizing that this "too big to fail" doctrine gives major commercial banks an invitation to make risky investments.

The Bush administration is planning reforms to give regulators more power to discipline imprudent bank management. Some major banks might be allowed to fail, and those with deposits above $100,000 would have to share in the losses.

Big banks have had a competitive advantage over smaller banks, since depositors knew that no matter how risky the bank's investments, the Federal Deposit Insurance Corp. would back any deposits.

Under the new plan, which is expected to be introduced in Congress in January, the big banks would face much more uncertainty -- what the administration calls "constructive ambiguity" -- and would have to conform with the more prudent banking
practices favored by regulators.

One of the reasons for the savings and loan scandals across the nation was that S&L owners could attract depositors with the guarantee of federally insured deposits at the same time that many were speculating in the riskiest kinds of investments.

The banking industry's problems do not even remotely approach those of the S&Ls in scope, but many banks have taken serious losses on real estate loans. Bank failures have drained the FDIC insurance fund to the lowest level in its 56-year history.

It would be intolerable if this fund were wiped out by several bank failures and the taxpayer were then asked for another multibillion-dollar bailout.

The banking industry, unlike the S&L industry, has generally done a good job of looking after itself through the FDIC program, to which all banks make small contributions on the basis of the amount of their federally insured deposits. The contributions will be increased in January in an effort to replenish the insurance fund.

But the federal government should not be standing in the background like a rich uncle, ready to throw in money no matter what.

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