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The Bush administration's reported proposal to reorganize the banking and securities industries will help relieve some of the growing strains on commercial banks.

But the fact that the proposal, which would allow interstate banking and mergers between banks and securities firms, is opposed by neither the securities nor the insurance industry is a sure sign that it doesn't go far enough.

There's no arguing about the need for drastic measures. To catalog the bleak state of commercial banking today is to dredge up frightening comparisons to the early 1930s.

Routinely, banks are reporting large losses, particularly on real estate loans and loans to less developed and Eastern European countries. Chase Manhattan lays off 5,000 or more people. The Bank of New England is supported by more than $1 billion in Treasury deposits, and many Northeastern savings banks are falling into serious trouble as real estate prices drop. Analysts warn ominously of a credit crunch.

Some are saying if banks' assets were reported according to market values, some of our largest banks would be insolvent. Shares of bank stocks have fallen by 40 percent, on average, over the past year. No U.S. bank is among the world's 10 largest and only two are among the 50 largest, compared with six of the 10 largest and 19 of the 50 largest in 1960.

Is the banking system in danger of a 1930s-style collapse? No, unless the Federal Reserve cuts the system's reserves, and the Fed is unlikely to repeat that drastic mistake of the 1930s.

But that doesn't diminish the seriousness of the situation. The industry is in danger of declining into insignificance, with attendant damage to the economy.

The banks' plight is not directly comparable to the savings-and-loan disaster. Most commercial banks hold assets and liabilities that, on balance, are not subject to much interest-rate risk. Thus, the impact of high interest rates, which economically destroyed thrifts in the early 1980s, never threatened banks.

However, as the recent losses make clear, banks often take considerable credit risks -- as they should. Banks can operate successfully in an uncertain world by holding diversified portfolios and sufficient capital to cover losses.

But banks hold much less capital to absorb losses than they did before the Great Depression. Indeed, banks then had ratios of capital to assets that averaged about 15 percent, compared with 5 to 6 percent today (thrifts are considered "healthy" with 3 percent ratios).

Also, the value of a bank charter, an important though not measured part of capital, sagged in the '70s and '80s, as depositors began abandoning bank savings accounts for the higher interest paid by money-market accounts and as computer technologies helped other businesses to penetrate banks' markets.

The regulatory reaction to banking risk has, by and large, enhanced the weaknesses and fragility of the banking system. Capital requirements have been increased somewhat and crudely related to risk. But there has been almost no reduction to date in the restrictions that keep banks from holding more diversified portfolios of assets, liabilities and services, such as sales of securities and insurance.

In addition, banks increasingly are subjected to special costs and taxes, all of which make them more expensive sources of funds than other financial firms. Non-interest-bearing reserves must be maintained against deposits.

Interstate branches are barred, reducing efficiency and geographical diversity.

Finally, solvent and well-run banks are required to pay extraordinarily high deposit insurance premiums. These are to compensate for the losses imposed on the Federal Deposit Insurance Corporation by poorly run banks and failed S & Ls. Is there any wonder bank shares have collapsed and now often sell far below book value?

As the Bush administration has realized, something can and should be done. First, banks should be required to hold capital equal to at least 10 percent of assets (preferably measured in market values). Higher capital would not be costly to banks if it includes debt. This is equivalent to time deposits that are definitely not insured.

If a bank's capital declines below, say, 10 percent, the authorities could order measures to restrict its growth and prevent it from paying funds to capital holders. Such measures should be mandatory when capital declines below 6 percent of assets. If capital declines below 3 percent, the bank would be taken over.

With these capital requirements in place deposit insurance premiums could be drastically reduced, as there would be almost no losses.

Second, all restrictions on interstate branching and merging as well as ownership by non-bank companies should be removed. This would allow efficient consolidations and reduce overcapacity as well as permit better geographic diversification. Constraints on banks' investments and services should be eliminated.

Unfortunately, the administration seems to have no taste for battle with the powerful insurance lobby. It does favor interstate banking and permitting banks to engage in securities activities.

But the administration would require the securities business be conducted by affiliates separated from the bank by "fire walls." This provision would deny banks the economies of scope from combined operations and thus defeats the purpose of the reform, which is to make banks more competitive and stable.

These changes would bring U.S. banking regulations in line with those of most other industrial countries, including the European Community after 1992. GEORGE J. BENSTON is professor of finance and economics at Emory University.

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