Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: WEDNESDAY, July 28, 1993 TAG: 9307280114
SECTION: BUSINESS PAGE: B6 EDITION: METRO
SOURCE: Associated Press
DATELINE: WASHINGTON LENGTH: Medium
Deposit insurance didn't cause the debacle, but it allowed it to spiral out of control, the commission said Tuesday in a long-delayed report.
"In the S&L crisis, deposit insurance was the gasoline that suffered a series of matches," said commission member Robert E. Litan, a fellow at the Brookings Institution, a Washington research organization.
The three principal causes were the interest-rate spike from 1979 to 1982, deregulation that allowed S&Ls to make risky investments unrelated to home mortgages and the relaxation of capital rules, which permitted S&Ls' owners to operate institutions with little or none of their own money at stake.
Fraud, the panel said, accounted for 10 percent to 15 percent of the nearly $200 billion debacle.
The report said deposit insurance allowed sick S&Ls to raise and lose large amounts of money in deposits, regardless of their health.
Its key recommendation, which it said was "central to avoiding future disasters," calls for the creation of federally regulated "monetary service companies," which would offer insured checking accounts.
The money in the accounts would be invested only in safe and easily-sellable, short-term corporate debt and government securities.
Monetary service companies could be owned by any type of financial institution, including but not limited to banks and S&Ls.
In effect, a bank customer could end up having a choice between an insured but low-interest checking or passbook account, which would be invested in marketable securities, or a higher-yielding account that the bank could use to make loans.
It would no longer be necessary to maintain a separate system of banks and S&Ls. The Federal Deposit Insurance Corp. would regulate monetary service companies.
Bert Ely, a financial institutions analyst in Alexandria, Va., said the monetary service company system could cause a shortage of credit for business loans and has the potential for allowing runs on uninsured banks.
"Risk doesn't go away just because it's shifted," he said.
by CNB