At the end of the savings and loan debacle two decades ago, Institutional Investor audaciously called for a banking crisis in America. “American banks may be sicker than at any time since the New Deal,” wrote Senior Writer John Milligan. “What Congress needs is to get good and scared, to experience the clarifying effects of exigency” to overhaul the ailing banking system.
He asserted that many of the problems that plagued the thrift industry were also rampant among the country’s banks: erosion of credit quality among loan portfolios, including real estate; highly leveraged transactions; weakened capitalization; and a dwindling FDIC insurance fund. Although many commercial banks struggled mightily in the early 1990s, it took Congress almost two decades to get good and scared — with the most recent crisis.
Ninety-four federally insured banks have failed this year, and independent banking analyst Meredith Whitney is predicting that 300 more could be close on their heels. The question now is how to reform the banking sector so that history doesn’t repeat itself. Milligan’s prescription — adequate capitalization and better supervision of banks — is valid, and under consideration by lawmakers today.