Imperial Valley Press

THE WRONG WAY
TO DO IT

(Wall Street Journal)

Senator Mead of New York has introduced a bill authorizing the Reconstruction Finance Corp., an arm of the government, to insure commercial bank loans up to $1,000,000 to a single borrower. The Senate Committee on Banking & Currency will begin hearings on the measure today.

The purpose of the Mead bill is to make it easier for "small" business men and corporations to borrow at the bank. The insurance coverage would be limited to 90 per cent of the loan, so that the lending bank would not be wholly relieved of risk or the necessity of exercising a wide discretion in passing upon loan applications. The RFC would be authorized to charge an insurance premium varying between one-quarter of 1 per cent and 1 per cent and to refuse to insure for any bank which offered only its less meritorious loans for insurance.

Senator Mead's impulse is a kindly one, but the bill is bad. It has no such justification as may be claimed for federal deposit insurance. There all banks are compelled to insure depositors—up to a limit of individual deposit—against the danger of their becoming the innocent victims of bad banking in a particular bank. The effect of the Mead bill could and probably would be to offer the owners of a bank insurance against the carelessness or incompetence of directors and officers they themselves had chosen. This is a species of partial government guaranty of an investment in bank stock, a thing which is absent from deposit insurance.

Any insuring agency, for its own preservation, must have the power to select the risks it insures. Therefore the RFC would necessarily become another bank examiner, in addition to the three federal and the respective state authorities which already play their parts in setting banking standards. The present RFC personnel is no doubt canny enough to watch its risks, but a greater multiplicity in bank examination is highly undesirable.

If the smaller business units are entitled to more bank accommodations—or more capital—than they can now obtain, this is a wrong way to go about supplying their needs.