ABSTRACT
In framing recommendations, it is useful to put the current trajectory of the banking industry into perspective. This industry for years was completely sheltered from market forces by a scheme of market segmentation and specialization. As Alan Greenspan has reminded Congress recently (see chapter 5), commercial banks have always enjoyed certain privileges under law. Arnong these are deposit insurance and the banking safety umbrella. Protection was traded for stability. In the mid-1970s Congress added to this balance the obligation to engage in community reinvestment. This historic compromise was sorely tested in the 1980s. When the U.S. macroeconomic environment deteriorated sufficiently, the industry was marketized only to be thrown into a broad-based crisis. The locally based institutions specializing in housing finance--the savings and loan associations--went into systemic default. The money-center banks at the heart of the commercial-banking system fell into a double lending trap, the LDC debt crisis on the one hand and the Texas/Oklahoma oil-patch collapse on the other. The banking "franchise" was worth very little, in effect, for a large share of the population ofbanking firrns.
