New Strains Trouble Banking System: Banks Increasing Reserves on Loans
ÛÏFor the first time in decades, questions have been raised about the strength of our nationÛªs, and indeed the worldÛªs, banking system,Û Federal Reserve Board chairman Arthur F. Burns sternly told last fallÛªs annual meeting of the American Bankers Association,</br></br>And while the nationÛªs central banker pronounced the overall condition of banks ÛÏstrong and sound,Û he noted that ÛÏfor the first time since the Great Depression,Û the FedÛªs willingness to act as a lender of last resort to banks that get into trouble ÛÏhas become... an essential ingredient in maintaining confidence in the commerical banking system.Û</br></br>There is no prospect for any repeat, of the widespread bank closings of the 1930Ûªs. Federal deposit insurance and other guarantees now stand behind the banking system to prevent runs by individual depositors.</br></br>But there are new strains in the banking system, endemic to the 1970s, that are giving banks and bank regulators the worst case of the jitters in more than 40 years. And though chances for a major smash-up of the financial systemÛÓan accompaniment to every serious past economic depression-are considered slim, there are some fears that a chain of major financial defaults by either corporations or deficit-ridden countries could trigger a row of falling dominos in 1975.</br></br>That is precisely why the FedÛªs willingness to act as a lender of last resort to banks has become so crucial. There has even been unconfirmed speculation that the Fed has and would act to backstop major corporations that got into trouble if that in turn would jeopardize the banking system.