Banking Stability

Report Outline
Signs of Strain in U.S. Banking System
Banking Expansion Since World War II
Outlook for Reform and Reassessment
Special Focus

Signs of Strain in U.S. Banking System

Financial Distress at Franklin National, Herstatt

The stability of the U.S. banking system has been taken for granted for decades, since the banks recovered from the collapse of the 1930s. But concern about the system has been building up behind the scenes, and now the assumption of stability is being questioned openly. Among bankers and their critics, concern has centered on three broad areas: aggressive expansion of the banking system, which has resulted in questionable practices; monetary and credit restraint imposed by the Federal Reserve Board in its fight on inflation, which can expose flaws in bank practices that might otherwise be obscured by easy bank credit; and international monetary and financial instability, aggravated by the oil crisis.

Potential weaknesses, previously seen mainly by the experts, were brought to public attention in May by the disclosure that Franklin National Bank in New York, the nation's 20th largest, was in financial distress. The well-publicized troubles of Franklin National have sent tremors through the financial community and shaken the public confidence on which the banking system depends. Jittery money markets have been swept by rumors that other banks and businesses are bordering on failure, reviving memories of widespread bank closings, financial collapse and economic depression in the 1930s.

Bankers dismiss fears of another such debacle. They point to safeguards built into the financial system after the 1929 crash and to the quick action taken by banking authorities to rescue Franklin National. David Rockefeller, chairman of Chase Manhattan Bank, and other banking leaders have said Franklin's problems are isolated. “I have no reason to believe the banking system in general is in jeopardy,” Rockefeller said shortly after Franklin's difficulties were made public. “It is strong.”